After two months of political infighting and bickering it would appear that Italy now has the makings of a new government, and in so doing, avoiding the need for further elections, after newly re-elected Italian president Napolitano threatened to resign if no decision was reached.
This news, while likely giving a small boost to equity markets and the euro
this morning, doesn’t make Italy’s economic problems any easier to resolve and the new government’s ability to move forward with an economic strategy will be a key test, and something that the markets could well put to the test. Italy’s FTSEMib looks set to open 180 points higher this morning on the back of the news, while this morning’s 5 and 10 year Italian bond auctions will also be a key test, however given the recent drops in yields should go through fairly smoothly.
Given the fractious nature of Italian politics the new government headed by Enrico Letta is indeed progress; however it was done without any of the protagonists who had led Italy’s main political parties in the original election campaign, which could bring into question the democratic legitimacy of the entire process with technocrats in a number of key positions.
Both Bersani and Berlusconi have stepped back while the 5 Star Movement’s Beppe Grillo has denounced the move as an “orgy worthy of bunga bunga” and vowed to have nothing to do with it.
The new government will face its first test of cohesion soon enough in June with respect to a new housing tax which Berlusconi’s party has demanded be scrapped, and could well also stress test the new Italian governments relationship with Brussels and Berlin.
Having been on the agenda for all of last week, growth or rather the lack of it, will once again be at the forefront of market thinking this week with the main focus set to be on meetings of the Federal Reserve, Bank of England and the European Central Bank, and any potential changes in policy that might come about from these meetings.
While no changes are expected from either the Federal Reserve or the Bank of England, after last week’s GDP numbers there is increasing speculation that the ECB could well cut interest rates this week.
This week’s European data is likely to increase speculation surrounding Thursday’s meeting and will start with today’s Spanish retail sales numbers for March, which are expected to be pretty awful given last week’s downgrades to its growth forecasts by the Spanish government.
Retail sales for March are set to decline by over 11%, worse than the 10.5% seen in February.
It is the German CPI numbers for March that could offer the most important clues as to a decision on Thursday, and these are set to show a decline of 0.2% month on month and a 1.4% rise year on year. A big drop in prices could shift the odds on action this Thursday.
While the debt versus austerity debate continues to rage events in Cyprus and Greece continue to play out with respect to the first details on deposit haircuts in Cyprus and Greece voting for new measures to unlock further aid.
The Bank of Cyprus has bailed in 37.5% of uninsured depositors as part of the first part of the recapitalisation process, with the option of another 22.5% as a buffer for converting into equity in the future. If depositors think they will avoid being bailed in on the balance they could well be disappointed given the bleak fiscal outlook for Cyprus going forward. These measures, amongst others, including the sale of gold reserves, are scheduled to be voted upon tomorrow.
Greek politicians have also voted for measures to unlock the next tranche of aid which include another 2,000 public sector sackings by June, and a further 11,500 by the end of next year. If unemployment in Greece wasn’t high enough already, its set to go up yet again, further eroding social cohesion.
In company news pub giant Greene King will kick the week off today with a full year update. Investors seem braced for somewhat weaker numbers, after a freezing start to the year left punters swigging their ale in the warmth of their own home instead of the local free house. The last update from the firm showed growth of 3% in Q3, with an increase in food sales the major contributor.
Aberdeen Asset Management will report interim earnings today, with the firm having announced last month that assets under management reached £213.3 at the end of February up 10% on the back end of last year. Analysts at Cannacord Genuity saw fit to re-affirm their buy rating on the stock last Wednesday, with £4.60 their price target. April has seen much evaluation from analysts, leaving the stock with an average Buy rating prior to today's announcement.
Another stock to watch today will be UK engineering firm Invensys, after US hedge fund Value act capital raided shares
to take its stake up to 8%. Newspapers have speculated over the weekend that Emerson Electric in the US may come back to the bidding table after talks broke down between the two last year. Another apparent candidate is France's Schneider Electric.
Earnings season over in the US continues with Newmont Mining one of many reporting. Estimates have slipped in the last few months following 3 straight quarters of declining revenue.
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