The Weekly Update

The Italian Prime Minister Matteo Renzi has formally announced his resignation after losing the referendum on constitutional reform, potentially tipping the Italian economy into political turmoil. As well as submitting his resignation to Italy’s President Sergio Mattarella, Renzi also insisted he would not be available to lead a caretaker government and over the weekend Paolo Gentiloni, the former Foreign Minister, was appointed Prime Minister. Although many expected Renzi to lose the referendum, the size of the loss will surprise some commentators. With over 33 million Italians voting, more than two-thirds of those eligible, nearly 60% voted against a change to Italy’s constitution. In a speech after the vote, Renzi said ‘My experience in government ends here … I did all I could to bring this to victory’ adding  ‘If you fight for an idea, you cannot lose.’ The vote is the latest blow to establishment politics in favour of populist and anti-immigrant parties, following on from the Brexit vote and Trump's surprise victory. The biggest objection to the reforms was that it would have given the ruling party more power at a time when there was little faith in politics. On the back of the result the euro touched a 20 month low against the dollar (1.0506).

Elsewhere, some good news for Mexico last week as they successfully auctioned off eight deep water oil and gas blocks in the Gulf of Mexico as an ongoing policy to open up the country’s energy industry. Companies such as China Offshore Oil Corporation (CNOOC), Australia’s BHP Billiton, France's Total, Norway’s Statoil, Malaysia’s Petronas, BP and a number of US companies were all successful bidders with a number of joint ventures established.

Mexico’s relieved energy minister Pedro Joaquin Coldwell said, ‘This underlines Mexico is very competitive in the oil and gas sector’ adding, ‘Before the current administration ends in two years’ time Mexico will likely hold three more oil auctions for shallow and deep water, as well as onshore areas’. Government expectations were reportedly that it would have been content if just four fields had been auctioned so the result that eight were successful was an obvious boost. It is thought that over the next decade the fields auctioned yesterday will add around 900,000 barrels a day to Mexican output with the auctioned fields thought to contain an estimated 8.4 billion barrels of oil.

Also good news from China, where both global and domestic demand appear to have improved as trade data releases for November materially rebounded, exceeding market expectations. Exports gained 5.9% while imports were up 13%, in renminbi terms; this was the first month of positive export growth, measured in US dollar terms since March this year. We expect exports to come under pressure if the US does go ahead to restrict imports from China, although China has a multitude of options to turn to and is currently in talks with the UK, which we expect, could be one of China's closest allies going forward. Trade between the two nations stood at just under $80bn last year.

China’s imports jumped the most in over two years off the back of a surge in copper, crude, iron ore and coal demand. The combination of a weaker currency and stronger commodity prices suggests China’s PPI will continue to push higher. Higher PPI inflation should lead to increased corporate profitability, as these two measures have historically been positively correlated. Higher and more stable inflation has aided the PBoC in shifting to a more neutral monetary policy stance.