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Rome deputy PM thinks continent ready to ditch austerity and embrace Trump economic policy

Italy’s deputy prime minister believes Rome’s controversial spending plans will become “a recipe” for reviving European growth and that the continent is ready to abandon austerity and embrace the deficit-busting approach of US president Donald Trump.

Luigi Di Maio, leader of the Five Star Movement, Italy’s largest political party, said he believed dialogue with Brussels would resolve the fight brewing over Rome’s budget ahead of European elections next year, which he said would show electoral support for austerity policies had been exhausted.

“If the recipe works here, it will be said at a European level: we should apply the recipe of Italy to all other countries,” Mr Di Maio said in an interview with the Financial Times.

Italy’s coalition government, made up of Mr Di Maio’s Five Star Movement and the anti-migration League party of Matteo Salvini, who is also deputy prime minister, has clashed with Brussels for proposing to sharply increase government spending on welfare while also cutting tax. The European Commission said last month the plans were so serious a breach of its budgetary rules that it had “no alternative” but to ask that they be redrawn.

“We are not betting on Italy being ‘too big to fail’,” Mr Di Maio said. “We believe in the fact that we can greatly reduce public debt with an expansive budget. I am convinced that we can change the rules on austerity and investment, and we can strengthen the European Union and the eurozone to do good from the point of view of social rights.

Mr Di Maio said the budget plans, which could see Rome fined under the EU’s rules on excessive deficits, would not change but that he expected Italy’s model for higher government spending to gain wider acceptance.

Despite disagreeing with Mr Trump on issues such as the environment, Mr Di Maio believes developed economies will move closer to the US president’s policies of tax cuts and spending increases, which have brought robust growth to the US.

“I believe that over the next 10 years, Europe will go in this direction because the United States is moving in this direction. The US economy is growing at 4 per cent with the expansive policies of Trump, which everyone said were wrong. He is expanding the deficit, lowering taxation and investing in infrastructure.”

Economists question the amb­itious growth assumptions underpinning the budget, and investors in Italian debt have pushed the cost that the eurozone’s third-largest economy pays to borrow much higher. Mr Di Maio said investors were worried by “a narrative” that the government wanted to leave the eurozone, which was wrong. Once inv­estors realised Italy would never leave the euro, then its borrowing costs would fall.

“We will tattoo ourselves to explain to the investment community that we do not want to leave the eurozone,” he said.

At 32, Mr Di Maio is one of Europe’s youngest front-line politicians, having been catapulted to the top of Italian politics with the transformation of the online protest group fronted by the comedian Beppe Grillo to the largest party in the country. In March polls, it secured almost a third of the vote, sweeping up support in the poorer south.

Mr Di Maio, who became leader of the party just last year and who once worked as a steward at Napoli football club, said his own life experience helped him understand the economic difficulties of the region. “I come from the province of Naples, an area with 60 per cent youth unemployment, with some of the highest cancer index levels in Europe. It was a very depressed area,” he said.

“Between 2007 and 2013, we were totally ignored as a political reality. Meanwhile, this project grew in society.”

He argues his generation was betrayed by Italy’s political establishment. “We had social rights in Italy related to health, welfare, the stability of employment contracts, the right to schooling and training, we had the right to a pension. These rights were sacrificed on the altar of debt, but while they were sacrificed the debt grew.”

In July, Five Star formed a coalition with Mr Salvini’s League, which has its roots in Italy’s northern separatist movement, that billed itself as “the government of change”. Together they have pushed through a budget of lower taxes and higher welfare spending, a plan that critics fear will destabilise the country’s economy.

Mr Di Maio expects the coalition to last its full term, but said the only way to reduce voters’ concerns over migration across Europe, the flagship policy for his coalition partners, was to increase government spending on welfare and investment.

“Today everyone says that the most important issue is immigration. This is nonsense. All the findings we have tell us that the most important issue is work and unemployment,” he said. “If today we have 6m poor Italians in Italy, this is causing a social tension that also creates tensions with foreigners. This is inevitable.”

He said the Five Star Movement was in talks with other parties across Europe about establishing a new grouping in the European Parliament based on an anti-austerity platform. In next year’s European elections, he expected voters to give the continent’s political establishment “a big shake”.

“There is a political class [in Europe] that in recent years has stuck with this belief: the belief in austerity policies, which certain individual countries have repeatedly broken,” he said.” It is a political class committed to all this failed economic theory, and they know it too, but they can’t allow anyone to violate it because they’ve somehow supported it for 10, 20 years, for the whole period of the crisis.”

The League will be running on a separate platform to Five Star in the European elections, with Mr Salvini having made overtures to other anti-migration parties across Europe to form an alliance. Mr Di Maio said he would not say which European political parties Five Star was negotiating with, but that he hoped an agreement would be in place for January or February ahead of the European elections.

“Many [across Europe] no longer identify with any ideology, neither right nor left. Our new group will keep at its centre expansive policies for work, income, welfare, and the environment. These are the principles on which we want to create the new Europe.”

Treasury secretarywho dashes hopes Swift system would be exempt

European governments are locked in negotiations over a special purpose vehicle to safeguard trade with Iran as they prepare for a long-awaited US crackdown on Tehran’s oil and finance sectors to come into force.

Hours before Monday’s launch of a US squeeze on Iran’s energy industry and central bank, European diplomats said a planned special channel to safeguard non-US trade with Iran would not be ready in time. Agreement has yet to be reached on crucial details, including where to locate it as countries fear triggering a political and economic backlash from Washington if they play host. European states have not put a formal deadline on when the launch will be, but some diplomats had hoped to have the channel ready in time for the reimposed US sanctions.

The Trump administration will add more Iranian banks to its sanctions list later on Monday, forcing international financial messaging system Swift to choose whether to fall in line with the US and cut the institutions from its global cross-border payment network. The Belgium-based company, which declined to comment on Sunday, could face possible punishment under new EU rules if it complies with US orders. 

President Donald Trump’s decision in May to pull out of a landmark international nuclear deal with Tehran has pitted the US against European powers and China and Russia, co-signatories to the 2015 accord.

Dieter Kempf, head of the BDI, Germany’s main business lobby, echoed widespread European business concern about the potential destabilising effect of the US decision to unilaterally reimpose sanctions it had suspended in exchange for Iran curbing its nuclear programme. This is the second and final tranche of US sanctions to be restored. New sanctions may also be introduced.

“By using the global economy to pursue political goals, the US is straining international relations and the transatlantic partnership,” Mr Kempf said. 

European efforts to create a “special purpose vehicle” (SPV) to process Iran’s import and export payments had made some headway but still needed further work, EU diplomats said. “We are now actively working on where the SPV will be located, deciding who will participate, and starting the process of registering it,” a French finance ministry official said, adding that there were “good options on the table” for hosting it. “It is definitively crunch time and considering how complex and sensitive this is in light of geopolitical consequences, progress is pretty swift and operational.” 

Details of the proposal are now being discussed at finance minister level, diplomats said. EU finance ministers are due to meet in Brussels on Tuesday, although the SPV was not on the published agenda as of Sunday. 

Steven Mnuchin, US Treasury secretary, on Friday dashed hopes that Swift would be exempted from the latest sanctions. Mr Mnuchin said the US Treasury would “aggressively” use its authority and warned Swift to disconnect any targeted Iranian banks “as soon as technologically feasible to avoid sanctions exposure”. 

Europeans have appealed for the US to safeguard at least one bank for humanitarian transfers. Mr Mnuchin said humanitarian transactions to non-designated entities would be allowed to use Swift, but stopped short of endorsing a specific bank.

Europeans fear that unless the US endorses an institution by name, western banks will be too nervous to touch any Iranian bank, even those not subject to sanctions. “[W]e need to figure out how to make sure that the US humanitarian exemption is workable,” a European diplomat told the FT, adding that resolving the delivery of humanitarian assistance and goods such as food and medicine was “becoming increasingly urgent”. 

There are also fears that other US bodies, besides the Treasury, could take legal action if they perceive there is any sanctions evasion. The Foundation for the Defense of Democracies, a Washington think-tank, has circulated a legal memo arguing that individual Swift board members — including executives at top international banks — could be at risk of violating sanctions if they provide messaging services to sanctioned Iranian institutions. 

But Iranian analysts say that — regardless of Swift’s decision — the world’s top banks would be unlikely to handle Iranian transactions for fear of facing massive penalties. Big international banks have mostly refused to transfer money to and from the country even after the suspension of sanctions under the nuclear deal. 

Stocks Stage Rebound Following October Sell-Off

The S&P 500 staged a rebound effort this week, tallying a 2.4% weekly gain. The continued expectation that the market was due for a bounce-back after last month's sell-off, compounded with mostly upbeat earnings and easing trade tensions underpinned the rally. As for the other major averages, the blue-chip Dow Jones Industrial Average gained 2.4%, the tech-sensitive Nasdaq Composite gained 2.7%, and the small-cap Russell 2000 gained 4.3%.

Cyclical sectors were largely the best-performing groups this week, with the lightly-weighted materials sector (+6.1%) and the heavily-weighted financials (+4.4%) sectors leading the advance. The consumer discretionary sector (+4.0%) also had a notable gain. On the downside, utilities was the only group to settle in the red, losing 0.6%.

U.S.-China trade tensions eased this week, with U.S. President Trump saying that he had a "long and very good conversation" with China's President Xi, adding that the two leaders will be getting together at the upcoming G-20 summit in Argentina. There were some conflicting reports as to whether Mr. Trump has asked his cabinet to begin drafting a trade deal, but the president did say he thinks a deal will eventually be reached.

On the earnings front, Facebook's (FB) third quarter report was "good enough" to temper negativity surrounding the stock, helping to ease growth-related worries. Apple (AAPL), on the other hand, raised some red flags after forecasting softer-than-expected revenue guidance for the holiday quarter and announcing that it will no longer provide unit-sales data for the iPhone, iPad, and Mac.

Other notable companies to report earnings this week included Pfizer (PFE), Coca-Cola (KO), Chevron (CVX), Exxon Mobil (XOM), General Motors (GM), eBay (EBAY), T-Mobile US (TMUS), DowDuPont (DWDP), and Starbucks (SBUX), all of which beat estimates. Conversely, results from General Electric (GE), Kellogg (K), Spotify (SPOT), and Wayfair (W) came in below consensus.

In M&A news, IBM (IBM) acquired Red Hat (RHT) over the weekend for an all-cash offer of $190 per share; that represents a 63% premium over Red Hat's October 26 closing price.

Will the chill in equities spread to corporate bonds?

After bouncing for much of the week, US stocks ended Friday on the back foot as a sharp rise in US government bond yields unsettled investors.

For much of October, the US corporate debt market failed to blink at the turbulence in equities but cracks are beginning to emerge, with bond and loan prices sliding.

Investors still expect another interest rate increase from the Federal Reserve next month and the potential for a further tightening in financial conditions threatens credit markets.

Money began to flow out of US bond funds in October, after a long streak of inflows. Investors have also increased short positions against a popular loan exchange-traded fund. It is a sign that money managers are beginning to pull money from the market, fearful that the sell-off could deepen.

The stakes are high because US corporate bond issuance has topped $1tn every year since 2009, as companies have taken advantage of low interest rates.

But not everyone is convinced the October chill for credit markets will worsen this month. Corporate earnings have remained robust for the third quarter and interest rates, at least by historical standards, are still low.

Will the pound regain its poise?

On recent form, probably not.

The UK currency has just come through a rough week that has illustrated its intense sensitivity to the Brexit talks. On Tuesday, it took a heavy blow after rating agency Standard & Poor’s warned that a no-deal divorce was now a likely enough proposition for it to take seriously. Such an outcome would spark a lengthy recession, it noted. To some this is a statement of the obvious. The pound fell anyway.

The very next day, the Brexit secretary Dominic Raab suggested that a deal was in fact in sight for later this month. Cue a pick-up in the pound. Further talk of an agreement on UK services that would protect the crucial financial sector gave it a further kick higher. The apparent rumour was later denied.

Most of this is political noise, or “nonsense” as UBS Wealth chief economist Paul Donovan put it. But the recent ups and downs show it has the power to move the pound, which is delicately poised to either rally or sink when the final destination of these divorce talks finally comes into view.

Can the oil price rediscover its mojo?

Oil bulls have had a torrid month, with prices having dropped by almost 17 per cent since hitting a four-year high of $86 a barrel on October 3.

Things got particularly ugly in the past few days, with Brent dropping below $73 a barrel and breaking below the 200-day moving average — a key technical indicator — for the first time in more than a year. So will prices keep falling?

For the moment, many traders are betting they will. The dramatic shift in the oil market has come about because of Iran. Washington has succeeded in pressuring Saudi Arabia and other producers to add significant amounts of additional crude to the market ahead of US sanctions taking effect against Iran’s oil exports next week.

At the same time Washington has announced it will give waivers to eight countries that buy Iranian crude, damping fears of a severe shortage emerging in the market. That should keep the pressure on oil in the coming sessions.

How important are the US midterm elections for investors?

While stocks have tended to rally strongly in the period after midterm elections, the volatility of recent weeks makes forecasting market reactions particularly treacherous.

If Republicans keep hold of both the House of Representatives and the Senate, the chances for further economic stimulus rise. Strategists say that may add fresh momentum to the stock market, but may also concern investors in US government bonds who are already looking at a rising budget deficit.

Lori Calvasina, head of US equity strategy at RBC Capital Markets, says that most investors have “viewed a Republican sweep as a bullish event for the [stock] market, and a Democratic sweep as bearish event”.

However, the base case for many investors is a split Congress in which Democrats retake the House and Republicans hold the Senate. It is an outcome that most view as broadly neutral for equities.

Any other outcome is likely to provoke a bigger market reaction.

“For US equities, we expect the impact would be negative if Democrats surprise on the upside, and positive for stocks if they underperform,” said Anna Stupnytska, Global Economist at Fidelity International, noting that the effect on Treasuries would be the other way round.

U.S. companies say they are blunting the effects from escalating tariffs with China through price increases or changes to their supply chains, but they warn investors that the picture could worsen next year.

Tariffs have slowed timber and grain shipments, raised the cost of clothes hangers and heavy-equipment materials, and compressed margins for chip- and toolmakers, among other effects, according to an analysis of results and comments from the roughly 75% of S&P 500 companies that have reported earnings.

“The negative impact is pretty widespread across the S&P 500,” said Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank. Still, he added, the overall impact is rather modest so far.

The tariff concerns come as the recent run of robust profit and sales growth shows signs of slowing. Gains are moderating and performance is uneven, with companies within some industries reporting markedly different results. Analysts and economists are warning of still-slower earnings growth next year.

Overall, third-quarter per-share earnings for S&P 500 companies were on track to rise 27.1% over the same period in 2017, the third straight quarter with earnings gains near or above 25%, according to financial-data firm Refinitiv. Analysts say as much as a third of that quarterly gain stems from last year’s corporate tax cut, and is unlikely to continue next year.

S&P 500 revenues are expected to rise 8%, still above normal for recent years but slower than the last three quarters, Refinitiv data show. The figures reflect reported results, as adjusted by analysts, and analyst estimates for the rest.

Companies are grappling with tariffs on trade with China, as well as on imports of steel, aluminum, softwood lumber and more.

Executives or analysts have mentioned tariffs or the terms “China trade” or “trade war” about 600 times in earnings calls at about 130 S&P 500 companies since mid-September, The Wall Street Journal found in an analysis of conference-call transcripts retrieved from Factiva. The terms arose at least a half-dozen times at about a quarter of the companies.

If tariffs jump to 25% on the $200 million of Chinese imports that currently face a 10% levy, as the Trump administration has threatened, it could reduce earnings growth for the S&P 500 by 2 to 3 percentage points, Mr. Lefkowitz said. He projects that would cut earnings growth to around 4%, a deceleration likely too small to derail the economic expansion on its own.

Some companies have said the tariffs are slowing demand for products shipped to China from the U.S. According to timber company Weyerhaeuser Co. , log exports to China declined with the country’s 5% tariffs, imposed Sept. 24, despite solid construction activity there.

Railroad giant Union Pacific Corp. said in October that the season’s typical grain-shipment increase hadn’t materialized, due in part to Chinese tariffs.

Caterpillar Inc. said sales haven’t suffered, and its manufacturing operations in both countries reduce its need for imports. Still, additional material costs are running toward the lower end of the company’s earlier forecast of between $100 million and $200 million in the second half of this year, company officials said in September.

Workplace uniform supplier Cintas Corp. said it is paying more for clothes hangers because of the tariffs, while other direct impacts are limited. “It is something that’s starting to creep in,” Chief Financial Officer J. Michael Hansen told investors in September.

Micron Technology Inc., which sells computer memory and storage, said tariffs could reduce its first-quarter gross margin by 0.5 to 1 percentage point, contributing to projections for a year-over-year decline of at least 1.4 percentage points.

Mitigation will take time, Financial Chief David Zinsner told investors in September. “It will be a quarter or two probably before we start to see some benefit,” he said.

Stanley Black & Decker Inc. said tariffs, with commodity-price and currency shifts, squeezed operating margins. Two-thirds of the toolmaker’s imports from China are subject to tariffs, primarily finished goods such as power-tool accessories, vacuums and some hand tools.

The additional costs are running $50 million this year, the company said in October, and could rise to $250 million next year, before mitigation efforts—and up to $150 million more if the U.S. follows through on other proposed tariff moves. The company said it plans to increase prices in January to adjust for tariffs imposed this fall, and has sought exemptions for some imports.

“I want to make it very clear that it’s not a doom-and-gloom story right now, and we don’t expect it to be in the fourth quarter, because the bulk of the tariff increases really don’t hit until January 1,” Chief Executive James Loree told investors in October.

Some companies say raising prices, as many firms have done, takes time and isn’t always possible.

BorgWarner Inc., which sells parts primarily to car and truck manufacturers, said it expects $20 million of tariff and inflation costs this year, and has absorbed all of it so far.

“We’ve not passed anything through,” CEO Frédéric Lissalde said. “Discussions take time and are happening.”

Mohawk Industries Inc., which makes flooring and countertops, said it has announced price increases on its imports from China that cover both the tariffs and other rising costs. The company also has revamped supply chains.

Still, Mohawk CEO Jeffrey Lorberbaum urged patience and said in the short term that higher prices could drive customers to buy other products unaffected by the tariffs. “It won’t happen like a light switch,” Mr. Lorberbaum said.

Fortune Brands Home & Security Inc., which sells cabinetry, doors and home security products, said the tariffs are expected to cost it $2 million to $3 million in the fourth quarter, and more in January if tariff rates increase.

Long-term, it said, the levies could help the company as it relies more heavily on production and assembly outside China. It is moving more door-component production to a facility in Mexico, for example, executives said on a conference call with analysts in October.

“Tariffs are not trivial, but they are manageable,” CEO Christopher Klein said. “Once we manage through the initial impact, we actually see potential upside for us from the tariffs given our competitive positions.”