Front and centre of our thoughts this week include

Following a week of heavy losses, equity markets struggled to find clear direction last week as a positive start to the US corporate earnings season failed to offset political risks weighing on sentiment. This week sees no let-up in political news flow with developments in Saudi Arabia and Italy chiefly in focus. On the macroeconomic front, the European Central Bank’s monetary policy meeting and third quarter estimates for US economic growth numbers will be the highlight of the week.

Saudi Arabia’s “future investment initiative summit” due to be held this week was meant to provide an opportunity for the country to showcase its wealth and future prosperity. Dubbed the “Davos in the Desert” the event is an opportunity for business leaders to gather in support of Saudi Arabia’s 2030 vision of diversifying the economy away from fossil fuels. However, the news over the weekend that the country admitted that reporter Jamal Khashoggi died in their consulate after previously denying any knowledge of his death has received international condemnation. Of greater interest will be whether sanctions are imposed on an important Western ally in the Middle East.

Rome’s confrontation with Brussels over the Italian budget continues this week, with the Italian government set to respond to Brussels criticism of its budget today. With the Italian government taking an uncompromising stance to its budget thus far, the events this week could provide the litmus test for the European Commission’s ability to police national budgets. It remains a tough balancing act for Brussels, push too hard and risk strengthening eurosceptic sentiment in Italy but too lenient a stance risks a counter reaction from other European members that comply with the rules. Investor sentiment around Italian assets has deteriorated in recent weeks and with debt rating agencies issuing downgrades (with more set to come) we are at a particularly precarious moment.

Moving away from politics, the ECB is unlikely to make any significant changes to its monetary policy this week when they meet on Thursday. The bank is on course to end its bond purchasing programme by the end of the year but with European politics in a sticky patch, the ECB’s every move is being heavily monitored. Investors will be paying attention to ECB president Mario Draghi’s post meeting press conference for any emphasis he places on the downside risks to European growth from the Italian budget, Brexit, emerging markets or softening Chinese growth.

Over in the US, Friday sees the release of the first estimate of economic growth over the third quarter of this year. The US economy is expected to have grown at an annualised rate of 3.3% over the third quarter, down from the 4.2% rate recorded over the second quarter. However, if confirmed, the pace of growth would still be higher than what is assumed to be the long term potential growth rate of the economy. Should the US economy continue on this trajectory, investors will expect the US Federal Reserve to raise interest rates again in December.

Going on in the engine of Brexit

The big Brexit story last week was the news that Prime Minister Theresa May is willing to extend the Brexit transition period beyond the current December 2020 end date by “a matter of months”. An extension would give negotiators more time to tackle some of the biggest obstacles blocking a deal, such as the Irish backstop and the period of frictionless trade with the EU.

By increasing the transition period, the EU would expect further contributions to the EU budget and a longer period of free movement of people. The extension proposal has been widely criticised, further raising concerns over the stability of Mrs May’s tenure. She is due to meet with her backbenchers this week in the hope of securing further support.