Angela Monaghan 

Italian markets suffer heavy losses after budget deal risks row with Brussels – as it happened

Italy’s decision to raise public spending despite a huge debt pile prompts major sell-off of shares and government bonds
  
  

The facade of Rome’s Campidoglio Capitol Hill is lit with the colours of the Italian flag
The facade of Rome’s Campidoglio Capitol Hill is lit with the colours of the Italian flag
 Photograph: Andrew Medichini/AP

Closing summary

Investors have struck a gloomy note on the final trading day of the third quarter.

Markets are sharply lower across Europe, as investors do not share the Italian government’s enthusiasm for a higher deficit target.

The spending plans - with a 2.4% of GDP deficit target for 2019 - have raised tensions with Brussels, which has argued for debt reduction in Italy, and prompted fears of a fresh debt crisis.

Italy’s banking index was down 6 % and set for its biggest one-day loss since June 2016, with shares in the country’s two largest banks, Intesa Sanpaolo and UniCredit, also falling by 6%.

The euro has also been hit, and is currently down 0.5% against the dollar at $1.1582. It is roughly flat against the pound at 88.98p.

In the UK, second-quarter economic growth was confirmed at 0.4%, but the detail showed firms cut their investments in Britain over the period.

On that note, we’ll close up for the day. Thank you for all the comments, and please join us again on Monday.

Wall Street opens lower

US markets have opened lower on the last day of trading in the third quarter. Sentiment is being dragged lower by Italy’s budget decisions, which have raised fears of a fresh debt crisis, and concerns over trade tensions continues to weigh.

Opening scores:

  • Dow Jones: -0.2% at 26,397
  • S&P 500: -0.2% at 2,909
  • Nasdaq: -0.2% at 8,025

US consumer spending ticked up 0.3% in August, following a 0.4% rise in July.

Wall Street is expected to open lower:

Time for a market re-cap.

Shares across Europe are sharply down after Italy defied EU wishes and set a deficit target of 2.4% of GDP, signalling higher spending and triggering fears of a potential debt crisis.

Here are the current scores:

  • Italy’s FTSE MIB: -4.3% at 20,585
  • FTSE 100: -0.5% at 7,505
  • Germany’s DAX: -1.8% at 12,214
  • France’s CAC: -1.3% at 5,468
  • Spain’s IBEX: -1.8% at 9,356
  • Europe’s STOXX 600: -1% at 383

Richard Flax at Moneyfarm says Italian bondholders could face further price falls when the European Central Bank winds down its bond-buying programme by the end of the year:

Italian bondholders’ hopes were raised by signs of greater pragmatism from the coalition government, once they were in office. However, tensions in the government seemed to have spilled over with an agreement to run a budget deficit of 2.4% for the next three years and committing to greater government spending.

As we begin to see signs of fiscal slippage, and a larger deficit, bond markets will continue to react negatively, perhaps even raising concerns about Italy’s long-term debt sustainability. This could be compounded when you consider that the ECB’s role in Eurozone bond markets is likely to reduce as the end of the year approaches.

Luigi Di Maio, Italy’s deputy prime minister, says he is proud of the work the government is doing.

He tweets:

With the #ManovraDelPopolo we are keeping the promises made! Yesterday they said it was impossible. Today they say it was not to be done. Tomorrow they will remain silent. Proud of the work we are doing for the Italian 💪🇮🇹😀 people

Euro falls below $1.16 as fears grow over Italy's deficit plans

The euro’s losses are widening as investors become increasingly fretful about Italy’s rising debts and the impact the country’s banking system.

The single currency is down 0.6% against the dollar, at $1.1572.

It is also down -0.2% against the pound, at 88.79p

Professor Costas Milas at Liverpool University’s Management School says the issues facing Italian banks have the potential to spread to other countries:

The Italian ‘virus’ has the potential to spread rapidly in other EU countries and in particular to France and Portugal because of bank exposure to Italian debt.

Bank of International Settlements (BIS) data suggests that French banks have quite a high exposure to Italian public and private debt, accounting for as much as 10.25% of their exposure around the world, followed by Portuguese banks with a 7.81% exposure to Italian debt.

Spanish banks have a much lower exposure of 4.65%, while British and Irish banks are ‘fairly’ immune: Irish banks have a much lower exposure of 1.28% and British banks an even lower exposure of 0.82% to Italian debt.

Angela Giuffrida reports from Rome:

Luigi Di Maio, Italy’s deputy prime minister and leader of the anti-establishment Five Star Movement, is feeling particularly victorious as the budget included the €10bn required to bring about the party’s key election campaign promise of a universal basic income.

Di Maio says it will finally lift 6.5 million people, long ignored by previous administrations, out of poverty.

But it is yet to be made clear who will benefit from the means-tested system. It could be that the income, which starts at €780 for a single person, will only go to those who do not own a property. Some 80% of Italians own their homes.

Updated

The Italian government is targeting a budget deficit of 2.4% of GDP for 2019, compared with a target of 0.8% set by the previous government.

At 2.4%, the budget target is safely within the EU’s general rule that a country’s deficit must not exceed 3% of GDP.

But Italy is a special case, because national debt stands at a whopping 131% of GDP, second only to Greece. The previous government had pledged to cut its debt, and had been aiming for a 0.8% deficit in 2019, before balancing the books and eliminating the deficit by 2020.

Italy's budget deficit

EU's Moscovici says its in Italy's interests to respect budget rules

Pierre Moscovici, the European commissioner for economic and financial affairs, gave a stark warning to Italians on Friday morning:

If Italians continue to get into debt, what happens? The interest rate increases and the cost of servicing debt becomes greater.

Italians must not be mistaken: every euro more of debt is one euro less for the highways, for schools, for social justice.

Moscovici told France’s BFM TV it was not in the interests of the EU to have a row with Italy over its budget plans:

We have no interest in a crisis between the (European) Commission and Italy, nobody has an interest because Italy is an important eurozone country.

But we don’t have any interest either that Italy does not respect the rules and does not reduce its debt, which remains explosive.

European markets dragged lower by Italy

It’s a sea of red across European markets this morning, with Italy’s FTSE MIB leading other major indices lower:

David Madden, analyst at CMC Markets, gives his take:

A rise in Italian bond yields has put major pressure on the FTSE MIB, and other European markets are feeling the pain too.

The coalition government has agreed to run a budget deficit of 2.4%, and the two parties in power are keen to boost public spending in a bid to stimulate the economy.

Brussels will not be happy with the announcement as they would like to see the budget deficit being capped at 2%. The Italian government is sitting on a mountain of debt, and the boosting in public spending is likely to make them more indebted, which could trigger another debt crisis in the currency bloc.

Italian banking shares on course for biggest one-day loss since 2016

Back to Italy now, where the sell-off of shares and bonds continues after the government announced it would increase public spending despite a massive debt pile.

The benchmark equities index, the FTSE MIB, is now down 2.7% at 20,930.

Banking shares have been hardest hit, with shares in the sector down 6% and on course for the biggest one-day loss since June 2016.

Eurozone inflation rises to 2.1%

Annual inflation in the eurozone increased to 2.1% in September, from 2% in August, according to the latest ‘flash estimate’ from Eurostat, the region’s statistics office.

Energy prices were the biggest driver, rising by 9.5% this month, compared with 9.2% in August. Food, alcohol and tobacco prices were another driver, up 2.7% from 2.4% in August.

Ruth Gregory, senior UK economist at Capital Economics, says the detail behind the headline growth figures is disappointing, and likely to make the Bank of England more cautious about raising interest rates.

Today’s second-quarter GDP figures left the economy looking a little weaker than before. [The ONS] confirmed that GDP rose by 0.4% on the first quarter, but growth in Q1 was revised down from 0.2% to 0.1%.

Meanwhile, the composition of growth revealed a rather less healthy picture. Admittedly, quarterly growth in household spending revised up a notch from 0.3% to 0.4%. But net trade exerted a large drag of 0.6 points on GDP growth. And both government consumption and business investment were revised sharply lower.

Looking ahead, though, there have been encouraging signs that activity has strengthened at the start of Q3, with three-month GDP growth rising from 0.4% in Q2 to 0.6% in July – a little above the Bank of England’s 0.5% growth projection for Q3 as a whole.

So despite today’s figures, we remain cautiously upbeat about the economy’s near-term prospects. But with the possibility of a “no deal” Brexit still hanging over the economy, we doubt that the Monetary Policy Committee will be in any hurry to hike interest rates again soon. We don’t expect the Committee to move again until May 2019.

Breaking: UK growth confirmed at 0.4% in Q2

The British economy grew by 0.4% in the second quarter, according to the second estimate from the Office for National Statistics - unchanged from the first estimate.

Growth was driven by the services sector, which increased by 0.6%.

Rob Kent-Smith, head of national accounts at the ONS, said the economy was weaker compared with historical averages:

Although it has picked up a little from a slow start to the year, underlying economic growth remains persistently below the long-term average.

The latest business investment data shows growth weakening for the fourth quarter in a row while households have spent more than they earned for seven consecutive quarters.

Meanwhile our deficit with the rest of the world has grown, with goods imports increasing and overseas income falling.

Angela Giuffrida, the Guardian’s correspondent in Rome, says there is a mixed mood in Italy.

Shortly before midnight on Thursday, a jubilant Luigi Di Maio, Italy’s deputy prime minister and leader of the anti-establishment Five Star Movement, posted a photo of himself doing an air punch on the terrace of the prime minister’s office in Rome, alongside the caption: “Goodnight everyone, tomorrow we’ll wake up in a new Italy!”

Meanwhile, politicians from the opposition Democratic Party said setting a deficit target at 2.4% of GDP was an “irresponsible gesture”.

An Italian debt crisis is “an accident waiting to happen”, according to economists at the Berenberg.

Holger Schmieding, chief economist at the German bank, says:

Since mid-2016, Italy has topped our list of home-grown risks in the Eurozone. With the fiscal plans on which the left-wing 5Stars and the right-wing Lega agreed last night, they have missed an opportunity to defuse the risk, to put it mildly.

Instead, Italy is bringing itself into a precarious position. In the long run, Italy’s structurally weak economy cannot afford the reversal of the 2011 pension reform and 2015 Matteo Renzi’s labour market reform.

Because Italy’s underlying fundamentals are shaky, it may not take much to trigger a major selloff in Italian bond markets that would weaken banks, tighten financing conditions and dampen economic growth further.

The increase in social spending might also lead to credit rating downgrades (Moody’s and S&P will update their ratings in October) increasing pressure on the sovereign bond yields. An Italian debt crisis remains an accident waiting to happen.

Italy’s budget plans are weighing on the euro this morning, but it could be worse.

The euro is down just 0.1% against the dollar, at $1.1626, suggesting that currency traders are not overly concerned that Italy’s debt issues will weigh on the wider eurozone.

Investors dump Italian bonds over deficit fears

The Italian government’s decision to target a budget deficit of 2.4% in 2019 - despite heavy debts and opposition from the EU – is weighing on bonds as well as equities this morning.

The yields on two-year, five-year and 10-year Italian are all higher, where a higher yield reflects a lower price.

Italian shares suffer heavy losses after budget deal

Italy’s benchmark index, the FTSE MIB, is down more than 2% in early trading at 21,038.

The sharp fall reflects investor fears over the budget agreement reached by the country’s government last night.

Under the terms of the agreement, Italy’s deficit in 2019 will be 2.4% of GDP, as leaders seek to increase public spending and deliver on election promises.

However, the pledge puts the heavily indebted country on a collision course with the European Union, as well as its own economy minister, Giovanni Tria, who were pushing for a lower deficit.

Michael Hewson from CMC Markets explains:

A greement on the Italian budget was eventually reached on a budget for 2019 of 2.4% of GDP, a move that could see the Italians censured by Brussels who wanted the budget to come in under 2% of GDP, and finance minister Giovanni Tria who was looking for the number to come in somewhere between the two.

Pound resilient despite drop in consumer confidence

The pound is not suffering too badly this morning despite those gloomy surveys on Brexit - and another intervention from Boris Johnson - which reflect a subdued mood among firms and consumers alike.

Sterling is up 0.1% against the euro at €1.1244, and down 0.1% against the dollar at $1.3067.

Jasper Lawler at London Capital Group, says:

After two straight sessions of declines, the pound was also showing signs of resilience this morning. Despite UK consumer confidence dropping by more than forecast the pound lifted in early trade.

GFK consumer confidence figures declined to -9, below the -7 forecast. Unsurprisingly Brexit remains the key culprit. The lack of clarity on Brexit is leaving consumer concerned over the health of the economy.

Although, so far confidence towards personal finance is still healthy. Consumers are still happy to spend, and recent solid retail figures support the survey evidence. This goes some way to explaining why the pound was able to shrug off the disappointing figure.

The agenda: UK firms and consumers suffer Brexit fatigue; UK GDP

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Surveys published this morning reflect a gloomy mood among UK businesses and consumers as the Brexit deadline draws closer.

With six months to go until the UK leaves the EU, nearly two thirds of UK firms have yet to prepare for a no-deal scenario according to the British Chambers of Commerce.

The BCC says many companies are “either awaiting more clarity before they act or are suffering from Brexit fatigue and have switched off from the process because they don’t believe they will be affected”.

Meanwhile consumer confidence fell two points in September, to -9, as the deadline nears, according to GfK’s long running index.

GfK’s Joe Staton:

“There are fewer than 200 days until Brexit arrangements in some shape or fashion take effect. The clock is ticking down and in September the consumer mood dropped a couple of notches.

When respondents talk about their personal finances, the scores are still positive. But for the general economy, they can only reflect on the obvious uncertainty surrounding Brexit.

Also coming up:

  • 9.30am BST: The ONS will publish its latest estimate of UK growth in the second quarter
  • 10am BST: Eurozone inflation data for September
  • 2.20pm BST: Speech by Dave Ramsden, deputy governor of the Bank of England
 

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