The Weekly- Italicita- the second domino?


You heard it here first; Italicita is the combination of ‘Italy’ and ‘Uscita’, the latter being the Italian word for exit. Structurally it might be the same as Brexit and not completely original in its thinking, but with the Italians going to the polls yesterday it is completely relevant.

The largest winner was the Five Star Movement (M5S), an anti-establishment Eurosceptic party. Provisional results show M5S gaining 31.6% of the vote. The League garnered 18.2% of the vote, and Silvio Berlusconi’s Forza Italia gaining 13.8%, while the Democratic Party performing much worse than expected and only securing 18.7%.

M5S was formed by Beppe Grillo, an Italian comedian; although the EU won’t be having anything to laugh about should any deal of a coalition involve both the Five Star movement and The League, the latter being a far right group alarmed at the levels of immigration, and not surprisingly Eurosceptic . A more likely coalition would be between the M5S and the Democratic Party. Any deal or coalition is probably a few weeks away so it is useless to speculate, however, with the surge in support for Anti-EU parties it could be a nervous wait for Brussels.

Italy is a net contributor to the EU budget, so should Italy decide to also go it alone then things will become very difficult for the EU. Overall it contributes more to the EU budget than the UK, currently around 14% compared to the UK which stands at 11%. Italy does benefit from a higher spend of the EU budget within its own borders, so we are a bigger net contributor, but nevertheless a combined 25% of the budget would vanish should Italy decide to join the UK. This could be the start of a domino effect across the rest of the Eurozone which could see other countries think about going it alone.

However, despite this uncertainty in Italy and the possibility that it may spread throughout the rest of Europe both the CAC and DAX are in positive territory, and even the Borsa Italiana at the time of writing is only slightly down. This is because a hung parliament was widely expected by markets, and politics in Italy is always viewed as relatively unstable – very few governments ever see out full terms anyway! Nothing sums up Italian politics more than a man renowned for his Bunga bunga parties and being convicted for corruption now potentially being the king maker in any future Italian government.  

It should certainly prove interesting seeing how talks between the main Italian parties play out, with the outcome less certain than the upcoming Russian election on the 18 March whereby Vladimir Putin will be elected for his fourth term as the ‘democratically’ elected president of Russia.

Italy’s vote may well have wider reaching ramifications when it comes to negotiating our own complex exit from the European Union. If Italy does form a government which has the potential to take Italy out of the EU, then like any organisation in its death throes, sudden violent movements can be expected from the EU, and these would be aimed firmly at the UK in the hope that any deal detrimental to ourselves will be viewed by Italy as a road that they won’t wish to go down.

Donald Trump has declared war! Thankfully not a militarised war in the traditional sense, but a trade war; however, like any type of war there will be no real winner, only varying levels of loss. Donald Trump announced last week that he would place a tariff of 25% on steel and a 10% tariff on aluminium.

Almost immediately the EU threatened to retaliate with Jean-Claude Junker announcing that the EU would retaliate by slapping tariffs on products produced in strong Republican states such as bourbon, Levi jeans and Harley-Davidsons. In response Donald Trump said that should the EU make such a move then he would place a higher tariff on cars produced within the EU. This move should not be seen as unexpected because it was part of Donald Trump’s campaign promise of America first.

However, like any war if you don’t look at the history books then you are destined to repeat mistakes from the past, and we only need to look back as far as the 2002 when George W. Bush placed temporary tariffs of 8-30% on imported steel. It has since been concluded that the costs outweighed their benefits in terms of aggregate GDP and employment. Furthermore, the World Trade Organisation (WTO) came out against these tariffs and ruled that they were a violation of Americas WTO tariff commitments. The WTO imposed more than $2 billion in sanctions, the largest penalty ever imposed by the WTO against a member state.

Donald Trump’s dislike and disregard for the WTO is already well documented, however, the US is currently enjoying strong GDP and employment, so it’s difficult to see his justification in imposing these tariffs.  If anything a trade war is going to create more inflationary pressures as its makes goods more expensive for Americans. American steel will be more expensive than the cheaper Chinese steel that has been flooding the market. If this plays out in full then this could lead to increasing interest rates to combat raising inflation, which in turn would push the yield on the 10-year government bond yield above the key 3% mark. This would have ramifications for the stock market as a sharp fall would be expected as investors flee into bonds due to rising returns and less risk.

Between the 20 March 2002 and the 4 December 2003, the duration of time in which the US last imposed sanctions on steel, both the Dow Jones and the S&P 500 fell 18.52% and 21.38%, respectfully:


Source: FE Analytics 2018


While some might point out this fall is not down to the steel tariff imposed at the time, but more likely a correction after a decade-long bull market, we would point out that currently we have been enjoying a decade long bull market as well!    

As someone who likes to measure the success of the presidency on the stock market, Donald Trump should be mindful of this before carrying out a trade war that would be in nobody’s interest. The Republican Party have voiced their concerns at such tariffs, because as a party they are broadly supportive of free trade. While Donald Trump has managed to unify the party somewhat since his inauguration, this could be his undoing if it adversely affects the markets, as this would almost certainly end his bid to rerun for President in 2020 which he also announced last week. 

Global Equities Slip Lower on Trade War Concerns

Equities endured a difficult week as most major indices suffered losses. Relatively solid economic data was trumped by renewed concerns of global trade wars. The S&P 500 shed -2.0% whilst the FTSE 100 closed the week -2.4% lower.

The UK’s ongoing Brexit negotiations with the European Union (EU) also impacted currency markets; Sterling devalued against both the Euro and the US Dollar by -1.6% and -1.4%, respectively.  The drop comes after Prime Minister Theresa May rejected an EU proposal to keep Northern Ireland under the European control. May’s speech on Friday went on to warn that access to each other’s markets will be less than it is now.

US Economic growth in the fourth quarter was adjusted ten basis points (bps) lower to a rate of 2.5%, quarter on quarter.  Last week’s second estimate saw consumer spending largely unchanged but slowing inventory build and non-residential investment detracted, outweighing other modest revisions.

Newly appointed Federal Reserve Chair Jerome Powell addressed Congress for the first time in his new position, acknowledging the continued strength of the US economy, labour market, and gradually rising inflation. Importantly, he reiterated his commitment to continue reducing the Bank’s balance sheet and gradually increasing interest rates.  The yield on 10-year US Treasuries dropped two bps over the course of the week to 2.86%.

Trade war rhetoric between Trump and European Commission president Jean-Claude Juncker also put paid to what had been a positive start to early-week trading in European markets. Germany’s DAX 30 suffered more than most after some poor retail sales figures added further food for thought, eventually succumbing to a loss of -4.6% whilst the French CAC 40 fell -3.4% by the week’s close.

The price of key commodities like oil and a number of industrial metals also slipped lower during the week. Brent Crude, the primarily European benchmark, drifted -4.4% to just over $64 per barrel.

The Week Ahead

Following on from last week’s manufacturing and construction PMI data, the Services sector comes to the forefront this week with a modest improvement on January’s 53.0 expected. Similar data is also due in the US with the Institute for Supply Management releasing their Services PMI equivalent. However, Friday’s labour market is the most important US release of the week with unemployment expected to have dropped back to 4.0% (from 4.1%) with 204,000 new jobs created last month. The ADP non-farm employment figure (due Wednesday) will act as a precursor for the report. In China, trade data is due on Thursday followed by headline CPI inflation in the early hours of Friday morning. It’s also a busy week for the central banks with both the European Central Bank and Bank of Japan hosting policy meetings although no changes are expected at either.