Italy weighs merger plans to safeguard struggling banks

Italy is considering merging troubled banks Monte dei Paschi and Banca Carige with healthier rivals such as UBI Banca as it scrambles to avert a new banking crisis, sources familiar with the matter said.

Monte dei Paschi, rescued by the state in 2017, and Carige, recently put into special administration by the European Central Bank (ECB), are struggling with bad debts and the prospect of asset writedowns that would eat into their capital.

Their problems threaten to reignite a banking crisis that Rome thought it had ended two years ago and could further damage an economy already at risk of slipping back into recession.

According to one of the sources, the options being considered even include the possibility of a three-way merger that would bring together Monte dei Paschi, Carige and UBI. The banks and the Italian treasury declined to comment. Discussions are at a very early stage and no final plan has been drawn up by the anti-establishment government, which has criticised past bank bailouts and wants to avoid spending taxpayer money to rescue lenders.

Several government officials have publicly voiced support for mergers that would strengthen the banking industry. Stefano Buffagni, cabinet undersecretary and a prominent member of the ruling 5-Star Movement, said this week the government should play a leading role in engineering such tie-ups.

Fed raises interest rates but signals fewer hikes in 2019

  • The Federal Reserve on Wednesday raised its key interest rate for the fourth time this year but signaled fewer rate hikes in 2019 than it had forecast.
  • Americans with credit cards and other short-term loans will soon notice the increase, though banks typically take longer to raise interest rates for savers.
  • The hike came amid criticism from President Donald Trump, signs of an economic slowdown, and stock-market volatility.

The Federal Reserve on Wednesday raised its benchmark interest rate as had been widely anticipated but signaled fewer rate hikes in 2019 than it had forecast.

Ahead of the announcement, the Fed was expected to set the tone for how it would handle an expected slowdown in economic growth next year, unprecedented political pressure from President Donald Trump, and investors who are nervous about the gradual removal of easy monetary policy.

The central bank’s Federal Open Market Committee unanimously voted to raise the fed funds rate by 25 basis points to a range of 2.25% to 2.5%. This will lift the benchmark interest rate to its highest level since early 2008, when the Fed was cutting rates amid the Great Recession. Wednesday’s decision was the ninth since the Fed started raising rates in December 2015.

Americans with credit cards and other short-term loans will soon notice the increase, but banks typically take longer to raise interest rates for savers.

The FOMC now projects that it will raise rates just twice next year, down from its September forecast for three increases. It also nudged down its expectation for gross-domestic-product growth in 2019 by 0.2 percentage points to 2.3%.

Wednesday’s rate hike came amid pushback from investors and President Donald Trump, who is concerned that higher borrowing costs will slow the economy. After repeated calls for the Fed to slow rate hikes, Trump tweeted Tuesday, at the start of the two-day policy meeting, that the central bank should “feel the market” and not pay attention to “meaningless numbers.”

The stakes are higher for the Fed not just because Trump is on its tail but amid signs the US economy is indeed slowing down. Since the Fed most recently raised rates, in September, the housing market has continued to weaken and business investment has softened. Also, the forward-looking stock market has slumped by more than 10% from recent highs into a correction, and rates traders have priced in a slower path of rate hikes for the Fed.

That’s why the Fed’s signals about monetary policy in 2019 were all-important Wednesday, starting with the press release. In it, the FOMC said it “judges” that gradual rate hikes would be forthcoming, tweaked from language that had said it “expects” rate hikes.

Fed Chairman Jerome Powell will have the opportunity to unpack any wording changes during his press conference, scheduled for 2:30 p.m. ET. Starting in January, he will hold press conferences after every meeting and not just once a quarter. That’s a development some economists expect to introduce more market volatility because the Fed will become more unpredictable.

The Fed is poised to walk a tightrope as it approaches the end of both this expansion and the accommodative monetary policy that juiced the economy. Sounding too optimistic could further tighten financial conditions and hurt the economy. But if the Fed is too dovish, the interpretation could be that the economy is on the rocks.

Here’s the Fed’s full statement:

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.”

European Shares Set To Open Higher

European stocks look set to open a tad higher on Monday as investors look ahead to key central bank meetings later this week.

Federal Reserve policymakers will gather on Wednesday for the last time this year to decide whether to raise interest rates for the fourth time amid headwinds to U.S. growth in 2019.

The Fed is widely expected to raise interest rates by another quarter point, but the central bank’s accompanying statement and forecasts will be closely scrutinized for clues about future rate hikes.

The Bank of Japan and the Bank of England will hold their monetary policy meetings on Thursday.

Brexit developments also remain in focus after Prime Minister Theresa May attacked one of her predecessors – accusing Tony Blair of “undermining” the Brexit talks by calling for another referendum.

She reportedly called his comments an “insult to the office he once held” and said MPs could not “abdicate responsibility” to deliver Brexit by holding a new poll.

According to pre-released text, May will urge MPs today not to “break faith with the British people” by demanding a second referendum.

Asian stocks are trading mostly higher after China said it would temporarily suspend additional 25 percent tariffs on U.S.-made vehicles and auto parts starting January 1, 2019.

Meanwhile, North Korea on Sunday condemned the Trump administration over its latest sanction measures for alleged human rights abuses and warned of a return to “exchanges of fire”.

Gold edged lower as the dollar held near a 19-month high on heightened concerns of a global economic slowdown.

U.S. crude oil futures for January edged up slightly in Asian trade after falling by 2.6 percent to $51.20 a barrel on Friday.

U.S. stocks succumbed to heavy selling pressure on Friday as disappointing industrial output and retail sales data from China sparked fresh fears that the global economy is slowing.

The Dow Jones Industrial Average tumbled 2 percent, and the S&P 500 dropped 1.9 percent to close at their lowest levels in seven and eight months, respectively, while the tech-heavy Nasdaq Composite shed 2.3 percent.

European markets also ended firmly in the red on Friday, with disappointing Chinese data, weak data from the euro zone and ECB President Mario Draghi’s warning that risks were moving to the downside keeping investors nervous.

The pan-European Stoxx Europe 600 index eased 0.6 percent. The German DAX and the U.K.’s FTSE 100 fell around half a percent while France’s CAC 40 index declined 0.9 percent.