All eyes were on Italy this week as its government worked on its draft spending plans for 2019 and beyond. In our view, the Italian budget was always going to cause excitement, given the coalition government’s vocal criticism of European Union (EU) fiscal rules and its radical reform agenda. On its wish list are tax cuts, generous pensions and the introduction of a minimum basic income for all. Brussels seemed braced for a budgeting battle.
What caused the most alarm, though, was news of the government’s intention to increase its budget deficit target to 2.4% of gross domestic product (versus a previously agreed-upon 2% maximum). This did not go down well in Brussels, and EU President Jean-Claude Juncker’s comparison of Italy’s budget plans to the finances of Greece did little to help investors’ already frayed nerves. Then came “fighting talk” from Italy’s Deputy Prime Minister Luigi Di Maio, who stated that the government wouldn’t yield “one millimeter” on this issue.
Understandably, markets were spooked. Italian government bonds sold off sharply, raising the 10-year yield to a four-year high on Tuesday. However, after days of losses, a measure of stability was restored when the government conceded some ground; watering down the 2020 and 2021 deficit targets to 2.2% and 2.0%, respectively. Italian government bonds recovered somewhat while European equities closed the week to the end of the day on Thursday down 0.9%, as measured by the FTSE World Europe ex UK Index.
So will Italy blow its budget? We think that there will be more wrangling and volatility before the final plans are submitted for EU approval in mid-October.
Brazil’s unpopularity contest
Brazil’s equity market was similarly turbulent, ahead of its first-round presidential elections this weekend. It is expected to be a hotly contested fight between left-wing Worker’s Party candidate Fernando Haddad and controversial far-right (but more market-friendly) contender Jair Bolsonaro, or ‘O Trumpinho’ as he is known locally.
Bolsonaro is unpopular with many minority groups and large swathes of the female electorate, given some of his more colorful views. Against this, Haddad’s credibility has been tarnished by widespread corruption investigations and he is unpopular with business and investors. With a second-round vote likely, who will prevail? We believe that it will probably be a case of the least disliked candidate “Trumping” the other.
Not “floating” but sinking
The stock market flotation of two high-profile UK companies proved disappointing this week. The share price of peer-to-peer lender Funding Circle slumped in its first full-day of trading, while luxury carmaker Aston Martin similarly failed to rev up much interest at its debut, as investors questioned the valuations of both companies.
In other corporate news, the UK’s Royal Mail issued a profits warning, having failed to deliver on its cost-savings forecasts and citing challenging trading conditions. After its trading update, its shares fell 18% on the day. Tesco shares were also hit by weaker-than-expected profits during the week, while RBS and Japanese carmaker Nissan became the latest companies to warn against the perils of a “hard Brexit.” Nissan described its manufacturing operation in the North East of England as a “European investment based in the UK”, and fretted about possible supply chain difficulties after Brexit, which is scheduled for March 29, 2019.
For the week to the end of the day on Thursday, the FTSE All-Share Index was down 1.2%, while the U.S. broader-market S&P 500 Index was 0.4% lower.
The “Maybot”– hot or not?
As the UK’s political party conference season began to wind down, the Conservatives gathered for their annual jamboree in Birmingham. And the Tories certainly garnered headlines, not least for Prime Minister Theresa May’s bold entrance ahead of her keynote speech. Performing some robotic moves to Abba’s “Dancing Queen,” it wasn’t just Brexit on which the UK was divided, but whether the prime minister’s dancing was cringe-worthy or inspired.
Key takeaways from the PM’s address included a pledge to freeze the fuel duty, an “end to austerity,” the need for new affordable housing, a political party “on the side of hard-pressed families,” and a post-Brexit future that is “full of promise.”
And finally …
Speaking of robots, a man recently claimed to have time-travelled forward to the year 8973, where he met a telepathic human-robot hybrid (remind us of anyone?), in a secretive project sponsored by the British government. Quite!
On his return from the future, William Taylor successfully passed a lie detector test, in which he described his journey to a “utopia,” from which he “never wanted to come back.” He claimed that there was no crime or conflict in this future paradise and that there were “cures for every problem”—even Brexit, perchance? Mrs. May might already have the robotic dance moves, but it sure sounds like she could do with some of that.
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