The last day of a major political party conference in the UK will usually have markets on tenterhooks, as party leaders like to include some economic policy in their speeches. In this case traders were anticipating that Theresa May would be shedding some light on Brexit in her end of conference speech. Instead the prime minister declared that the government’s program of austerity, which has lasted for eight years, was at and end.
What does this mean in practice? Up until now the Conservative party has been identified with spending cuts and tax rises, but the prime minister declared today that debt as a share of the economy will be going down, with more support for public services and no return “to the uncontrolled borrowing of the past.”
GBP moved higher against several currencies as the markets were relieved that there were no unexpected Brexit landmines in May’s speech, and she also seems to have finished the conference without a major plot against her emerging and the commensurate possibility of an election. Previous speeches by May at party conferences have seen sterling sold off but this time she seems to have emerged with the currency unscathed.
Dow hits record positive territory as Wall Street shrugs off trade fears
The Dow Jones index spent the morning in record territory in early trading in the US. It was the latest in a series of records for the benchmark, reflecting an easing from yesterday’s fears that Italy’s debt might pose an existential threat to the financial system. The gains were largely across the board, with 11 component sectors in positive territory.
The S&P 500 was also up and on track for a record close. The optimism came on the back of an article in the Italian daily Corriere della Sera that the government in Rome may give some ground in its negotiations with the EU. There have been fears that the Italians will breach the current Eurozone borrowing requirements, creating a crisis in the world’s third largest government debt market.
Could the Italian government be about to yield to Brussels?
This threat had not been lost on Wall Street, where some traders have been looking past the Brexit and tariff issues which have dominated headlines recently and have seen the iceberg that is the Italian debt situation looming ahead.
Fears also seem to be subsiding on news that the Italian government has said it would cut its debt and not go on the spending binge it had previously indicated. Sources close to an Italian cabinet meeting told Corriere dell Sera that the government would bow to EU pressure to reduce its budget deficit to 2% of GDP by 2021. This was enough to convince UBS, which stated that it was going to be overweight in two year Italian bonds and that the market now looked cheap for short-dated Italian debt. The bank is still prudently cautious on longer term Italian bonds but fears over a short term default seem to be ebbing.
There will be some relief on trading desks in London and New York this afternoon, but if there is anything that is certain, it is the uncertainty of Italian politics. The country could still be downgraded, and it is being run by a coalition that has more than enough scope to fall apart. Yields on the two year Italian government bond jumped more than 60 basis points in two weeks to around 1.49% on Tuesday, but that should come down somewhat in days to come, barring further fractures in the Italian coalition.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions."