European stock markets weren’t able to hold onto their early gains yesterday, despite getting a decent tail wind from Asian stocks, as concerns about trade, geopolitics and the budget stand-off between Italy and the European Commission kept investors cautious.
US markets also closed lower as concerns about a lack of progress between China and the US on trade weighed on investors’ appetite to dive back into the market despite earnings reports, that by and large have been fairly positive, while this morning’s Asia session has also seen those markets come under pressure once more, and is set to see markets here in Europe come under further pressure this morning.
Yesterday’s soft downgrade by Moody’s ratings agency late on Friday, and a less confrontational tone from the European Commission with respect to Italy’s budget, initially saw some early gains yesterday, however the optimism soon evaporated when it became apparent that the Italian government was in no mood to compromise on its spending plans.
There were some soothing woods from Italian Prime Minister Giuseppe Conte about wanting to work with the commission to work out a compromise and that for all the disagreements Italy was unquestionably committed to the euro and the EU. Finance minister Giovanni Tria also weighed in by saying that the extra spending was needed to kick start a recovery in the economy after years of stagnation.
Sadly, for the European Commission and all the warm words of the Italian Prime Minister and finance minister they aren’t the ones calling the shots, rather it is deputy PM Matteo Salvini, and he has no incentive whatsoever to compromise, given the League’s polling numbers, which remain buoyant.
So, while the Commission will in all likelihood push back on the Italian budget there remains little likelihood that it will be changed significantly, which suggests further back and forth before Italy is placed in Excessive Deficit Procedure, with the potential to be fined for noncompliance of EU rules.
As if to highlight the tensions being generated across Europe, Austrian Prime Minister Sebastian Kurz urged the commission to reject Italy’s budget unless changes were made.
The pound had another one of those days when it was entirely driven by events entirely unconnected with the economics of the UK economy. It was events out of Westminster that sent it to two-week lows against the US dollar as MP’s from both sides of the Brexit divided mulled over handing in letters of no confidence in Prime Minister Theresa May over her handling of negotiations with the EU.
Once again it’s been the neuralgic issue of the Irish border that is causing all the political angst as both sides push back on the proposal to extend the transition period a few months in order to buy some extra time. This is problematic for several reasons not least the reason that it’s not immediately obvious how that would unlock the talks given that none of the solutions proposed so far would get past a vote in the UK parliament given the current voting maths.
It is clear that Prime Minister May probably isn’t the most popular person in her party right now, however given the fractured nature of the opposition to her plans for differing reasons, while the 1922 Committee may well be able to get 48 letters to trigger a leadership challenge there is likely to be little agreement on who could replace her, with the various touted replacements polarising in terms of their appeals to certain wings of the party.
Furthermore, none of the touted options look likely to gain the 159 votes needed to win any contest outright. This may help explain why Mrs. May is still in position, despite constant rumblings of a challenge as Teflon Theresa battles on.