In the 1969 British film the Italian Job, a film depicting a gold theft in Turin, the actor Michael Caine delivered what’s now regarded as a legendary line; “you were only supposed to blow the bloody doors off!” The bank robbers had used too much explosive and accidentally destroyed the whole van, when practising to steal the gold ingots. Italian voters and prime minister Renzi, might “just blow the bloody doors off” their economy and banking system on Sunday evening…
Whilst most market analysts and traders focus on the OPEC meeting, which finally takes in Vienna on Wednesday, there’s another huge issue on the radar which is beginning to make many investors, particularly those invested in Italian banks, incredibly nervous.
Italy has a referendum this coming weekend on Sunday December 4th. Italians will vote on the constitutional changes proposed by Prime Minister Matteo Renzi to limit the power of the Senate and the upper house of parliament. If Renzi loses and resigns, then many commentators are predicting political and economic turmoil. At stake is not just how Italy will be run, but potentially the future of its stagnant economy and its banking system, which has massive NPLs (non performing loans). The FT summed up the Italian NLP chaos quite well recently;
“There are €360bn of impaired loans in the system, according to the Bank of Italy; €200bn of these are of the worst sort, the non-performing sofferenze. This is a huge number given that there is €225bn in equity on the books of the banking system. And this may understate the rot. Banks close to being bust have reason to mark the value of their assets generously.”
The likelihood is these banks will be overestimating their asset value and underestimating their bad loans. An argument is therefore being circulated that the Italian banking system is insolvent. And the domino effect; the kind of counter-party reaction we haven’t witnessed since 2007/2008, could be contagious. But let’s not get too far ahead of ourselves, firstly there’s the vote on Sunday, then Mario (whatever it takes) Draghi, can set about repairing the solvency issues with some form of asset swap and rescue, hopefully.
USA consumer confidence data registered a reading much higher than expected on Tuesday, coming in at 107.1, ahead of expectations of 101.5. This data was arguably the first sounding of voter sentiment and overall confidence, after the USA presidential election. USA GDP data slightly disappointed, registering at 1.4% for the month of October, below the expectation of 1.5%. However, annual GDP rose to 3.2%. Both this annual GDP reading and the jump in consumer confidence, helped the main USA indices to rise moderately in the afternoon session. The DJIA closed up 0.12%, the SPX finished up 0.13% and the Nasdaq closed up 0.21%.
European markets had a marked split on Tuesday, with the U.K. FTSE ending the day down 0.40%, but France’s CAC closing up 0.91% and Germany’s DAX closing up 0.36%. The STOXX 50 ended the session up 0.72%. The divergence in sentiment was as a direct result of the U.K. Brexit agenda once again coming under scrutiny, as other E.U. officials began to bear their teeth and indicate impatience and frustration regarding the UK’s lack of coherent exit planning.
WTI oil slumped by 3.9 percent to $45.23 a barrel at 4 p.m. in New York, after rising 2.2 percent on Monday. Saudi Arabia apparently stated that it will reject an agreement, unless all OPEC members, excluding Libya and Nigeria, take part. Copper fell from its highest level in more than a year, as the main industrial metals tumbled in London. Gold (for immediate delivery) fell by 0.5 percent to $1,189.01 an ounce.
The dollar is on schedule for its largest monthly gains versus yen since 2009. The greenback has risen more than seven percent in November due to speculation that the Federal Reserve will increase the base rate by 0.25% in December, with further rises in 2017. The rally since November 4th, is the dollar’s biggest rise versus yen in over two decades. The dollar appreciated 0.4 percent to 112.38 yen at 4:30 p.m. New York time, after reaching the eight month high of 113.90 last week. The Dollar Spot Index, measuring the greenback versus its ten major peers, is up 3.4 percent in November.
Economic calendar events of note for Wednesday 30/11/2016
The U.K. Bank of England publishes its stability report. This registers as high impact, given the Brexit situation and could effect sterling’s value versus it’s major peers. The euro could see activity as Germany publishes its unemployment figures at 10.00 am London time, expected in at -5K for the month, with the overall rate expected to remain static at 6%. Consumer price data for Europe is also published, expected to be up by 0.1% to reach 0.6% annually.
At 12.30 pm London time Mario Draghi will be speaking in Madrid, the range of subject matter may include: Italy and its banks, Brexit and the overall stability of Europe’s economy. There is a raft of USA related data published between 13.00 – 13.30 pm London time. The highlights should include the ADP employment change, predicted at 160K jobs created in the month and core USA personal consumption, expected to remain steady at 1.7%, year on year.
The Canadian dollar may experience volatility from 13.30 pm onwards, as the GDP figures are published. The annualised third quarter figure should come in at 3.2%, with the year on year figure at 1.8%.
USA pending home sales and energy inventory numbers are released at 14.30 pm London time, thereafter at 7.00 pm the Fed’s “beige book” is published. This analysis is used by the FOMC to help make their next decision on interest rates. It tends to produce a mild impact, as the FOMC also receives 2 non public books; the Green Book and the Blue Book, which are widely believed to be more influential to their base rate decision.