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Daniel Marc Richards - MENA Economist
Published Date: 21 August 2019
Italian Prime Minister Giuseppe Conte announced in parliament yesterday that he would give the president his resignation today, prompting a fresh bout of uncertainty in the country. The coalition the independent Conte had been heading broke down as relations between Matteo Salvini’s League and Luigi di Maio’s Five Star deteriorated over the summer. There will follow a round of negotiations aimed at forming a government, but there is a strong possibility of fresh elections in the autumn. Should Salvini – currently leading the polls, and who has been on a campaign footing for some months – return as premier, it could set Italy on a collision course with the EU, given his desire to cut taxes and go on an infrastructure spending spree, and the bloc’s concerns over Italian debt and fiscal deficits.
US President Donald Trump has floated the idea of inflation-indexing capital gains taxes as he seeks to avert a recession, although the move is perceived as primarily benefitting the wealthy and would run into opposition in Congress. He also said yesterday that he was not ready for a deal with China, and intimated that some short-term pain was necessary in taking the country on.
The UAE has announced new ‘sin taxes’ on non-carbonated sugary drinks and electronic cigarettes, which will have fresh levies of 50% and 100% respectively imposed on them. This adds to the list of goods introduced in 2018 which included carbonated sugary drinks and tobacco products.
UK Prime Minister Boris Johnson’s letter to the European Council opposing the Irish backstop was met with a lukewarm response from EU figures yesterday, who called out the missive for a lack of detail or specifics on alternative proposals. Nevertheless, German Chancellor Angela Merkel did say that the EU would look for ‘practical solutions’ to the issue.
Source: Bloomberg, Emirates NBD Research
Treasuries closed higher as equities slipped. The resignation from Italian Prime Minister Giuseppe Conte also weighed on investor sentiment. However, volumes remained muted ahead of Fed Chairman Jerome Powell’s speech at Jackson Hole on Friday. Yields on the 2y UST, 5y UST and 10y UST closed at 1.51%, 1.45% and 1.55% respectively.
Regional equities continue to track moves in benchmark yields. The YTW on Bloomberg Barclays GCC Credit and High Yield index closed at 3.20% while credit spreads remained at around 167 bps.
The dollar index weakened modestly yesterday, falling 0.2% to close at 98.19. This morning, pound stirling is looking weaker against the greenback as the public disagreements and apportioning of blame between the British government and EU officials over the Irish backstop yesterday marked the latest bout of uncertainty in Brexit negotiations. It was trading at 1.2161 at the time of writing, not quite at the lows of 1.2033 seen last week. The euro, meanwhile, is flat today after whipsawing during Prime Minister Conte’s appearance in parliament yesterday, when he announced he would resign. The single currency is at 1.1096, having this month fallen to levels last seen in May 2017.
Developed market equities closed lower as investors remained cautious ahead of comments from the Fed Chairman. The S&P 500 index and the Euro Stoxx 50 index dropped -0.8% and -0.6% respectively.
Regional equities closed mostly higher with the Tadawul and the Qatar Exchange gaining +0.3% and +0.9% respectively. Julphar dropped -9.8% after the company had to recall a single batch of a medicine due to labelling error. Elsewhere, Emaar Misr dropped -1.2% after reports of a potential dispute at one of its projects.
Oil prices remained bid higher overnight thanks to a larger draw in inventories than had been expected, according to data from the API. Brent closed at USD 60.03/b, up 0.49%, while WTI gained 0.23% to close at USD 56.34/b. API data showed a draw in US stocks of 3.5m bbl last week while EIA data will be released later tonight.
Geopolitical risk continues to add bid tone to markets as the release of an Iranian tanker and US warnings to nations not to accommodate the vessel highlight the lingering standoff between the countries. While a single tanker represents only a drop in the proverbial ocean of global crude oil markets, it nevertheless will keep an element of supply anxiety in markets.
Gold prices continue to oscillate around USD 1,500/troy oz as the market awaits the latest US Federal Reserve minutes. A persistent aggressive tone from the US toward China over trade will help act as a support for gold near term although any indication from the minutes that the Fed was less assured about cutting rates could see some downside risk enter markets.
US-China trade deal awaited
US lifts China FX manipulator label
Markets take relief at easing tensions