Two and half main events

 US-Mexico-Canada reached a trade agreement that will replace NAFTA. In the end, also Canada after Mexico agreed on the trade deal.

The main new elements are:

  1. Automobiles: members must produce at least 75% of a car for it to pass through the countries duty-free, up from 62.5%. Additionally, 40% of each car must be produced by workers earning $16 an hour or more to avoid duties.
  2. More free trades for dairies, lumbers and agricultural products
  3. Increased protections for intellectual property

US officials have called the “USMCA” agreement a template for future trade deals that will lead to increased wages for Americans, improved workers’ rights and a better intellectual property protection.

President Trump said the deal was a victory for farmers, car workers and the US manufacturing industry: “It means far more American jobs, and these are high-quality jobs.”

Following US government pressure on wages, Amazon will increase the minimum wage to $15 an hour for more than 250,000 employees in the USA from November 1st.

 Italy against the European Commission

The new Italian government announced that they intend to set the budget deficit at 2.4% GDP in 2019 and for the following two years (expectation was 1.6%). The announcement was a disappointment for the market: Italy/Germany 10 year government bond spread widens 70 bps at 300 bps, the widest level since 2013.

This big movement in spread is not explained by higher than expected government expenses (a mere 10 bln of extra budget on 1.7 tln Euro GDP) but by political tensions between Italian government and EU institutions.

EU president Jean-Claude Juncker has warned: “Italy is distancing itself from the budgetary targets we have jointly agreed at EU level” and he added “If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict.”

Italian ministers slammed comments by the Eurocrats in Brussels.

As ECB’s President Draghi said “words on budget have caused economic damage in Italy”.

Words more than facts.

To be monitored closely is whether if Moody’s, S&P, Fitch and DBRS rating agencies will downgrade Italian sovereign rating. ECB provides liquidity to Italian banks based on the rating of Italian bonds given as collateral. In case of Italy downgrade, there will be a reduction or a stop of these liquidity transactions that will provoke a lot of damages to the Italian financial system and real economy.

From the Italian point of view, European Central Bank cannot keep relying on ratings made by these rating agencies, the same private entities that provided triple A (AAA) rating to complex structures based on defaulted subprime loans during the 2008 crisis.

 In this turmoil also Greece is preparing a soft budget law looking at 2019 election.

Will also Greece enter in conflict with Brussels Eurocrats?

We continue to think that being long US Dollar is not the worst idea!