Global Weekly: Bond investors keep wary eye on Italy

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Bond investors this week were shook up by news about Italy. Over the weekend, deputy prime minister Salvini of the Northern League was quoted as saying he does not intend to stick to the eurozone 3% budget deficit rule.

This for sure would cause unrest in Brussels. Italian government bonds nosedived. Salvini quickly backtracked on his comment, and bond prices recovered. What’s interesting to note is that no news came from the biggest populist party, the Five Star Movement. Being the smaller party in the coalition, the League has upstaged the Five Star Movement on every occasion since the formation. Even in the polls the League now have a significant lead. This for sure will heat up sentiment in the coalition.

Meanwhile, the Italian government needs to submit its budget plan to parliament on 27 September. We will then see if Italian policymakers indeed aim for a budget deficit below 3% of GDP. This will be followed by a public discussion with the EU and the ‘verdict’ of the rating agencies. Both Fitch and Moody’s now have Italy on ‘negative watch’. All in all, we suggest investors to also keep looking at the bigger picture. For instance, the end of the ECB’s asset purchase programme, which will take us to the next stop: rate hikes. Slowly but surely, corporate bond spreads are creeping higher. Could this already be a side-effect?

Equities moving lower

Equity markets this week declined across the board, with emerging markets suffering the most. Trade tensions between the US and China persisted. Thursday marked the deadline for tariffs that the US planned to impose on China. China was expected to also impose tariffs on the US in response. Trade tensions between the US and Canada continued as well, because of the new NAFTA pact between the US and Mexico. Trump wants Canada to sign a new NAFTA agreement on his terms as well. Negotiations are still going on. This week, the Institute for Supply Management reported that its ISM manufacturing index reached the highest level in 14 years, bolstering confidence in the world’s largest economy. Even this strong ISM number, however, could not prevent equity markets from falling.

Deutsche Bank will be removed from the Euro Stoxx 50 as of 24 September. It will be the first time for Germany’s largest lender to drop out of the Euro Stoxx 50 since the index was established in 1998. EON and Saint Gobain will also be removed from the index. Linde, Amadeus IT Group and Kering are the new stocks in the index.

On a different note: a lot of people think sustainability only has to do with environmental issues. We like to share an example of social issues that are also part of sustainability. Microsoft announced last week that it will start requiring its vendors in the US to offer employees a minimum of 12 weeks paid parental leave. According to the company, several studies show that paid parental leave helps to improve productivity and morale of new mothers. It also might help companies like Microsoft in attracting employees.