This week we look at Italian debt, three pieces of news coming out of the UK, EU and US, and flag three upcoming data releases.
On Friday the ratings agency Moody’s downgraded Italian debt from Baa2 to Baa3 – one notch above Junk. Moody’s cited the weakening of Italy’s fiscal strength and stalled plans for economic and fiscal reforms. The move was broadly anticipated by investors however it will still do little to calm the rift between Brussels and Rome.
The decision by Moody’s was the first of two extremely important ratings decisions with the second being by S&P this coming Friday. Last week Italian Bond yields and spreads against the equivalent German Bund hit their highest level since the crisis several years ago
The public finances have continued to improve rapidly this year, enabling the Chancellor to accommodate plans for higher NHS spending without raising other taxes or cutting spending in other departments. Public sector net borrowing was £4.1bn in September, lower than September 2017 (£5.0bn), and the consensus estimate of £4.5bn. The estimate of borrowing in the first five months of the fiscal year was also revised down to £15.7bn, from £17.8bn. If this trend continues, this year’s borrowing will total £25.9bn (or 1.2% of GDP), some £11.1bn less than expected in the Spring Statement.
The seasonally adjusted current account surplus in the Eurozone rose to €23.9B in August, from a downwardly-revised €19.5B in July. A rebound in the surplus of goods was the primary driver of the headline increase, offsetting a dip in the services surplus. That said, the surplus of primary income also edged higher, reversing weakness in the past few months. The secondary income deficit narrowed marginally, but remained wide overall at €13.2B, probably driven by outflows of workers’ remittances.
Existing home sales fell 3.4% to just 5.15mn in September, well below the consensus, 5.29mn, and the lowest since February 2015. The percentage declines in single-family and co-op/condo sales were identical. A combination of higher mortgage rates, slightly tighter lending standards and the limiting of state/local tax deductions as part of December’s tax ‘reforms’ is hurting existing home sales. Hurricane Florence likely depressed the September numbers too, and this is unlikely to improve in October given Hurricane Michael.
The Alternatives continue to provide an diversified source of return for the 7IM portfolios. In combining an array of alternative assets we believe we can deliver characteristics that are similar to traditional fixed income securities. The characteristics are stable low volatility and diversified returns, when compared to equities.
Commodities and Infrastructure have performed well considering the increased turbulence seen in equity markets recently. Unfortunately, the trend following strategies have suffered, as markets have see sawed over the summer. We continue to look at opportunities in the Alternatives space as doubts remain over Fixed Income returns in the future.
THREE ANNOUNCEMENTS DUE THIS WEEK
23 Oct – UK CBI Industrial Trends Survey // 24 Oct – UK Mortgage Approvals // 25 Oct – UK Annual Survey of Hours & Earnings
SOURCES: PANTHEON MACRO, IHS, ONS, REUTERS, 7IM
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