Europe in the Spotlight

August 28, 2019

Tense political dramas are happening in the U.K. and Italy this Wednesday.

  • British Prime Minister Johnson, A.K.A. Bojo, requested that Queen Elizabeth suspend parliament for five weeks. This tactic is meant to curtail the maneuvering room of opponents to a hard Brexit from passing a law preventing such. Johnson’s request creates a constitutional crisis. Sterling fell 0.5% against the dollar overnight.
  • In Italy, center-left parties are engaged in a last minute effort to prevent snap elections that could elect a highly nationalist right-wing government that would endanger the euro and EU. Former Prime Minister Conte resigned eight days ago, and the parties purportedly have until the end of today to form a viable coalition, or elections will be called.

Fragile European politics and weak economic activity have been both cause and effect to one another lately. The euro, meanwhile, remains remarkably stable against the dollar, showing zero net overnight change. The dollar otherwise rose 0.2% against the kiwi and 0.1% relative to the loonie and Australian dollar but fell 0.2% versus the peso and 0.1% vis-a-vis the yen and Swiss franc.

Ten-year sovereign debt yields are lower this Wednesday, including outsized declines of 16 basis points in Italy, 8 bps in Greece, 6 bps in Switzerland, and 5 bps in Great Britain. 10-year yields are down 3 bps in France, 2 bps in Germany and a basis point in the United States.

Stock market action in Europe has seen share prices drop 1.0% in Germany, 0.8 bps in France and Switzerland, 0.4% in Italy but 0% in the U.K.. Earlier in the Pacific Rim, equities closed up 1.0% in New Zealand, 0.9% in South Korea, and 0.5% in Taiwan and Australia. Stocks closed down 0.5% in India and 0.3% in China and up just 0.1% in Japan and Indonesia.

WTI crude oil advanced 1.3%, while Comex gold is generally firm but little changed.

The Central Bank of Iceland’s key seven-day interest rate was cut for the fourth time in 2019, following moves in March, May, and June. The 3.50% new rate level is down 125 basis points altogether after today’s latest 25-bp adjustment. In a released statement from the Monetary Policy Council, officials said inflation expectations had eased since their prior meeting. Targeted inflation is now projected to be secured by the first half of 2020, and the outlook for growth next year has deteriorated because it is taking longer than assumed for the hard-hit tourism sector to recover. GDP this year will likely contract marginally.

British shop prices posted a 0.4% year-on-year decline in August, the biggest 12-month drop in 14 months.

German consumer confidence in September held steady at September’s 28-month low.

German import price deflation swelled to a 35-month high of 2.1%. Import prices also posted their third straight month-on-month retreat, this time of 0.2% after June’s drop of 1.4%. Non-oil import prices were 1.7% lower than a year earlier.

The Swiss ZEW expectations index of investor confidence in the economy fell by a sharp 13.5 index points in August to a 7-month low.

Italian sentiment in the manufacturing sector sank to a 56-month low in August, and overall business confidence dropped 2.3 index points to a 4-month low. Consumer confidence in August settled back 1.4 points to a 2-month low.

Austria’s manufacturing purchasing managers index bounced up 0.9 points from July’s 57-month low to a 3-month high of 47.9 in August, but that marked the fifth consecutive sub-50 reading, which signifies a deteriorating trend.

Irish retail sales dropped at their sharpest month-on-month rate since April 2015 during July, resulting in a 12-month 4.4% decline, most in at least a year.

On a brighter note, Swedish retail sales rose for a second straight month in July. Such increased 0.4%, resulting in an on-year advance of 4.3%, most in 38 months.

On-year growth in Euroland M3 money accelerated to 5.2% in July and averaged 4.8% over the latest three-month period. Loans to non-financial firms (3.9%) and to households (3.4%) grew on year at similar rates as in June. On-year credit growth to private residents dipped under 3.0%, however.

Construction work done in Australia suffered through a deepening contraction in the second quarter, dropping 3.8% from 1Q and by 11.1% from the second quarter of 2018. All elements of construction felt the pain.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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