Robeco: Italy’s Salvini hints at breaking EU rules

Main market events

Peripheral spreads came under significant widening pressure as the US raised tariffs on Chinese imports and China retaliated, fueling worries of an all-out trade war. Sentiment was furthermore impacted by defiant rhetoric from deputy PM Salvini. On Friday, US president Trump decided to delay the decision on whether to place tariffs on auto imports from Europe and Japan by six months. Italian bonds have returned 1.4% year-to-date, Spanish bonds 4.4%, Portuguese bonds 4.7% and Irish bonds 3.6%.

Italy

The 10yr BTP-Bund spreads broke above 280bp this week, partly driven by increased concerns about Italy’s fiscal outlook. Comments from the country’s government leaders indicated that the government is unlikely to go ahead with a VAT hike in early 2020 – which is penciled in to keep the budget deficit below 3% of GDP. Deputy PM Salvini went even further, arguing that “if we need to break some limits, like the 3% or the 130-140% [of debt-to-GDP ratio], we’ll go ahead”. If Salvini’s League party does exceptionally well at next week’s European elections, this might spur talk of a possible government collapse and snap elections.

Spain

Acting PM Sanchez still struggles to form a new government. This did little to affect Spanish 10-year spreads over Germany, which managed to fully reverse the widening seen earlier this week. 

ECB

The past week saw two important ECB officials, Executive Board member Coeuré and Bundesbank president Weidmann, expressing doubts about the need for a tiered deposit system. Coeuré said negative interest rates were not the main culprit for bank’s reduced profitability, while Weidmann stated that the relief it would bring for banks would be “ insignificant”

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