After passing the confidence vote in both branches of parliament, the Meloni government is now fully empowered. We expect a prudent approach to the budget, and a bias towards cheap but visible measures which should help to contain political risk The Meloni government is fully empowered after passing confidence votes in both branches of government Meloni government easily passed both confidence votes After passing a confidence vote at the Lower House yesterday (235 votes in favour out of 400), today the Meloni government got the rubber stamp also from the Senate (115 votes in favour out of 206), and is now fully empowered. Meloni keen to reassure on Atlantic alliance and relationship with European institutions In her parliamentary address before the confidence votes, PM Meloni had broadly outlined the programme for the legislature. She sounded aware of the scope of short-run challenges and is very keen to reassure her enlarged audience about the international positioning of Italy and the relationship with European institutions. On the first, she re-affirmed that under her leadership Italy will remain well anchored into the Atlantic alliance, unambiguously supporting Ukraine. On European integration, she clarified that the promised defence of national interests will be met by acting “from within”, in an attempt to better steer the process when facing crises and external threats. The absence of any reference to Italexit options of sort is clearly reassuring, but the way this strategy will be implemented is still unclear. Prudent approach on economic matters, for the time being When dealing with economic matters, Meloni adopted a relatively prudent approach, acknowledging that in the current deteriorating economic environment the short-term priority will be to refinance the set of measures to help households and businesses weather the energy price shock (energy bills, temporary reduction of fuel tax). As this will likely use up most available resources, she added that some planned measures (tax wedge cuts and extension of the flat tax) will only gradually be introduced. We thus suspect that the government will set up a priority list topped by those measures bearing a small monetary cost tag but high symbolic value. The proposal by Salvini to raise the limit for cash transactions to €10K seems to point in this direction. The replacement of the expiring early pension scheme (the so-called level 102) will also likely be high in the priority list, as inaction on the subject would bear a high political cost. Frictions among coalition to remain under control in the short run After some frictions with junior ally Forza Italia when the list of ministers was compiled, tensions within the government alliance have seemingly cooled down. Furthermore, the appointment of Giancarlo Giorgetti, an experienced moderate politician from the Lega, in the key role of finance minister should in principle reduce in perspective the risk of political instability coming from the benches of the Lega. 2023 budget and RRF implementation as forced priorities All in all, we remain convinced that in the short run PM Meloni will have very limited room to manoeuvre on the economic front, with priorities mainly set by external constraints (energy inflation) and by the need to implement the Recovery and Resilience facility measures to contrast the incoming recession. Read this article on THINK TagsItaly elections Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Markets learnt about the rising risk of EU money being withheld from Poland last week. However, the market reaction was quite muted. While the Rule-of-Law standoff threatens new EU funding to Poland, this is in line with the baseline scenario   Financial market participants are already assuming virtually no new EU fund flows to Poland before the late 2023 general election as a base case. However, there is mounting concern about 2024 when the absorption from the current EU budget ends and inflows of new funds look set to be modest. Context Although the European Commission (EC) formally greenlighted Poland’s National Recovery Plan (NRP) in June, funds from the EU’s Recovery Fund have not been disbursed. This is because Poland did not fulfil so-called horizontal milestones, in particular rules governing the independence of judges. As such, the country cannot start to absorb the €24bn in grants or the €12bn in preferential loans under the NRP.     The latest media reports suggest there are risks surrounding the EU’s structural and cohesion funds from the new 2021-27 multi-year budget. Poland’s allocation of grant money from these funds is three times as high as the NRP grants (above €75bn), and the implementation of them was expected to reach full-speed beginning in 2024. Direct payments to farmers (around 20% of EU transfers to Poland) are not subject to potential delays, given that they are processed at the EU-wide level. Taken together, the potential withholding of new EU funds to Poland, amounts to some €100bn. New and old EU money flows to Poland The main concern right now relates to the ‘new’ EU money to Poland as inflows already underway from the EU are not seen as likely to be disrupted. Because of the so-called T+3 rule, funds from the 2014-20 multi-year budget can be disbursed through the end of 2023. According to our estimates, the amount of remaining funds is around €20bn and given that Poland has an effective track record, the country should be able to absorb all of it. As of September 2022, contracts with EU financing have covered almost 100% of the available budget envelope, while payments were advanced in less than 75% of cases (as you can see in the chart below).   Historically, overlapping two consecutive EU budgets has been far from perfect. Poland’s experience is not impressive as shown by the sizeable drop in EU cohesion fund flows in 2016, to 1.6% of GDP compared to 2.2% of GDP in 2015, down from 3.3% of GDP on average in the previous three years. The previous EU budget expired in 2015, while investment projects from the new budget were not yet ready. The situation in late 2023 may be similar, and a sizeable gap in EU money flows may materialise in 2024. Partnership Agreement in place but not activated due to Rule-of-Law issue After the adoption of the Partnership Agreement in late June 2022, the EC made it very clear that the member states must fulfil so-called horizontal and thematic enabling conditions in the implementation of cohesion policy programmes. One of the enabling conditions requires compliance with the EU Charter of Fundamental Rights, which includes independence of the judiciary, during the whole programming period. If these conditions are not fulfilled, the EC cannot reimburse expenditures related to the parts of the programme concerned. The recent changes in the judiciary system introduced by the Polish authorities are not perceived as sufficient by officials in Brussels. Little hope for compromise before the end of 2023 A solution to the political deadlock ahead of next year’s general elections looks unlikely. This applies both to the new NRP (about 1% of GDP yearly from 2023 to 2026) and cohesion funds (above 2% of GDP yearly from 2024). The rhetoric of the current government has been centred on maintaining independence from EU bureaucrats in decision-making, so the scope for concessions in the run-up to next year’s elections is narrow. However, because confidence in the EU is very high in opinion polls, the internally-divided government will not be looking for an open conflict with Brussels. The opposition has generally shown a readiness to solve clashes with the EU. The Rule-of-Law and independence of judges remain key topics in internal policy disputes. Therefore, a scenario of no new EU money to Poland before the general election in late 2023 appears to be a baseline scenario for financial market participants. Flows of EU money will be delayed and this will hit Poland’s economy in 2024. Provided that the new EU money is not activated, the overall net balance of EU transfers to Poland (EU transfers minus Poland’s contribution to the EU) may appear close to balance (zero net flows) rather than a sizeable surplus (net balance of 2.1% of GDP yearly on average in 2017-21). Absorption of 2014-20 EU cohesion funds for Poland A percentage of total available funds Source: ING estimates. Statements from rating agencies The potential withholding of the EU's large budget for Poland could have dire economic and market implications. According to Moody’s, a further deterioration in the Rule-of-Law could negatively impact investing in Poland and further intensify the conflict between Warsaw and Brussels, which would be a credit negative. Withholding payments from the 2021-27 financial perspective would weigh on Poland’s economic as well as fiscal strength – Moody’s assessed. A similar view was presented by Fitch. The agency pointed out that delays in the disbursement of structural funds could undermine investor confidence, negatively impact the Polish zloty and hence lead to a further increase in inflationary pressure. So long as the delay is not substantial, it would not markedly impact the current absorption or investment trends, but the main risk is the suspension of EU money inflows after 2023. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

On 10 October, the leader of the Belarusian opposition Sviatlana Tsikhanouskaya proposed to President Volodymyr Zelensky that an alliance be formed between Ukraine and a free & democratic Belarus – i.e. the interim cabinet formed under Tsikhanouskaya’s leadership in August this year. At the same time, she declared that Belarus should give up its political, economic and military alliance with Russia, and that Ukraine would win its war against the Russian aggressor. So far, the offer has not met with a high-level reaction from Kyiv. On 12 October Oleksiy Arestovych, an advisor to the Ukrainian presidential office, reacted positively to the Belarusian opposition leader’s appeal, while at the same time criticising the Ukrainian political class for “unfairly” holding Belarusians responsible for the pro-Russian policy of Alyaksandr Lukashenka. However the chairman of the Ukrainian parliament’s foreign affairs committee and member of the Servant of the Nation party Oleksandr Merezhko, together with another deputy from the same party Bohdan Yaremenko, stated that Ukraine could not recognise Tsikhanouskaya and her cabinet because the stance of the Belarusian opposition towards Russia remains unclear (including its failure to condemn Russia as a terrorist state); they also questioned the credibility of “certain people within her entourage”. Read full article on OSW.WAW.PL

On 10 October, Russia launched massive missile and drone attacks across Ukraine. A total of 84 rockets (43 of which were shot down) and 24 drones (13 shot down) were launched. 19 people were killed and 105 were wounded. The main targets were critical infrastructure facilities (power plants, thermal power plants and substations) in 11 regions and the capital. Among those damaged were the Burshtyn (Ivano-Frankivsk region) and Trypilska (Kyiv region) power plants, as well as thermal power plants in Kyiv, Lviv and Kharkiv. As a result, there was a power outage in most localities both in the east of the country (Kharkiv, Sumy and Poltava regions) and in the western part of the country (Lviv, Ternopil and Ivano-Frankivsk regions). The attacks not only involved energy-related infrastructure–buildings and streets in the centre of Kyiv were also shelled. Ukrenergo (the grid operator) decided to impose emergency power outages (including in the capital), and the government urged people to limit their electricity consumption between 5 and 10 pm. Energy Minister Herman Halushchenko announced the suspension of electricity exports from 11 October in order to stabilise the voltage on Ukrainian grids. Russian attacks continued on 11 October, hitting, among others, the Ladyzhyn power plant (Vinnytsia region) and two power facilities in Lviv. Read more on OSW.WAW.PL

As largely expected, a centre-right coalition led by Giorgia Meloni has secured a clear victory in Italy's election. Meloni will now form a government which will count on a stable majority. For now, concerns about budget decisions and relationships with the EU are quite muted, and both Italian bonds and the euro have bigger short-term issues to deal with Giorgia Meloni secured a clear victory in Italy's election Centre-right got an ample majority in both branches of parliament For once, actual Italian election data broadly confirms what opinion polls had anticipated. According to preliminary data available as we write, the centre-right coalition has got an ample majority (44%), with the centre-left following some way behind (26%). The Five-Star Movement, which runs in isolation, has come third (15%), followed by the centrists of Azione/IV (7.7%). As expected, with the current electoral system attributing a third of seats under a first-past-the-post rule, the ability (or a lack thereof) to form a wide coalition was a decisive factor. The centre-right exploited it very well, mopping up an overwhelming majority of first-past-the-post seats. Based on preliminary data, the centre-right coalition should get a decent majority in both branches of the Parliament.  Meloni to get a mandate to form a government The undisputed big winner in this election was Giorgia Meloni, the leader of Fratelli d’Italia. With 26% of the votes, she prevailed in her coalition by a huge margin over Lega (9%) and Forza Italia (8%). There will be no leadership issue, and she will very likely get the mandate from President Sergio Mattarella to form a new government. This will not happen before mid-October, though, after the first gathering of the houses and the election of their speakers. A new Meloni government could thus be installed by the end of October. Italian election results Source: Italian Ministry of the Interior, ING A tight agenda awaits Meloni, with the budget at the top of the list The scope of Meloni’s lead within her coalition will likely give her the upper hand in many decisions, but we suspect she will be very careful not to humiliate her allies for the sake of stability. Still, on some crucial matters, such as the fiscal stance, she will likely be in a position to effectively oppose calls for more deficit from Matteo Salvini, the leader of Lega, who was a big loser in the polls. As the new budget will have to be approved before year-end, we expect the outgoing Mario Draghi government to set up the macro framework and, possibly, the Planning Document setting the budgetary framework. This should prevent any meaningful deviation from the set track in the short run. More critically, Meloni will over time have to clarify her stance on the international positioning of Italy. If adhesion to the Atlantic Pact seems not at stake, the relationship with Brussels and big eurozone countries will have to be clarified. If participation in the euro project is neatly reaffirmed in the programme, the notion of doing so while defending national interests has yet to be qualified. Not a very short-term issue, but a potential area of conflict for 2023, when the new European fiscal rules will be discussed.   Rates: too early to make long-term calls on policy Italian bonds largely shrugged off the goldilocks result of this weekend’s election: enough votes for the right-wing coalition to ensure stability but not too much so it can change the constitution with a two-thirds majority. Italian spreads tightened into the election in a sign that they have made peace with the prospect of an FdL-led government, for now at least. Focus is now on the early decisions that Meloni’s government will take, including the FinMin appointment, and on the 2023 budget. Longer term, this government’s policies, especially towards Brussels and fiscal discipline, are an unknown quantity. But markets aren’t well equipped to make long-term calls on policy, especially with contradictory near-term signals. Instead, the main driver of Italian bonds over the coming weeks and months is likely to be the broader tone in financial markets. In a context where central banks tighten monetary policy in unison, or even competing with each other in some instances, carry-oriented investors are understandably shy in picking up the additional yields offered by Italy’s bonds. The ECB’s newfound hawkishness is a particular worry, and so is the prospect of it reducing the size of its bonds portfolio through quantitative tightening. FX: Italy is not a short-term concern for the euro The Italian election results seem to have gone mostly unnoticed in the currency market. This is partly due to the predictability of the outcome, but may also denote how markets are giving Meloni the benefit of the doubt after a campaign where she firmly reiterated her intention to respect fiscal rules and maintain Italy’s foreign stance unchanged. Quite crucially, like for government bonds (BTPs), the euro has bigger concerns to deal with – Russia-Ukraine developments and the energy crisis above all – and is now also feeling some spill-over effect from the meltdown in the GBP market over the past two sessions. With the ECB’s hawkishness having blatantly failed to offer the euro any solid support and the dollar staying strong, EUR/USD downside risks remain quite elevated in the near term, even without Italian politics adding any pressure. We think that some Italy-EU confrontation on Meloni’s party's core themes (like immigration) may trigger some adverse market reaction further down the road, and that fiscal decisions may be scrutinised more if she presses forward with tax cut proposals, but it is simply too early for any risk premium to emerge on EUR/USD or even EUR/CHF.   Read this article on THINK TagsItaly elections Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

With Covid no longer taking up international relations, the Northern Ireland Protocol was back creating tension between London and Brussels. But, over the weekend, a proposal was quietly put forward by EU representative Sefcovic that could potentially put an end to the issue. Which could help improve the risk situation in the UK, and the EU, as well as speed along a trade agreement between the UK and the US. What changed? While Liz Truss was the leading contender to replace Johnson, there was quite a bit of speculation over what would happen in the relationship with the EU. She was the Foreign Secretary, and had been pushing heavily to resolve the remaining issue between the two economies: How to trade with Northern Ireland. Most importantly, she had been publicly threatening to invoke Article 16 over the issue. That would allow the unilateral suspension of a part of the agreement. Were that to happen, it was expected retaliation from Brussels, and an escalation of the dispute. Yet now that Truss is the PM, the issue seems to have stopped being as prominent. Of course the EU and UK are facing an unprecedented energy crisis and need to be on good terms to deal with that. But, there is another issue: Politics. Finding a solution that looks good One of the main issues around the Protocol is that any agreement would likely imply one side or the other offering concessions. And that would be politically unacceptable. However, the current situation is untenable, and the "easiest" resolution might simply be to stop making an issue of it. Which is basically what Sefcovic proposed over the weekend. The main problem is that the Brexit agreement effectively creates a customs border for goods between Northern Ireland and the rest of the UK. This was in order to prevent the customs border being between Northern Ireland and Ireland, a violation of the Good Friday agreement. The EU did not want to have an "open border" with the UK, which would allow British goods into the common market without being checked. Starting a problem, and ending it When Brexit became effective, the EU was draconian in the application of customs rules (to the point of infamously seizing ham sandwiches in the cabs of trucks crossing the Channel). That meant enforcement across the Irish Sea was tedious, leading to supply delays from the UK to Northern Ireland. On top of the supply chain problems due to covid, this meant Northern Irish grocery stores were starting to go empty at times. Naturally this led to a lot of unhappy people, and included the resignation of the government. Sefcovic's proposal would be to drastically scale back the amount of checks on cargo going across the Irish Sea to "a few lorries a day". That would technically satisfy the EU on the basis that a border was still in place, but not create the supply bottlenecks that have made trade difficult. Of course both sides could potentially present this as either having provided concessions to or obtained concessions from the other. Which could be politically costly, depending on how it's perceived, so simply letting the situation "fade" without a formal announcement, might be a solution.

On 11 July, in line with previous announcements and annual practice, Gazprom stopped gas deliveries to European customers via the Nord Stream 1 (NS1) pipeline, which runs from Russia to Germany along the Baltic Sea bed. Although the supply interruption is thought to be of a technical nature (related to planned maintenance work), a number of European commentators and officials (including Germany’s Economy Minister Robert Habeck, France’s Economy and Finance Minister Bruno Le Maire and European Commission Vice-President Valdis Dombrovskis) are concerned that supplies will not be fully or even partly restored once the interruption ends (21 July). Already in June, Gazprom reduced gas supplies via NS1 (from 167 million m3 to 66 million m3 per day), citing one of the reasons being problems related to the sanctions-related blockage in Canada of Siemens gas turbines for the compressor station being repaired there. Russian presidential spokesman Dmitry Peskov rejected accusations levelled at Moscow that the decisions were political, and indicated (on 8 July) that the return of the turbine would help boost supplies after the technical break. On 10 July, Canada’s Energy Minister Jonathan Wilkinson announced that the government would allow an exception to the country’s sanctions and grant temporary, revocable approval for the delivery to Germany of Siemens gas turbines that are being repaired in a Siemens subsidiary in Montreal, to be later delivered to Russia’s Gazprom. According to media leaks (published in the Canadian daily The Globe and Mail on 13 July), the approval is to last for two years and applies to six turbines. The Canadian decision was criticised by the Ukrainian authorities, including President Volodymyr Zelensky. On the same day, the Ukrainian Foreign Ministry conveyed its protest in a verbal note to the Canadian ambassador in Kyiv. Also, Ukraine’s energy and interior ministries called on the Canadian parliament to halt the return of the turbine, arguing that otherwise Moscow would gain support in its hybrid war against Europe. The statement stressed that the Russian side is not taking advantage of existing opportunities to increase gas supplies through Ukrainian territory. On 10 July, the Canadian government’s decision was welcomed by German Chancellor Olaf Scholz. On 11 July it was also supported by the US State Department. In doing so, it stated that its implementation would allow Germany and other European countries to replenish their gas stocks and protect themselves from Russian energy blackmail. On the same day, a spokesperson for the German government stated that the German side had taken note of the critical position of the Ukrainian authorities regarding the return of the turbine, and stressed that EU sanctions do not cover equipment related to the supply of natural gas. A spokesperson for the European Commission gave a similar assessment. On 8 July, during a meeting with members of the government on the fuel and energy industry, President Vladimir Putin called on the cabinet and Russian energy companies to prepare for a Western embargo on imports of Russian energy and to intensify efforts to diversify its exports to the South and East. On 11 July, the Krasnodar Krai court in Rostov-on-Don, following an appeal by the KTK/CPC consortium (the operator of the oil pipeline from the Kazakh Tengiz field to the Russian terminal in Novorossiysk), amended the Novorossiysk district court’s order of 5 July and replaced the suspension of the company’s activities for 30 days for environmental violations (and consequently the operation of the oil pipeline) with a fine of 200,000 roubles (currently equivalent to approximately $3,300). On 13 July, the International Energy Agency’s (IEA) monthly report was published, showing, among other things, that Russian crude oil production increased by 490,000 barrels per day (b/d) in June – to 11.07 million b/d. Crude exports decreased in June to 7.4 million b/d, down 250,000 b/d from May this year. (Crude oil accounted for about 5 million b/d of this and oil products, whose export volume remained unchanged, accounted for about 2.4 million b/d). At the same time, Russia’s oil export revenues increased by $700m in June compared to May and exceeded $20bn per month. This was due to an increase in the average price of Urals crude oil, which in June (according to the Russian Ministry of Finance) stood at $87.25 per barrel, 10.7% higher than in May this year. On 13 July, credit rating agency Moody’s reported that Germany’s plan to reduce its share of natural gas imports from Russia to 10% by 2024 will be very challenging (despite having already managed to reduce this percentage from 60% to 35% in April this year). Italy, on the other hand, could become completely independent of Russian gas imports by 2025. According to the agency’s assessments, the possible suspension of gas supplies by Russia via NS1 and the resulting problems would cause losses estimated at 3–6% of Germany’s GDP and 1–3% of Italy’s GDP. Read full article on: Stopping the Nord Stream 1 gas pipeline (osw.waw.pl)

Relevance up to 10:00 2022-07-08 UTC+2 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.   UK Prime Minister Boris Johnson said he has no intention of abdicating despite many of his cabinet members resigning in response to his scandals. Transport Secretary Grant Shapps and Business Secretary Kwasi Kwarteng were among the dignitaries who told Johnson that his time was up as more than 40 ministers and aides quit, following the resignation of Teasury chief Rishi Sunak and Health Secretary Sajid Javid. The exodus continued early Thursday, with the resignations of Northern Ireland Minister Brandon Lewis and Finance Minister Helen Whately. For most of the day, Johnson's administration was in real danger of collapse as its authority waned. But after meeting with his inner circle, the Prime Minister went on the attack, firing Michael Gove, one of the cabinet's remaining big hitters. This news makes shorting the FTSE100 index a good idea, especially since interest rates are likely to increase and threats of a recession correlate with political uncertainty in the UK.     The numbers are definitely not in Johnson's favor. Had 32 more of his MPs voted against him in June, his authority would have ended. The number of resignations in the last 24 hours already exceeds that. However, in Parliament, Johnson made clear that he had no intention of resigning and said that he believed his mandate to power came from the voters who gave him a stunning victory in the 2019 election.   Read more: https://www.instaforex.eu/forex_analysis/315533