28 September 2018
Italy: Politics trumps fiscal discipline

The Italian government's choice to mark a break in the fiscal adjustment path was partly expected, but the scope and, more importantly, the persistence of the deviation is a reason for concern. The possibility of a downgrade and risks of medium-term debt sustainability have just gone up

After days of noises, leaked numbers and what not, the Italian government approved but hasn't published, the framework for the next budget. This was the first official opportunity for the new Five Star Movement and Northern League's government to put their actual stance on budgetary policy and attitude towards Brussels.

New Riksbank call: Earlier hike likely, but dovish bias remains

After the September meeting and recent communication from policy-makers, we revise our view of Riksbank policy and think they are more likely to hike rates by 25bps in February 2019

The September meeting marked a turning point in the Riksbank’s policy stance. Policy-makers appear to have returned from their summer holidays in a rather sunnier mood, and now seem more determined to raise interest rates within the next six month. While further delays can't be excluded, we think they're likely to follow through this time, even if the Swedish economy continues to slow down and underlying inflation remains soft. 

Federal Reserve: Onwards and upwards

The Fed voted unanimously for another 25 basis point rate rise and while policy is no longer described as “accommodative” the “gradual increases” in the Fed funds rate look set to continue for at least another couple of quarters

Brexit blog: Why ‘no deal’ may still be avoided

Plus: What markets should look out for in this year's political party conferences, and is the UK economy heading into another rough patch?

With six months to go until the UK leaves the EU, our weekly Brexit update/blog is back. Each week we'll try to give a brief digest of the twists and turns of the negotiations as the clock counts down, as well as provide our latest thoughts on the UK economy and markets.

Aluminium: Yet another extension for Rusal

LME aluminium continues to trade at depressed levels. This is despite expectations of yet another ex-China deficit in 2019, a buoyant alumina market, and Rusal uncertainty. We remain bullish on aluminium moving into next year

Where do we stand with Rusal and sanctions?

In the aftermath of US sanctions on Rusal, LME aluminium surged to $2,537/t- a level not seen since August 2011. However since then, the market has trended back down towards the $2,000-2,100/t range, as the US Treasury provided a number of extensions to Rusal. The aluminium market has also been unable to escape the downward pressure across the base metals complex from an escalating trade war between the US and China. Deadline extensions from the US Treasury, including the latest, which gives Rusal and the US until 12 November to come to a deal (the previous deadline was 23 October), have given the market some comfort that the US is keen to come to an agreement. Based on media reports, Rusal also appears optimistic that a plan for Oleg Deripaska to reduce his controlling stake in EN+ and ultimately Rusal will be accepted.

Along with the extensions, the US has allowed existing Rusal clients to enter certain new supply agreements, as long as they are consistent with past behaviour. The move is aimed at maintaining the status quo, as the absence of supply agreements could force Rusal to curtail output, whilst buyers would be forced to look elsewhere for supply, in an already tight market. While the clarification allows agreements to be negotiated, risks remain as to how new agreements will be worked out after 12 November if the US Treasury doesn’t provide sanction relief. In that case, buyers might be exposed once again to supply risks.

We expect that the US and Rusal will come to a deal, and if this is the case, we could see some immediate downward pressure on the market. We believe this would provide a good buying opportunity for consumers, with the market outlook still remaining constructive, driven by expectations for yet another deficit year in 2019 and stronger alumina prices.

Swedish politics: Will it all be over by Christmas?

As Swedish politics settles into trench warfare, the key question is whether anyone can form a sustainable government. New elections early next year could be the only way out

Yesterday, Swedish Prime Minister Stefan Lofven lost a vote of confidence in parliament, putting an end to his four-year centre-left government and triggering the start of negotiations on forming a new one. Given, no natural coalition holds enough seats to form a government -  a compromise of some kind will be necessary. But with most parties doubling down on a set of mutually incompatible restrictions on what kind of government they will accept, a solution looks some way away.

Higher risk, lower reward? Attitudes to financial risk are seriously skewed

Most people are risk-averse and many have the counterintuitive belief that the more risk you take on, the lower the returns will be. These findings from our study on risk attitudes towards investments across 15 countries suggest significant flaws in financial planning  

People’s perception of financial risk varies noticeably both between individuals within a country and between individuals from different countries. These risk preferences play a crucial role in understanding households financial behaviour and decision making. In a recent article published on the VoxEU policy portal, I show the surprising extent of the differences in financial risk attitudes both within and between countries, the importance of behavioural factors in explaining these differences, and the challenges these present to standard investment theory and financial advice.

Reading time around 5 minutes

In case you missed it: Collision course with Brussels

Italy is defying the EU's demand to rein in debt, Brexit talks remain at an impasse and Swedish politics have settled into trench warfare. Where will it all end? Our analysts gaze into their crystal balls. Plus, a look at the diverging views on Fed policy in 2019 and a special report on the very strange attitudes to financial risk

In this bundle