Markets tepid, south Europe’s countries in focus

Summary:

• US dollar trades flat, Asian stocks mixed as the new week gets underway

• Italy plans to spend up to 80 billion EUR to rebuild infrastructure, EU budget rules at stake

• Greek bailout programme finally comes to an end

The beginning of trading in the new week has been quite tepid so far regardless of what a market we are focusing on. As far as equities are concerned, one may notice relative calm in Asia where only the Hang Seng (CHNComp) has been able to produce any noteworthy gains being almost 0.6% higher as of 6:28 am BST. Moods look a bit worse elsewhere as the NIKKEI (JAP225) is moving 0.15% down, the Shanghai Composite is slipping slightly more than 0.2% while the Australian blue chips index is treading water. Let us point out that the US stock market ended the last week with subsequent gains, they were fairly limited though. Rises ranged from 0.1% to 0.4% but looking at, and comparing European stocks with their US counterparts one may discern a widening discrepancy which, at least in part, could be justified by the much better earnings season in the US. On the currency front, the US dollar is stabilsing being subtly higher in the morning while most of EM currencies are being slightly offered at the same time.

We already wrote last week that Italy might become a major point of concerns for European investors once Turkey was set aside. After the bridge collapse in Genoa borrowing needs may increase further putting the Italy’s fiscal position at a danger position being at odds with European budget rules. Indeed, according to The Telegraph’s article the Italian populist government is drawing up a “Marshall Plan” of up to 80 billion EUR to rebuild the country's dilapidated infrastructure. Officials were to say that they will aim to invoke the “Golden Rule” championed by UK’s Gordon Brown to remove chunks of public investment from the headline budget deficit. Should the Italian government manage to do so successfully, it would make it easier for it to bring fiscal stimulus trying to reflate the economy anew. Bond yields drove higher while the Italian stock exchange lost steam last week on the back of mounting risks related to the country’s fiscal position.

The Italian index (ITA40) lost a chunk of its valuation over the past days being beleaguered mainly by the country’s internal woes, Turkey seems to have played a less important role. Source: xStation5

Southern Europe draws attention at the start to the new week therefore we are focusing on not just Italy but also on Greece - another country being part of the PIGS group once. Namely, Monday is the official date when the international bailout programme, providing Athens with emergency financial support, is finally coming to an end. After 6 years of financial aid Greece is, at least in theory, already deemed strong enough to stand on its own feet. Since 2010, when the first financial rescue arrived, the country was given billions of euros aimed at restructuring public finance, lifting retirement age through implementing austerity measures. Have these billions helped the country recover? Having looked at the chart below one may be sceptical in thinking in such a way as the debt to GDP ratio ballooned to over 180% at the beginning of 2018. Obviously, all implemented measures need time to begin kicking in, and essentially one might notice that debt has stopped rising over the recent years. Nevertheless, this change has been predominantly on the back of higher economic growth rather than severe public spending cuts. Hence, the true test will come once economic growth slows down further demanding the most indebted countries to keep their finances in check.

Greek debt totalled more than 180% of GDP while the Italian debt to GDP ratio stabilised somewhat above 130%. Source: Bloomberg