Markets make tentative rebound as Italian fears ease - business live

With European markets drifting - but mainly still managing to stay in positive territory - Wall Street is expected to open marginally lower. There is an eerie sense of calm after all the ructions caused by the Italian political crisis, with investors hoping a new government can be formed after all without the need for another election campaign. Craig Erlam, senior market analyst at Oanda, said:

Not too long ago, a coalition government in Italy consisting of two eurosceptic populist parties was a feared and unlikely prospect that many believed would majorly concern investors. While much of this remains true, it is also currently viewed as the least unattractive and feasible outcome for markets, with the other alternative being fresh elections and the possibility that the parties are given an even stronger and potentially less euro-friendly mandate.

Italy’s President, Sergio Mattarella, may have believed he was acting in the best interest of the country when he rejected to populists choice of Finance Minister but the reality is that in doing so, he has given both parties more ammunition with which to attack the euro. Mattarella has already been accused of acting on behalf of Germany and others while Brussels has been accused of interference, it all feeds very well into the eurosceptics message that the country no longer even has control over its domestic politics.

Should the country move straight on to another election, both Five Star Movement and Lega will look to take advantage of any fury linked to perceived meddling and could significantly add to their numbers. All of a sudden, the worst case scenario prior to the election looks tolerable compared to what could come from another. With both parties now in discussions again, there is a hope that the political impasse can be resolved which is helping to lift sentiment in the near-term. That said, a positive outcome now poses many further risks in the long-term.

While Italian assets have bore the brunt of the pain from the latest period of political instability and uncertainty, there has been a negative impact on the wider markets including the euro which dropped to a 10-month low against the dollar. While we’re still far away from the days of the debt crisis and the risk of a breakup, a second election was being portrayed as a vote on the euro which seems drastic and probably overhyped but it certainly hit the single currency.

Could Haskel also be hawkish? David Owen, chief european financial economist at Jefferies, says:

His expertise will also be invaluable when it comes to assessing how much spare capacity there is in the UK economy, as well as trend GDP growth, both key when looking at monetary policy.

Jonathan Haskel’s recent book “Capitalism Without Capital: The Rise of the Intangible Economy” highlights the growing use of things that we cannot really measure accurately in the production process in the UK. Everything being equal, this would suggest that labour productivity is stronger than official estimates suggest and like Ian McCafferty (who leaves the BoE in August) will vote for a rate rise when he joins the MPC.

A UK interest rate rise in August is by no means a done deal, says ING Bank economist James Smith. Commenting on the credit figures, he says:

It’s not something markets or analysts typically spend much time looking at each month, but the unexpectedly sharp fall in consumer credit in March was probably a key factor in the Bank of England’s decision to keep rates on hold in May.

Admittedly the reasons for this sudden decline were fairly unclear, and the latest figures released today show that the amount of unsecured consumer credit supplied fully recovered in April, rising by £1.8 billion. This tentatively suggests that the fall was simply a blip, perhaps related to the wider economic slowdown in March (although it’s not entirely clear why the bad weather would have resulted in such a sharp change).

We still think this is a story worth keeping an eye on over the next couple of months. A net 39% of banks said they tightened up on credit availability in the first quarter according to a Bank of England survey. If credit growth were to slow further, it would no doubt be a bad omen for growth - particularly as, of what little spending there has been over the past year, much of it appears to have been financed by borrowing.

Meanwhile consumers continue to remain cautious. While household incomes are no longer being squeezed quite as much as before, shoppers are now being confronted with higher petrol prices, and the latest confidence surveys suggest individuals remain pessimistic about the economic situation overall.

These cracks forming in the retail sector remain a big risk to the Bank of England outlook. While we are inclined to think policymakers have a preference to hike rates again in August if economic data allows (particularly given the better wage growth trend), this is certainly not a done deal.

As one committee member said recently, the cost of waiting a bit longer before hiking rates is relatively low.

The independent economist is referring to remarks made earlier this month at at select committee hearing, when Sir Dave said there was a risk households were spending less than the Bank had expected - as reported by the Financial Times (£).

More positive news for Italy: