Italian political drama weighs on markets

This is an audio transcript of the FT News Briefing podcast episode: Italian political drama weighs on markets

Marc Filippino
Good morning from the Financial Times. Today is Friday, July 15th, and this is your FT News Briefing.

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Markets are on edge as the Italian government wobbles and the euro is sinking and sinking as currency investors flock to the safety of greenback.

Katie Martin
The dollar is just screaming higher.

Marc Filippino
And US banks kicked off earnings season with a surprise for investors. I’m Marc Filippino and here’s the news you need to start your day.

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Italian politics are kind of like a bad movie right now. One of the stars, Prime Minister Mario Draghi, a guy known for his competence, offered to resign yesterday after political opponents refused to work with him. The president, Sergio Mattarella, said, no, you can’t leave.

Amy Kazmin
He’s rejected the resignation and asked Mario Draghi to communicate with Parliament on Wednesday next week.

Marc Filippino
That’s our Rome correspondent, Amy Kazmin.

Amy Kazmin
So there’s gonna be a lot of behind the scenes political manoeuvring as members of Parliament decide whether they can persuade Draghi to stay or whether they’re happy for Italy to be plunged into early elections. There’s a lot of uncertainty about, you know, what the shape of a new government would look like. So there’s a lot of anxiety about what lies ahead.

Marc Filippino
So, Amy, how are markets responding?

Amy Kazmin
Draghi is seen as somebody who could be counted on to maintain fiscal rectitude. I think markets would feel more reassured if Draghi was still in power to see through the next budget. I think there’s going to be a lot of market anxiety and that is gonna be reflected in a sharp spike in bond yields. There is a growing concern in the markets about the sustainability of Italy’s public debt. And so bond yields are rising. And the difference in the spread between Italian government bonds and German government bonds are widening. And that is a sign that the markets are increasingly anxious about Italy’s financial situation, which in turn will put a lot of pressure on the European Central Bank and on the euro.

Marc Filippino
Amy Kazmin is the FT’s Rome correspondent.

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Italy’s troubles aren’t the only thing weighing on the euro. And yesterday, Europe’s common currency dropped below the US dollar for the first time in 20 years. The FT’s Katie Martin reminds us that when trouble hits, currency traders flock to the greenback.

Katie Martin
There’s a few reasons for that. One of them is just risk aversion. People just gravitate to the dollar when things get tough. But in addition to that, holy smokes, did you take a look at the US inflation number earlier this week?

Marc Filippino
Oh, yeah. We had 9.1 per cent year on year.

Katie Martin
Crikey. Blimey. And so now you have typically very sensible investment banks telling their clients that the next interest rate rise from the US Federal Reserve could be a full percentage point. So in this case, in the US you have interest rates going up at an incredibly rapid clip. All things being equal, that is positive for currencies. And it’s the market’s way of saying, look, I think the, I think Europe’s heading for a really horrible recession here, and I’m not necessarily so sure that the US is. So if you line these things up against each other, it’s got to be the dollar every time. And you know, I just bumped into Martin Wolf on my way in here and he was saying, you know, as far as he’s concerned, this dollar move is gonna carry on until US interest rates peak, and that might not be until 6 or 7 per cent.

Marc Filippino
So let me get this straight. In trying to tackle inflation, the Federal Reserve will raise US interest rates like we’ve seen, which makes the dollar stronger. But in doing so, it will drive down the value of other currencies like the euro, the one, you know, we’re talking about right now, which will exacerbate inflation in those countries. Is that right?

Katie Martin
Yeah.

Marc Filippino
Which I guess then puts pressure on other central banks to raise rates, to keep pace, to strengthen their (sic).

Katie Martin
And they might need to raise rates even harder than they were previously thinking they had to try and get inflation under control. So it just causes spirals of problems everywhere.

Marc Filippino
So what does this weaker euro mean for Europeans, Katie? What it, why does this matter?

Katie Martin
So it matters, at least in part because places like the eurozone and the UK import a lot of stuff that’s in dollars, in particular energy. And so if we’re importing lots of oil that’s denominated in dollars, then it gets even more expensive if those dollars are more expensive. And in turn, that can make inflation problems even worse for countries like the UK or for countries across the eurozone.

Marc Filippino
Did you, did you hear that? Those are the wheels churning in my brain to catch up on this. (laughter) Katie Martin is extremely patient and the FT’s markets editor. Thank you so much, Katie.

Katie Martin
Pleasure.

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Marc Filippino
Two of the biggest US banks reported second-quarter earnings yesterday, and it was not what analysts had predicted. JPMorgan Chase and Morgan Stanley both reported bigger than expected profit declines. But it wasn’t all bad news. Here’s our US banking editor, Josh Franklin.

Joshua Franklin
If you look at JPMorgan, for instance, they did post their best earnings from lending in over a decade. So they really did benefit from rising interest rates. Where there was a disconnect between what analysts were expecting and what the results actually showed was in investment banking. Analysts were way too optimistic about how well investment banking would hold up in this environment, where dealmaking has really slowed, especially for initial public offerings. You’ve got to remember, 2021 was an incredibly lucrative year for investment banks with M&A, with IPOs, especially the Spac boom that we saw a lot of that Wall Street benefited from. So that was really where banks fell short. You also had some other unpleasant surprises for investors, with JPMorgan saying that they would suspend their share buyback programme while they look to retain earnings in order to meet new tough capital requirements from the Federal Reserve. And JPMorgan also said that they expected to pay around $200mn in a fine around record keeping on Wall Street. So, all in all, a pretty bruising quarter for the banks.

Marc Filippino
So what did JPMorgan say about its economic outlook for the rest of the year?

Joshua Franklin
So JPMorgan increased their guidance for how much they expected to make from their lending activities this year. Really kind of banking on rising interest rates from the Fed to help them out there. Interestingly, one of the big things that investors always look out for from banks just ‘cause they are, they do have their finger on the pulse when it comes to the health of the economy is on the health of their, the US consumer and also of the corporate landscape. And despite getting lots of questions asking about weaknesses in credit markets, the bank CEOs really were very upbeat about what they were seeing from customer cash balances, customer default rates so far holding up really well.

Marc Filippino
Josh, we’ve got more bank earnings today, including Wells Fargo and Citigroup. What are investors bracing for?

Joshua Franklin
Investors will hope that Wells Fargo and Citi will be a slightly simpler story. They should be like JPMorgan benefiting a lot from rising interest rates, making more money from lending. Citi, I think people will be curious to see whether or not investment banking also underperforms there ‘cause they are a top five player in investment banking. But definitely considering that JPMorgan in particular is a bellwether for the industry, it did not set a good tone for earnings season.

Marc Filippino
Josh Franklin is the FT’s US banking editor.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Michael Lello, David da Silva, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.

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