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MNI US Open: Whatever It Takes To Avoid Early Italian Elections

EXECUTIVE SUMMARY:

  • EX-E.C.B. PRES DRAGHI POISED TO BECOME NEW ITALIAN PRIME MINISTER
  • IRELAND, SPAIN SERVICES PMIS DISAPPOINT; ITALY BEATS
  • EUROZONE INFLATION TURNS POSITIVE FOR FIRST TIME IN 6 MONTHS
  • CHINA EYES CAPITAL GAINS TAXES TO LIFT REVENUE (MNI EXCLUSIVE)
  • COVID ANTIBODIES REMAIN SIX MONTHS AFTER INFECTION, STUDY SHOWS


Fig. 1: Ireland and Spain Services Sectors Contract More Than Expected In January


IHS Markit, MNI


NEWS:

ITALY: Former ECB chief Mario Draghi is set to meet with President Sergio Mattarella at 1200CET (0600ET, 1100GMT) to discuss the potential of the central banker forming a new technocratic gov't after it became clear last night Prime Minister Giuseppe Conte would not be able to put together a majority coalition.

  • Thetalks taking place to cobble together a parliamentary majority under Conte broke down last night after it became clear that former PM Matteo Renzi would not accept the 5-Star Movement (M5S) offer of more influence in Cabinet for his minor Italia Viva party, and would demand that Conte does not lead the next gov't.
  • The main risk at present is that M5S does not uniformly support the installation of a technocratic Conte gov't. Last night a senior Cabinet minister, Secretary of the Council of Ministers Riccardo Fraccaro from M5S, stated that his party had been clear that it would only support a gov't led by Conte.
  • However, many M5S lawmakers are likely to support a technocratic Draghi gov't. While they may lose their influence in gov't, many will want to avoid snap elections given the slump in support for their party recorded in recent months.
  • As such, Draghi gov't may rely on a patchwork quilt of support from parties of the left, centre, and right.
  • In the event a Draghi gov't comes to power, as in previous technocratic gov'ts, it would likely be made up of independents and non-partisan officials. The gov'ts work would be to deal with the pandemic and associated economic crisis by utilising EUR200m+ of EU COVID-19 recovery funds - a major source of contention within the Conte gov't.
ITALY (BBG): President Sergio Mattarella will give Mario Draghi complete freedom over the make-up of Italy's next government, according to an official who asked not to be named discussing confidential deliberations. Draghi will be given liberty to decide on make-up of administration as well as on seeking alliances between political parties, official says.

SPAIN DATA: Spanish Jan Services PMI came in much weaker than expectations, at 41.7 (45.0 expected, 48.0 prior). COVID lockdowns obviously a factor, but so too was weather. From the IHS Markit release:

  • "the effects of local restrictions related to dealing with COVID-19 continued to have a noticeable and negative impact on the performance of the services economy. Moreover, the situation was exacerbated by recent snowstorms, which reportedly further weighed on market activity. Subsequently, volumes of new business were also down for a seventh month in succession, with the rate of contraction accelerating since the end of last year. Both domestic and foreign sales were lower: new export business declined for a twenty-first month in a row, and at the sharpest rate since October."

ITALY DATA: Italy Services PMI remained contractionary in January but accelerated from Dec and beat expectations (44.7 vs 39.5 expected, 39.7 prior). While business activity and new orders continued to fall, the rates of decline moderated, while future sentiment improved, per the IHS Markit report.

  • Of some note was continued input price inflation... "At the same time, firms registered another round of cost inflation during January, with the rate of increase the quickest for three months, albeit still well below the long-run average. Respondents cited greater utility and fuel costs, as well as additional coronavirus related expenditure as the main drivers of inflation..."
  • But: "In spite of rising costs, service providers continued to provide discounts to customers during January in an effort to stimulate sales. Average charges levied by services firms decreased at a slightly quicker pace than in December, and one that was solid overall."
  • On jobs: "The rate of job shedding was little-changed from December and remained sharp. Lower employment was mostly attributed to the non-replacement of leavers and use of the government furlough scheme, however."
IRELAND DATA (RTE): The country's services sector contracted last month at the sharpest rate since the economy was emerging from an initial Covid-19 lockdown last May after the Government imposed its toughest restrictions in nine months. Most building sites, shops and the hospitality sector was closed from late December after a four-week reopening led to a huge surge in Covid-19 infections, hospital admissions and deaths. The curbs may be lifted only gradually from March 5. The AIB IHS Markit Purchasing Managers' Index (PMI) for services tumbled to 36.2 in January from 50.1 in December. Activity has only fallen at a sharper rate twice on record, in May and April 2020, when the PMI sank to a record low of just 13.9.
EUROZONE DATA (BBG): Inflation returned to the euro area in January as energy surged and pandemic tax breaks to stimulate German consumption ended. Consumer prices rose an annual 0.9%, more than economists expected, for the first gain in six months. A measure that excludes volatile items such as food and energy surged to 1.4%, the highest in more than five years.
CHINA (MNI EXCLUSIVE): China is considering capital gains charges that will increase taxes for the wealthy and help narrow the fiscal deficit but a sustainable increase in tax revenue requires deeper reform, say advisors some of whom are calling instead for a cut to the maximum personal tax rate to close a loophole. For full article contact sales@marketnews.com
COVID (BBG): The vast majority of people who contract Covid-19 still have antibodies at least six months after infection, a new study involving more than 20,000 people showed. Some 88% of participants who tested positive for a previous infection retained antibodies for six months, according to the report by UK Biobank, a major biomedical database. The number was 99% at three months. The results follow other, smaller studies that indicate a level of immunity following a natural infection for at least 6 months.
CHINA: At least two provinces in China have reported new swine fever cases in recent days, according to local media, raising concerns over a virus return, driving up pork prices which are heavily-weighted in China's CPI index. The hangover from 2018's African Swine Fever kept pork prices for almost two years, pushing CPI above 5% at one point. However, as the fever dissipated through 2019 and 2020, supply returned to more normal levels, pushing prices lower and CPI eventually troughed at -0.3% in November. Any reduction in supply will push prices higher, threatening the outlook for China's 2021 inflation outlook

DATA:

MNI: EZ FINAL JAN SERVICES PMI 45.4; FLASH 45.0; DEC 46.4


MNI: EZ FINAL JAN COMPOSITE PMI 47.8; FLASH 47.5; DEC 49.1


MNI: GERMANY FINAL JAN SERVICES PMI 46.7; FLASH 46.8; DEC 47.0


MNI: GERMANY FINAL JAN COMPOSITE PMI 50.8; FLASH 50.8; DEC 52.0


MNI: FRANCE FINAL JAN SERVICES PMI 47.3; FLASH 46.5; DEC 49.1


MNI: FRANCE FINAL JAN COMPOSITE PMI 47.7; FLASH 47.0; DEC 49.5


MNI: ITALY JAN SERVICES PMI 44.7; DEC 39.7


MNI: ITALY FINAL JAN COMPOSITE PMI 47.2; DEC 43.0


MNI: SPAIN JAN SERVICES PMI 41.7; DEC 48.0


MNI: SPAIN FINAL JAN COMPOSITE PMI 43.2; DEC 48.7


MNI: UK FINAL JAN SERVICES PMI 39.5; FLASH 38.8; DEC 49.4


MNI: UK FINAL JAN COMPOSITE PMI 41.2; FLASH 40.6; DEC 50.4


EZ JAN FLASH HICP +0.2% M/M; +0.9% Y/Y; DEC -0.3% Y/Y


Italy Jan Flash Inflation Beats Expectations

  • Prel Jan HICP -1.1% m/m, +0.5% y/y (Dec -0.3% y/y), coming in stronger than markets expected (BBG: 0.1% y/y)
  • Main domestic index (NIC) Jan +0.5% m/m, +0.2% y/y (Dec -0.2% y/y)
  • Italy prel y/y NIC CPI first uptick since March 2020 (+0.1%)- ISTAT
  • Jan core HICP inflation +1.1% y/y vs Dec +0.4% y/y.
  • Net-of-energy Jan HICP index +1.2 % y/y vs Dec +0.5% y/y
  • Flash Jan HICP data provides -0.6 % "acquired" inflation

FIXED INCOME: A busy session for Italy

A busy session for EGBs and particularly the BTP, following Draghi being touted to form a Government.

  • BTP saw a 110 ticks opening gap.
  • The move in Italy saw BTP/Bund spread to 10.5bps tighter and through the January low, and at lowest levels since March 2016.
  • Gilt is seeing a more subdued session, trading in a 23 ticks range (133.46-133.69).
  • US treasuries have taken their cue from EGBs and trade in the red, albeit lagging behind Bund.
  • Looking ahead, US ADP and service PMI, although will be the final reading for the PMI, so unlikely to move the needle.
  • Italian Sergio Mattarella, Italy's head of state, will meet Draghi around lunchtime.
  • Speakers sees Norge Bank Bech-Moen, and Fed Kashkari, Bullard, Harker, Mester and Evans
  • Bund futures are down -0.20 today at 176.55
  • BTP futures are up 1.06 today at 152.03
  • OAT futures are down -0.01 today at 166.64
  • Gilt futures are down -0.14 today at 133.61
  • TY1 futures are down -0-3 today at 136-27

FOREX: EUR Circling Key 1.20 Support

The single currency remains weaker, with EUR/USD inching below the Monday low to narrow the gap with key psychological support at the 1.20 handle. The moves come despite Eurozone CPI estimates for January beating to the upside, with Core CPI rising at the fastest rate in five years.

It's clear there remains caution over further EUR losses, with options markets hedging more materially against further EUR downside. Today, 1m risk reversals for EUR/USD hit their lowest level since June of last year.

EUR's losses are working in favour of the greenback, with the USD index again challenging the best levels of 2021. Scandi currencies are softening along with the EUR, with SEK, NOK among the poorest performers. AUD, NZD trade well, rising against most others so far Wednesday.

US ADP Employment Change and ISM Services are the data highlights later Wednesday, with markets watching for any further clues on this Friday's payrolls release. There are numerous Fed speakers due today, with Kashkari, Bullard, Harker, Mester and Evans all on the docket.

EQUITIES: Tech Leading

Tech is leading overnight US futures gains, with Alphabet up sharply after earnings (and in contrast, recent 'frenzy' stocks such as Gamestop are dropping fast).

  • Asian markets closed mixed, with Japan's NIKKEI up 284.33 pts or +1% at 28646.5 and the TOPIX up 24.07 pts or +1.3% at 1871.09. China's SHANGHAI closed down 16.377 pts or -0.46% at 3517.308 and the HANG SENG ended 58.76 pts higher or +0.2% at 29307.46.
  • European stocks are higher, with the German Dax up 82.37 pts or +0.6% at 13916.1, FTSE 100 up 15.75 pts or +0.24% at 6556.66, CAC 40 up 14.16 pts or +0.25% at 5601.9 and Euro Stoxx 50 up 24.77 pts or +0.69% at 3615.9.
  • U.S. futures gains are led by tech, with the Dow Jones mini up 38 pts or +0.12% at 30624, S&P 500 mini up 12.5 pts or +0.33% at 3830.75, NASDAQ mini up 76.5 pts or +0.57% at 13525.5.

COMMODITIES: Oil Gains, Precious Metals Slip

  • WTI Crude up $0.41 or +0.75% at $55.1
  • Natural Gas up $0.01 or +0.42% at $2.859
  • Gold spot down $3.53 or -0.19% at $1835.69
  • Copper up $1.35 or +0.38% at $352.7
  • Silver down $0.06 or -0.21% at $26.7716
  • Platinum down $3.28 or -0.3% at $1095.45


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