Italy budget uncertainty returns to haunt Europe

[September 27, 2018]  By Marc Jones

LONDON (Reuters) - Europe's share markets and the euro both took a tumble on Thursday as a report that Italy's long-awaited budget was facing a delay compounded an already groggy global mood after the third U.S. interest rate rise of the year.

Italy's main Milan bourse slumped as much as 2 percent in early trading, with the country's main banks down even more as the country's borrowing costs hit a three-week high in the government bond markets. [.EU] [GVD/EUR]

Investors have been anxious about Italy's budget which some fear could lead to a blowout of the country's deficit, and put the coalition government on a collision course with the European Union.

Italian Deputy Minister Luigi Di Maio confirmed that a cabinet meeting over budget targets was planned for later, dismissing a report in the Corriere della Sera newspaper which said it could be delayed.

But it couldn't soothe the markets, especially after the economy ministry was forced to deny its chief Giovanni Tria, an academic who doesn't belong to any one party, had threatened to resign.

"It is very fluid and it is changing by the minute it seems," State Street Global Advisers' head of EMEA macro strategy Tim Graf said.

"Even if things get resolved positively today, Italy is not a situation that is going to go away," he added, pointing to the still growing popularity of the country's fractious anti-establishment coalition government.

The strains weighed on the rest of Europe too. The STOXX 600 was down 0.5 percent while the euro skidded all the way down past $1.17 in the currency market. [/FRX]

That fall also gave the dollar a boost after it had only managed a lazy gain overnight after the Federal Reserve hiked U.S. interest rates by another 25 basis points to a range of 2 percent to 2.25 percent.

The dollar index which measures the greenback against a basket of currencies, was last up 0.4 percent to 94.529.

The index had scaled a 13-month high in mid-August, drawing safe-haven demand as trade tensions buffeted riskier emerging market currencies. The index has since fallen about 2.8 percent though as investors have become more nuanced in their views.

The Australian dollar seen as a barometer of global investor risk appetite and Chinese demand for goods, fell 0.4 percent to $0.7226, its lowest since Sept. 19 and not far off its 2-1/2 year lows of $0.7085 hit earlier this month.

The Fed still foresees another rate hike in December, three more next year, and one increase in 2020.

OIL PRESSURE

In Asia, MSCI's index of Asia-Pacific shares outside Japan had ended lower. There were, however, pockets of resilience such as South Korea's Kospi, which hit three-month highs, as it resumed trade after a three-day public holiday.

Japan's Nikkei briefly touched an eight-month high too signs the United States may not impose further tariffs on Japanese automotive products for now lifted carmakers, though the index eventually ended down 1.0 percent. [.T]

Asia had generally fared better than Wall Street, where the Dow Jones Industrial Average fell 0.4 percent and the S&P 500 and Nasdaq had dropped 0.2 and 0.3 percent. [.N]

A man looks at a mobile phone next to an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo, Japan, March 23, 2018. REUTERS/Toru Hanai

The 10-year U.S. Treasuries yield fell to 3.043 percent, from Tuesday's four-month high of 3.113 percent when traders had been bracing for a more hawkish Fed message than it ended up delivering.

The U.S. central bank did drop a description of its policy stance as "accommodative" in its post meeting statement, but Fed Chairman Jerome Powell then downplayed the significance of the change saying in a news conference that policy was still generally accommodative.

Falling Treasury yields were good news for emerging markets. Plenty of EM currencies were firmer despite the dollar's broader gains against the likes of the euro.

EM currencies have been pressured for months by concerns that higher U.S. yields would encourage investors to move funds out of those economies back into the U.S. That's on top of worries over the U.S.-China trade feud.

Indeed, the European Central Bank said on Wednesday the United States would have the most to lose if it started a trade war with other countries, while China would be better off after retaliating.

The finance minister of the Philippines warned meanwhile that the world will be in "deep kimchi" if the current trade war drags on. Its central bank then raised rates for a fourth straight meeting in an effort to stem the pressure on its currency.

Rising oil prices also remain a major pressure point. They gained again on Thursday on an impending fall in Iranian exports due to U.S. sanctions, which are set to be implemented in November. [O/R]

Global benchmark Brent rose 1.1 percent to $82.22 per barrel, near the four-year high of $82.55 set on Tuesday. West Texas Intermediate (WTI) crude futures gained 1.3 percent to $72.47 a barrel.

"The real big impact is the fuel price...that is what is really worrying me," Philippines finance minister Carlos Dominguez told Reuters.

(Reporting by Marc Jones; Editing by Toby Chopra)

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