Rates: Italian credit spread returns above 300 bps
Risk sentiment on stock markets and developments in Italy will probably remain today’s main trading themes. Main EMU equity indices are sliding towards crucial support levels, while the Italian credit spread returns above 300 bps. Both factors provided a safe haven bid into the Bunds, outperforming US Treasuries.
Currencies: Euro remains in the defensive, but losses remain modest
Yesterday, the global risk-off context caused a classic correction on FX markets with EUR/USD, USD/JPY and EUR/JPY turning south. However, the correction developed in an orderly way. Today’s drivers for FX trading might be similar to yesterday. Italy remains a wildcard. For now, there is no reason turn positive on the euro yet.
The Sunrise Headlines
- US equity markets opened this week fairly good after turmoil on Asian and European markets yesterday. Nasdaq underperformed. Asian markets are mixed with China outperforming and Japan losing substantial ground.
- The IMF has revised its global economic outlook, citing rising trade tensions and a weakening of emerging markets. World economies will grow 3.7% this year and next, down from the 3.9% forecast in July.
- The Pakistan finance ministry said the government will seek emergency financial assistance from the IMF to ease a growing liquidity crisis. The IMF commented that Pakistan has not yet formally approached them.
- US officials have warned China that President Trump will not engage in trade talks with President Xi Jinping at next month’s G20 summit in Buenos Aires if China does not come up with a detailed list of concessions.
- Oil prices surged back up yesterday as Iranian crude sales dropped further in the run-up to the re-imposition of US sanctions. In the US, a hurricane is moving across the Gulf of Mexico, putting further stress on oil supply.
- Italy’s Finance Minister Giovanni Tria will visit the Italian parliament today in an attempt to defend the government’s fiscal targets. Opposition lawmakers already criticized the decision to borrow more and will grill him on the plan.
- Today’s eco calendar US NFIB’s Small Business Optimism and German trade data. Fed’s Kaplan and Harper, ECB’s Villeroy and BoE’s Broadbent speak. Italian FM Tria defends the budget proposal in parliament
Currencies: Euro Remains In The Defensive, But Losses Remain Modest
EUR/USD in the defensive, but losses stay modest
Yesterday, a selling wave of Chinese assets (including the yuan) set the tone for global trading. In Europe, the rift between the Italy and the EU on the country’s budget proposal continued. BTP’s ceded further ground, widening intra-EMU spreads. There were also some negative spill-over effects on the euro. In a classic risk-off move, EUR/USD, EUR/JPY and USD/JPY all turned back south. However, the move still developed in an orderly way and major cross rates didn’t break any important technical references yet. EUR/USD finished the session at 1.1492 (from 1.1524). USD/JPY also drifted further away from the 114+ levels reached last week. The pair closed the session at 113.23. This morning, sentiment on Asian markets remains fragile. The sell-off of Chinese equities slows and so does the decline of the yuan (and some other regional currencies like, the IDR/INR). Yen strength translated in a further underperformance of Japanese equity markets. EUR/USD hovers in a tight range close to, mostly slightly below 1.15. USD/JPY settled near 113. Today, the eco calendar is thin, containing mainly second tier eco data including the NFIB small business confidence. The index is expected to ease slightly from last month’s record level. However, we don’t expect a big impact on broad USD trading. Italy remains a wildcard as Fin Min Tria will defend budget before Parliament. For now, we don’t expected the government to adapt a softer tone yet. This is no good news for risk sentiment on European markets. However, quite some bad news should already be discounted. Yesterday, the euro also reacted in a very modest way to broader (EU and non-EU driven) market tensions. Over the previous days, we had a cautious yet positive USD bias as EUR/USD struggled not the fall below the 1.15 support area. We maintain that view. Admittedly the damage for EUR/USD was limited of late, but we don’t see a trigger to already become positive on the euro.
Yesterday, sterling trading was mostly technical in nature. Last week’s sterling short squeeze slowed. Some sobering comments from UK policy makers on Brexit maybe tempered the positive sterling sentiment. Overnight BRC retail sales came out soft. Over the previous days sterling regained some ground as markets hoped that the UK and the EU were coming closer to some kind of Brexit deal. There are no really concrete signs yet. We stay neutral on sterling and expected EUR/GBP to look for a new ST equilibrium until there is hard news on Brexit.
EUR/USD: holding near recent lows, but downside pressure remains modest even as uncertainty on Italy persists
