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Macro Digest: The beginning of the end?

Macro
Steen Jakobsen

Chief Investment Officer

Not only is President Trump preparing to hit China with $200 billion worth of tariffs effective September 6, but here in Europe we have European Commissioner for Economic and Financial Affairs, Taxation, and Customs Pierre Moscovici in the headlines this morning with a harsh and controversial interview in Italian financial paper Il Sole 24 Ore.

Moscovici told press that Brussels expects a “substantial effort” from Italy on its upcoming budget law, and added that if the EU's 3% deficit/GDP limit is breached, it would create difficulties that he doesn't even want to imagine.

Moscovici seeks a clear commitment to a budget deficit reduction of 6% from Rome, with deficit/GDP staying inside the 3% limit. He also stated that Italy has already been the prime beneficiary of what he terms EU "flexibility", laying down a firm line for Italy's populist coalition government.

Shortly after the publication of Moscovici's remarks, it was announced that Italian prime minister Giuseppe Conte will not seek a second mandate... you can hardly blame him!

Unlike the 180-degree turn seen in Greece, there seems to be a deep-seated desire among Italy's populists to confront the EU directly, and for the EU to take them on. This does not bode well for Italian assets, and it will probably spill over into the euro as well. This is the start of "budget season" across Europe, and while it is always a time of headline risk, strikes, and tumult, the stakes are higher this year.
Italy-Germany 10-year gov't yield spread
Italy-Germany 10-year gov't yield spread (source: Bloomberg)
Italian 10-year BTP yield vs. five-year CDS
Italian 10-year BTP yield vs. five-year CDS (source: Bloomberg)
As Italian instability prepares to strike at Europe's heart, a series of linked issues facing China are keeping sentiment negative and slowdown fears front-of-mind.

On August 30, President Trump reportedly told aides that he wants to follow through on a threat to impose tariffs on another $200 billion worth of Chinese goods as early as next week. According to Business Insider, "that would mean more than half of all Chinese imports would be subject to tariffs". US stocks sold off on the news, which ratchets up the trade war tensions between Beijing and Washington further still and places one of the world's largest and most pivotal trade relationships in jeopardy.

The headline risks for China do not end there. In today's Hong Kong session, shares of Chinese tech giant Tencent plummeted by 5% after authorities announced plans to limit the number of new online games and restrict the amount of time kids spend playing on electronic devices.

Beijing's move, reports Bloomberg, is part of a broad effort to cub social and health ills such as device addiction and myopia among Chinese children, but the push is very unwelcome news for Tencent, which reported a rare decline in profit earlier this month.

With Europe facing its latest round of existential dread, Chinese growth curbed by tariffs on one side and reforms on the other, and Washington seemingly content to persist in its bellicose trade stance, the risks facing world markets are varied, severe, and unlikely to resolve themselves easily.

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