FT : Budget uncertainty keeps Italy out of European rally

Budget uncertainty keeps Italy out of European rally
Bond yields rise and stocks fall as investors measure political uncertainty

Uncertainty in the run-up to Italy’s budget in October is leaving the country’s assets looking exposed.

As the populist coalition government prepares its first finance bill, there is once again an uneasy tone to trade, keeping the FTSE MIB out of a broader rally on global markets, while its sovereign debt is also being sold off, sending yields higher.

The pattern comes as the ruling parties continue their budget negotiations. The League and Five Star parties are united in power but have opposing policy aims, adding to the uncertainty.

The yield on the country’s benchmark 10-year sovereign debt is at its highest level since May up 3.6 basis points at 3.202 per cent. Apart from one session on May 29, it last regularly traded above 3.2 per cent in late 2014.

There is also a debt auction scheduled for Thursday, with €7.5bn in bonds expected to be sold.


“There continues to be high uncertainty about the size and composition of Italy’s draft budget for 2019. The promises made in the coalition agreement of the new government are estimated to add up to between 4½% and 7% of GDP (including a flat tax, citizenship income and pension reform). If implemented, this would most likely derail Italy’s debt dynamics.

“Based on the October draft budget, the EC will prepare an opinion by 30 November, scrutinising the assumptions and evaluating the budget proposal against EU fiscal rules.”

FELIX HUEFNER, SENIOR EUROPEAN ECONOMIST, UBS
On Tuesday Reuters carried reports that the deputy prime minister, Luigi Di Maio, told an Italian newspaper that he did not rule out breaching the European Union’s rules limiting public deficits to 3 per cent of gross domestic product.

Milan’s FTSE MIB is down 0.8 per cent and is being led lower by banks, underperforming a rise of 0.3 per cent for the Europe-wide Stoxx 600.


The country’s banks are major holders of Italian government debt, which also faces losing a major buyer when the European Central Bank reduces its bond-buying stimulus spending on schedule in September.

UBI Banca is down 2.1 per cent and UniCredit is down 2.5 per cent.

The euro remained aloof from Italy’s politics — up 0.1 per cent at $1.1692 — but analysts remained concerned that any turbulence with the bloc’s third-biggest economy could yet become an important driver for the shared currency:

“The main downside risk to the outlook for the euro against the dollar in the near-term continues to be posed by Italian political developments.

“There is clearly the potential for conflict with the EU and an unfavourable Italian debt market reaction. So far, the euro has proven relatively resilient to the pricing in of a higher Italian political risk premium, but that may not last.”

LEE HARDMAN, CURRENCY ANALYST, MUFG

>>> DIA eyed by Amazon; suitor Fridman will not oppose Amazon bid - reported rum

DIA eyed by Amazon; suitor Fridman will not oppose Amazon bid - reported rumour (translated)
28 AUG 2018
Spain-based supermarket chain Distribuidora Internacional de Alimentacion [DIA:SM] (Grupo DIA) is being eyed by Amazon [NASDAQ: AMZN], according to a report in the Spanish-language online newspaper OKDiario.
As reported, Russian businessman Mikhail Fridman, who is DIA’s main shareholder with a 25% stake through the vehicle Letter One, is preparing to launch a bid for 100%. However, according to OK, which cited sources close to the magnate, he will not fight against Amazon if it decides to step in.

According to previous reports, Fridman partnering with Goldman Sachs [NYSE: GS], may have contacted DIA shareholders French bank Societe Generale [EPA: GLE], Edinburgh-based investment fund Baillie Gifford, Canadian fund Black Creek Investment Management and Norwegian bank Norges Bank.
Grupo DIA's market value is EUR 1.327bn.

FT Alphaville : The bull market is running out of brea(d)th

The bull market is running out of brea(d)th
Just days after US stocks entered their longest-ever bull market (although the FT's John Authers calls bull**** on this), the S&P 500 and Nasdaq closed at record highs. While many have cheered on these milestones and say there's still room to run, others have greeted them with far less fanfare on fears that it's all downhill from here.
To make the case that the current bull market is not yet out of steam, many investors point to the cumulative advance/decline (A/D) line for the S&P 500. This indicator measures the number of stocks rising or falling on a daily basis. If it trends negative, that means more stocks are declining than rising. The reverse is true if it's positive. Bespoke Investment Group believes the cumulative A/D line can say a lot about how much momentum the market has left. Here's what they wrote in a recent note:
In a rising market, breadth, as measured by the cumulative A/D line, should be rising as well. If it’s not, it serves as a red flag that leadership in the rally is thin. We’ve all heard the phrase 'there’s strength in numbers,' and it’s also applicable to the market. In a broad-based rally, you can afford to have a few stocks falter because other stocks are there to pick up the load. In a narrow rally, though, if you lose a few stocks, you won’t have much left.
The cumulative A/D line of the S&P 500 six months before and after a peak in late-January is not only positive, but has topped new highs. That's in contrast to in 1999-2000, before the dot-com bubble burst, when the cumulative A/D line had turned negative. Back then, Bespoke says, “it was tech and only tech”, whereas this time around it's “tech and a lot of other companies.” Here's their chart comparing the two rallies:

While Morgan Stanley's Michael Wilson concedes that the cumulative A/D line is ticking higher, he stresses that other indicators of market breadth are saying something quite different. The percentage of stocks making new highs and the percentage of stocks above their 200-day moving averages have fallen. More worryingly, the S&P 500's narrowness has become “extreme” in its most recent leg higher.
According to Wilson, the S&P 500 would not be busting through its recent record highs without Amazon, Microsoft and Apple. Here's his chart tracking the normalised performance of the S&P 500 versus a version excluding the three stocks:
A glance at the FAAMG stocks (Facebook, Apple, Amazon, Microsoft and Google) confirms this. Their combined market capitalisation of $4.1trn is just about equal to the combined market capitalisation of the 283 smallest S&P 500 members, according to Bank of America Merrill Lynch. So long as investors piled into the FAAMGs and other technology stocks, market-watchers could sideline the risks brought on by this dominance. Not anymore. Inflows to the sector more broadly have slowed in recent months:
How long the bull market can sustain itself on such a small and shrinking base remains to be seen. Morgan Stanley predicts growth to slow later this year and next. In their eyes, “this is a more dangerous set up than most recognise”.

FT : May says no-deal Brexit ‘not the end of the world’

May says no-deal Brexit ‘not the end of the world’
Prime minister reiterates that leaving EU without a deal is preferable to a bad deal

Theresa May has undermined Philip Hammond’s warnings about the economic damage from a “no-deal” Brexit by suggesting that the Treasury’s forecasts are still “just a work in progress” and that such an outcome would not be “the end of the world”.

Last week Mr Hammond, the chancellor of the exchequer, released a letter suggesting that UK GDP could drop by a relative 8.8 per cent if the country left the European Union without an agreement — compared to staying in the bloc. The letter to Nicky Morgan, chair of the Treasury select committee, also suggested that borrowing could be £80bn higher in 15 years’ time under that scenario.

Speaking to reporters on the government’s RAF Voyager plane en route to Africa for a three-day trip, Mrs May played down the substance of that letter. “I understand the chancellor was talking about a set of figures that when they came out in January I actually commented . . . that they were just a work in progress at that particular time,” she said.

That letter was political dynamite because it was published just hours after Dominic Raab, Brexit secretary, tried to demonstrate that Britain was prepared for a no-deal scenario by releasing an initial 24 technical notices advising various industries on how to prepare.

The timing prompted accusations by Brexiters of sabotage by Mr Hammond, one of the most senior Remain-leaning ministers in the Tory government.

But in remarks that will infuriate the Treasury, Mrs May stuck to her line that no-deal is better than a bad deal. She cited the head of the World Trade Organization, saying that he had told her that leaving Brussels empty-handed would not be terminal: “He said that it would not be a walk in the park but it wouldn’t be the end of the world.”

The prime minister said she was confident that the government would get a good deal: “But of course it is absolutely right that as a government we make preparations for all potential outcomes.”

Best for Britain, an anti-Brexit group, responded to Mrs May’s remarks, saying: “We’ve has government ministers telling us all summer that no deal would be a disaster for the UK, but now the prime minister is back saying no deal is OK and better than a bad deal.”

“With every passing day it’s more obvious that they don’t know what they are doing, other than putting the future of our country at risk,” it said.

There have been mixed messages from ministers about the chances of a no-deal outcome, which many business leaders believe would be disastrous for the economy. Mr Raab said last week that it was “unlikely” but Liam Fox, trade secretary, has suggested that it is more likely than not at “60:40”.

Mrs May also said that Brussels would be to blame if a deal was not agreed by the original deadline of October.

The prime minister is on her first trip to Africa since becoming leader two years ago. On Tuesday, she is set to visit Robben Island, where former South Africa president Nelson Mandela was held for 18 years.

Mrs May, who is accompanied by a trade delegation, will also visit Nigeria and Kenya during her trip — and will meet the presidents of all three countries.