And finally, here’s our financial editor Nils Pratley on the Italian banking deal, and its worrying implications for the long-term health of the Eurozone banking sector....
One cannot get around the fact that the spirit of the relevant EU banking directive has been ignored. The rules apply, except when they don’t, it seems. That has two important consequences. First, as Capital Economics argues, the “doom loop” between Italian banks and the Italian government remains a worry. If taxpayers can be on the hook at two regional banks, they may also be exposed if and when the banks more important and the sums significantly greater.
Second, as the thinktank also points out, the cause of banking and fiscal integration in the eurozone has just suffered a serious jolt. In the next round of collective risk-sharing, eurozone states are supposed to guarantee deposits in each others’ banks. It is now hard to imagine Germany rushing to join such a scheme.
So forget the market’s initial cheery response to this Italian bank job: a short-term problem has been fixed only by raising major long-term uncertainties. That does not sound like progress.
And that’s probably all for today; thanks for reading and commenting... GW
An afternoon wobble has dented what had been a very positive day for stock markets. Another apparently order bank rescue for the eurozone, this time in Italy, plus a robust German IFO reading, had put markets on the front foot in the early part of the session. Even the UK government appeared to get its act together, with a deal between the Conservatives and the DUP putting the Tories across the threshold for a majority. But once again the summer malaise appears to be getting the better of equity markets, with gains being surrendered as London heads towards the close, with a disappointing US durable goods figure not helping matters.
Unsurprisingly, financial names are in high demand in London following the Italian banking news, which is helping to keep the FTSE 100 in positive territory. But it is clear that for now investors are none too keen on pushing global markets higher. It could be a long summer.
Silvia Merler, fellow at Bruegel, has published a really good analysis of last night’s Italian bank deal.
Here’s her conclusion:
Overall, this episode confirms a pattern in the management of Italian banking sector problems over the past years. Authorities try to kick the can down the road and often let political considerations outweigh economic issues.
We have seen this in the delay of MPS’ recapitalisation until after the constitutional referendum, in the creation of Atlas [Italy’s bank bailout fund], and in the never-ending effort to shield retail junior bondholders to whom the sale of those product should have instead been better prevented.
And we see it again here, in the use of generous liquidation aid. Some in Italy will see this last turn as a happy ending. Others will see it for what it actually is: a political choice.
In Brussels, this episode will perhaps finally demonstrate that harmonising bank insolvency law is an indispensable complement to BRRD, as argued strongly by others before. As long as this is not done, the door remains open for the use of national insolvency frameworks to escape from resolution.
The latest US economic data is out....and it’s weaker than expected.
Orders for durable goods shrank by 1.1% in May. That’s nearly twice as large a drop as expected, and suggests US companies were more cautious about buying new machinery and electrical equipment last month.
It’s the second monthly fall in a row, and the biggest drop in six months.
This has knocked the US dollar, and also driven down the yield (or interest rate) on US government debt. That shows that Wall Street is dialling back its expectations for US interest rate rises.
Andrew Hunter of Capital Economics says the data shows businesses cut back on capital investment this quarter:
May’s durable goods data suggest that, after rising at a 7.2% annualised pace in the first quarter, business equipment investment has expanded at a much more modest pace in the second, which would fit with the slightly weaker tone of some of the surveys.
Nonetheless, with consumer spending growth on course for a big acceleration, overall GDP growth is still likely to have rebounded quite strongly.
Unionists are now vowing to continue their walkout until Thursday amid warnings of a public health crisis as temperatures surpass edge towards 40 degrees Celsius, and rubbish continued to pile up.
From Athens, Helena Smith reports:
After abruptly ending talks with interior minister Panos Skourletis, the head of the municipal worker’s union, Nikos Trakas, demanded that prime minister Alexis Tsipras intervene.
Skourletis, he said, had thrown out the union’s counter-proposal – following the government’s olive branch offer of extending short-term contracts and permanent job status to around 2,500 workers – after five minutes. “We will continue the fight and on Thursday we will demand to see the prime minister of the country because the interior minister is incompetent,” he said.
Meanwhile Thessaloniki’s mayor, Yannis Boutaris, has announced that he will outsource rubbish collection to private contractors as piles of garbage gather almost a week after the strike began. Temperatures are set to hit 43 degrees Celsius on Wedsnesday.
Gold has hit a five week low this morning, as investors move money into riskier assets like shares.
The price of an ounce of gold bullion fell 1.2% at $1,240, its lowest level since 17 May.
Craig Erlam, senior market analyst at OANDA, attributes the moves to relief over the Italian banking deal, and the Conservative-DUP pact signed this morning.
The one notable piece of news over the weekend came from Italy where an agreement was reached that will avoid winding down two Italian banks, the good assets of which will be transferred to Intesa Sanpaolo. The resolution seems to have appeased both the European Commission and the Italian government, both of which have been at loggerheads as to how to deal with the failing banks, as well as investors with financials across the board being boosted by the announcement.
Reports this morning of an agreement between the Conservatives and Northern Ireland’s DUP have seen the pound pop higher, albeit only marginally given that the deal has been widely anticipated and doesn’t offer the kind of stability that a majority or even full coalition would. The deal will see Northern Ireland receive an extra £1 billion over the next two years in exchange for the DUPs support for May’s minority government. With the deal now agreed, the next question is whether May will remain in charge throughout that period.
The improved sentiment in the market is weighing on safe haven assets, particularly Gold which is down more than 1% on the day. Gold recovered back towards $1,260 towards the end of last week but has been sold heavily this morning, hitting its lowest level since the middle of May at one point. A sustained break below $1,240 could trigger a move back towards $1,220, which has been a very notable level on numerous occasions this year.
As this chart shows, gold took a tumble early this morning, sparking chatter in the City that a traders could have made a fat-finger error....
The pound has nudged a one-week high, after UK prime minister Theresa May finally secured an agreement with Northern Ireland’s DUP party.
Sterling gained almost half a cent at one stage to $1.2759, the highest since 19 June, as the City welcomed a rare piece of political certainty.
The deal isn’t cheap, though; the DUP have secured an extra £1bn in spending on Northern Ireland over the next two years, in return for promising to support the Conservatives in confidence and budget votes.
This has already caused a stir, with critics wondering which ‘magic money tree’ is providing the cash and other UK regions suggesting they should get more funds too.
Over in Milan, branches of Veneto Banca and Banca Popolare di Vicenza have opened as usual today.
And there are no signs of panic. That will please Italy’s finance minister, Pier Carlo Padoan, who pledged last night that it would be business as normal, following the sale of these ‘good’ assets to Intesa SaoPaolo.
Since then, officials have been negotiating with EU authorities over how to handle the rescue. A draft plan was drawn up earlier this month, that will see some bond-holders “bailed in”, taking a financial hit.
Rome is also expected to inject state funds into MPS, by tapping into a €20bn fund created last year (which is also being used to finance last night’s deal for Veneto Banca and Banca Popolare di Vicenza)
Miatta Fahnbulleh, research director at the IPPR, argues that Britain’s economy would be more productive if workers benefitted from better protections.
Rather than simply worrying about job creation, Fahnbulleh says organisations should consult with staff to redesign and improve the workplace.
Stefan Baskerville of the New Economics Foundation is also at the TUC conference.
He argues that the increased digitalisation of the labour market is creating more insecurity for workers, and giving employers more power to control workers, including through algorithms that assess performance.
Union chief: Workers need proper rights, not 'flexibility'
Ouch!
Sally Hunt, general secretary of the University and College Union has slapped down Matthew Taylor’s argument that workers enjoy the flexibility of today’s labour market.
Hunt points out that the boom in self-employment and zero-hours contracts is a recipe for exploitation.
Despite his comments about protecting ‘flexible’ work, Matthew Taylor does concede that many workers in the Gig economy are unable to save for their pensions or pay for sickness insurance.
After a tweet warning his audience not to expect too much (!), Taylor reveals that his inquiry should be published in a couple of weeks:
However...Taylor then argues that many workers appreciate the “flexibility” in today’s labour market; and that the priority has to be to get people into work.
Veneto Banca and Banca Popolare di Vicenza senior bond prices rocketed up more than 15 points on Monday, after the Italian government shielded the notes from losses in its wind-down of the two lenders.
The senior bonds had been trading at steep discounts to face value, reflecting investors’ fears that they could be “bailed-in” – a process whereby losses are imposed on private creditors to lessen the cost to the taxpayer. But over the weekend the EU commission signed off a scheme that will see Intesa Sanpaolo take on the good assets of the two Venetian banks, while also fully protecting senior bondholders.
Vicenza’s €750m 2020 senior note was trading at around 85 cents on the euro on Friday, according to Tradeweb prices, but soared up to 102 cents on Monday morning. Veneto’s €500m 2019 senior bond surged from 88 cents to 103 cents over the same period.
I’m sure that Italian taxpayers are absolutely delighted for these bondholders...
Markets boosted by Italian bank deal and German confidence
The Italian bank rescue/wind-up has helped to spark a relief rally across Europe’s stock markets.
Shares are up in London, Milan, Madrid, Paris and Frankfurt, as investors welcome the news that two of Italy’s fragile lenders have been dealt with.
The Italian FTSE MIB index is the top performer, up almost 1.5% this morning. Inteso Sanpaolo is still up almost 4%, with other banks also gaining ground.
David Madden, market analyst at CMC Markets, explains:
European equity markets are higher on the day as two Italian banks were rescued over the weekend. The deal will result in Vento Banca and Banca Popolare di Vicenza being wound down, and the good assets of both banks will be sold to Italy’s largest retail bank, Intesa Sanpaolo, and the Italian government will should the burden of both banks bad assets.
The bailout could cost the Italian tax payer up to €17 billion. There are still questions still hanging over the Italian banking sector, but for now investors are content with the Continent’s financial health.
Joshua Mahony of IG says the IFO report has bolstered confidence in the eurozone economy.
The German economy appears to be in rude health, if today’s record Ifo business climate figure is anything to go by. According to Ifo, German businesses are ‘jubilant’, and it is clear that investors feel the same way, with the record high reading sparking a sharp move higher for the DAX, while gold immediately shed 1.4%.
This is just the latest in a long line of encouraging economic indicators, with the eurozone seemingly emerging from years of decline at the very moment that the UK decided to leave the EU.
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