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Global Markets Weekly Update - Europe

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BM.GE
13.11.18 19:42
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The European STOXX 600 index was relatively flat for the week, pressured by fears of rising U.S. interest rates, disappointingearnings, worries about Italy’s growing rift with the European Union (EU) and continued signs that trade tensions are hurting
economies throughout the region.

Italian debt came under added pressure after the EU warned Italy that it is poised to breach the EU’s 3% budget deficit limit in
2020 if the government proceeds with its current spending plans.

In issuing the warning, the EU has ratcheted up the pressure on Italy and called its budget assumptions into question,
European Commission (EC) said that it expects Italy’s deficit to hit 2.9% in 2019 and 3.1% the following year and that the
Italian economy would expand only by 1.2% in 2019—less than the 1.5% estimate that underpins Italy’s budget plan.

Many Sovereign Analysts believe that while the EU forecast may be conservative, the warning sends a clear message that
Italy’s fiscal policy deviations are far too large to be ignored and will require large corrections, which the government is
unlikely to deliver.

As a result, the expectations that the EC will initiate its excessive deficit procedure (EDP) on Italy by year-end.

The EDP has limited mechanisms to penalize countries for noncompliance, however so the EC will continue relying on
markets to force the government to change its fiscal stance.

Markets pushed the yield on the 10-year sovereign bond as high as 3.418% on Thursday, many analysts disagree with the
fact that the Italian government will compromise until yields and credit spreads are much higher.

Economic data continued to show signs of the slowing across the region and the toll that trade tensions are taking on exports
and sentiment.

The EC said that eurozone growth would slow though 2020, pressured by trade worries, high oil prices and overall
uncertainty.

Eurozone composite final purchasing managers’ indexes (PMIs) fell in October to 53.1, their lowest level since September
2016.

Eurozone factory activity grew at its weakest pace in more than two years, with export orders falling for the first time since
2014.

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