Italy Believes That The Rise In Its Bond yield does not reflect its fundamentals

Notes/Observations

• Optimism prevalent that UK and EU could come to an agreement
• Italian govt officials reiterate concern on rise in bond yields; maintain that there will be no backtracking on its 2019 budget

Asia:

• US Treasury Sec Mnuchin has warned China on competitive currency devaluation
• Former PBoC Advisor Yu Yongding said hard to imagine yuan (CNY) currency will fall to a level that could trigger financial crisis given China’s economic fundamentals. China should refrain from market intervention even if the yuan slides below 7 level against the USD
• RBA Deputy Head of Economic Analysis Coombs stated that the:expectation was that GDP growth to remain a little above 3% for the next year or so, which would further reduce spare capacity in the economy

Europe:

• UK BoE Deputy Gov Broadbent: Govt could stop issuing debt linked to RPI; large change to UK inflation-linked gilts would risk legal challenge
• UK, EU said to be make progress in Brexit negotiations over Irish backstop
• Approx 30 Labour Party MPs said to be prepared to support the Chequers deal in order to prevent a ‘no-deal’ Brexit.
• PM May said to ‘force’ cabinet into new Brexit compromise. Expected to include a commitment to keep the whole of the UK in an effective customs union with the EU after Brexit, but with a “clear process” of steps to exit
• Italy PM Conte reiterated Italy govt would not change its budget outline – comments after budget meeting. govt would confirm the targets provided in its budget plan, despite the Italy Parliamentary Budget Office (fiscal watchdog) rejecting the plan
• Italy Dep PM Di Maio: turning back on the 2019 budget plan would be betraying the Italian people
• EU banking regulators reportedly monitoring Italy bank liquidity levels more intensely than usual due to market turbulence but had found no cause for alarm

Americas

• President Trump reiterated view that did not like what the Fed was doing; I think we don’t have to go as fast on rates

Macro

• (US) US: Treasury Secretary Mnuchin warned China on competitive currency devaluation. Worth noting that the Treasury’s Semi-Annual Report is due out next week. China has been on that watch list since 2016. It’s one of six countries currently on the list. When Trump ran for office said he would label China a “currency manipulator” on “day one”. If they really wanted to escalate this would probably be the next course of action. The Treasury Department hasn’t accused China of artificially suppressing the Yuan because it relies on The Trade Facilitation and Trade Enforcement Act 2015 law that sets strict standards for the designation. (A min $20B trade surplus with the US, current account surplus greater than 3% of GDP, & repeated interventions in the currency markets – China only meets the trade deficit test) But The Omnibus Foreign Trade & Competitiveness Act 1988 law (still in effect) sets a looser standard which the US has reportedly been looking “very strongly” in to.
• (IT) Italy: Moody’s says Italy’s fiscal plan is a mistake. They are due to issue their rating update this month and Moody’s chief economist Mark Zandi told La Stampa that market concern about Italy will be reflected in upcoming reviews. Zandi suggested the fiscal plan was akin to gambling with the long-term fiscal and economic health of Italy and stressing that the views of markets and ratings agencies are based on numbers not politics. Italy’s parliamentary budget office is expected to give its assessment this week. Both houses need to approve the fiscal outlines, which will then send to the European commission before the October 15 deadline.
• (UK) UK: According to reports a group of at least 30 opposition Labour MPs would break with party leadership and vote for Prime Minister May’s Chequers plan at the last minute, if needed to avoid a no-deal exit from the EU. The group consists of those who oppose a second Brexit referendum, and who would offer their support to offset the expected no-vote from the hardcore Eurosceptic MPs in the prime minister’s own party. These Labour MPs according to the report also reject the Labour strategy of trying to use a vote against any Chequers-type deal to trigger a general election. If the report is accurate it suggests that a negotiated plan would at least have a chance of passing a vote in Parliament.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.4% at 371.5, FTSE -0.1% at 7227, DAX -0.6% at 11904, CAC-40 -0.7% at 5283, IBEX-35 -0.6% at 9203, FTSE MIB -0.2% at 20023, SMI 0% at 8960, S&P 500 Futures -0.1%]

Market Focal Points/Key Themes:

• European Indices continue their bearish tone with declines across the board tracking US futures lower and mixed session in Asia. Chinese export related stocks continue to be under pressure on US-China trade issues, with Italian Budget and UK Brexit commentary continue to weigh on markets.
• On the corporate front LVMH trades lower after in line results, trading at the lowest level since April; Marston and Telford Homes among other companies lower after trading updates. Meanwhile strong order intake sees Nordex higher, with Takeaway.com and PageGroup also trading higher after positive updates.
• Elsewhere a report suggesting the US is considering blocking the UK from a 46 nation gloal procurement agreement sees Roll Royce and Serco lower.
• Looking ahead Fastenal is set to report.

Equities

• Consumer discretionary: [LVMH [MC.FR] -4% (earnings), Marston’s [MARS.UK] -2% (trading update), Takeaway.com [T5W.DE] +6% (trading update), PageGroup [PAGE.UK] +1% (earnings), Bureau Veritas [BVI.FR] +1.4% (analyst action)
• Energy: Nordex [NDX1.DE] +1% (order intake)
• Healthcare: Eckert & Ziegler [EUZ.DE] +4% (raised outlook)
• Industrials: Hella [HLE.DE] -7% (analyst action), CTT Systems [CTT.SE] -38% (de-selected as supplier), Rolls Royce [RRUK] -2.3% (US reportedly considering blocking UK from 46-nation global procurement agreement )
• Real Estate: Telford Homes [TEF.UK] -7.5% (trading update)

Speakers

• ECB’s Mersch (Luxembourg) reiterated view that euro area economy was currently experiencing a broad-based economic expansion. Remained confident that the underlying strength of the euro area economy would continue to support the gradual build-up of price pressures
• BOE’s Haldane (leaning hawk, chief economist): Pay growth should start picking up despite false dawns in the past. Saw longer-term threats to pay growth from reduced worker bargaining power, automation and business monopolies. Reiterated market expectations of 25 bps a year increase in BOE rates “not dissimilar” to BOE forecasts for pick up in wage growth over next 3 years
• Italy Dep PM Salvini reiterated Italy govt would not backtrack on its budget
• Italy Dep PM Di Maio reiterated Italy govt would not backtrack on its budget and expected economic growth to be higher on 2019 measures. Goal was to have dialogue with all EU institutions
• Italy Fin Min Tria stated in Parliamentary hearing that the Government bond yield gain was a reason for concern as it did not reflect fundamentals. Stated that the Govt economic forecasts were approved by budget watchdog but that it had a different view on the growth target. Govt set aside €15B for 2019 expenditures (derived from €6.9B in spending cuts and €8.1B in revenues
• Russia said to consider a 5 year extension to the START Treaty
• China govt said to be planning a major expansion of its ‘too big to fail’ rules

Currencies

• Political crisis in Italy over its 2019 budget plan continued to be a key concern as Italy political leaders seem keen to disobey Brussels’s fiscal line. The EUR/USD saw some initial gains erode away as the Italian 10-year yield rose by over 10bps in the session. Italy Fin Min Tria tried to sooth the market as he noted that bond yield gain was a reason for concern
• Optimism was swirling that The UK and EU could reach a compromise in the Brexit negotiations prompted the GBP currency to rise for a 2nd straight session. PM May appears to be working on a plan that shows commitment to keep the whole of the UK in an effective customs union with the EU after Brexit, but with a “clear process” of steps to exit
• The USD/JPY was higher as the yen snapped a 4-day losing streak as some safe-haven flows ebbed as US Treasury rates stabilize

Fixed Income

• Bund Futures trades at 158.01 down 12 ticks as the 10-year Bund falls back below the 0.55% level. A downside break of 157.25 sees 155.69 initially. To the upside 158.50 remains initial resistance.
• Gilt futures trades at 119.89 down 13 ticks following the move in Treasuries. Continued support at 120.50, with a continued move higher targeting 123.93 then 124.00.
• Wednesday’s liquidity report showed Tuesday’s excess liquidity fell from €1.893T to €1.892T. Use of the marginal lending facility stayed fell from €58M to €40M.
• Corporate issuance saw 2 issuers raise $1.2B in the primary market

Economic Data:

• (NL) Netherlands Aug Manufacturing Production M/M: +1.3% v -1.1% prior; Y/Y: 3.1% v 1.9% prior Industrial Sales Y/Y: 12.8% v 8.5% prior
• (RO) Romania Sept CPI M/M: 0.5% v 0.3%e; Y/Y: 5.0% v 4.8%e
• (RO) Romania Q2 Final (3rd reading) GDP Q/Q: 1.4% v 1.4%e; Y/Y: 4.1% v 4.1%e
• (DK) Denmark Sept CPI M/M: -0.3% v +0.1%e; Y/Y: 0.6% v 1.0%e
• (DK) Denmark Sept CPI EU Harmonized M/M: -0.2% v +0.1%e; Y/Y: 0.5% v 0.8%e
• (NO) Norway Sept CPI M/M: 0.6% v 0.4%e; Y/Y: 3.4% v 3.3%e
• (NO) Norway Sept CPI Underlying M/M: 0.5% v 0.3%e; Y/Y: 1.9% v 1.8%e
• (NO) Norway Sept PPI (including Oil) M/M: 1.5% v 0.6% prior; Y/Y: 21.1 v 22.8% prior
• (FI) Finland Aug Industrial Production M/M: +0.2 v -1.6% prior; Y/Y: 1.8% v 2.3% prior
• (JP) Japan Sept Preliminary Machine Tool Orders Y/Y: 2.8% v 5.1% prior
• (FR) France Aug Industrial Production M/M: 0.3% v 0.1%e; Y/Y: 1.6% v 1.5%e
• (FR) France Aug Manufacturing Production M/M: 0.6% v 0.1%e; Y/Y: 1.9% v 1.7%e
• (SE) Sweden Aug Household Consumption M/M: +1.5% v -2.0% prior; Y/Y: +0.3% v -0.7% prior
• (IT) Italy Aug Industrial Production M/M: 1.7% v 0.8%e; Y/Y: -0.8% v +1.8% prior, Industrial Production WDA Y/Y: -0.8% v -1.5%e
• (UK) Aug GDP M/M: 0.0% v 0.1%e, 3M/3M: 0.7% v 0.7% prior
• (UK) Aug Visible Trade Balance: -£11.2B v -£10.9Be; Total Trade Balance: -£1.3B v -£1.2Be; Trade Balance non-EU: -£4.2B v -£3.1Be
• (UK) Aug Industrial Production M/M: 0.2% v 0.1%e; Y/Y: 1.3% v 1.0%e
• (UK) Aug Manufacturing Production M/M: -0.2% v +0.1%e; Y/Y: 1.3% v 1.1%e
• (UK) Aug Construction Output M/M: -0.7% v -0.5%e; Y/Y: 0.3% v 1.2%e
• (UK) Aug Index of Services M/M: 0.0% v 0.1%e; 3M/3M: 0.5% v 0.5%e
• (GR) Greece Aug Industrial Production Y/Y: 1.4% v 2.0% prior
• (GR) Greece Sept CPI Y/Y: 1.1% v 1.0% prior; CPI EU Harmonized Y/Y: 1.1% v 0.9% prior

Fixed Income Issuance

• (IE) Ireland Debt Agency (NTMA) opened its book to sell EUR-denominate 12-year green bonds; guidance seen +15bps to mid-swaps
• (IN) India sold total INR150B vs. INR150B indicated in 3-month, 6-month and 12-month bills
• (NO) Norway sold NOK3.0B vs. NOK3.0B indicated in 2% May 2023 Bonds; Avg Yield: 1.66% v 1.36% prior; Bid-to-cover: 2.70x v 1.76x prior
• (IT) Italy Debt Agency (Tesoro) sold €6.0B vs. €6.0B indicated in 12-month Bills; Avg Yield: 0.949% v 0.206% prior; Bid-to-cover: 1.63x v 1.64x prior

Looking Ahead

• (MX) Mexico Sept Nominal Wages: No est v 5.5% prior
• (SE) Sweden Central Bank (Riksbank) Dep Gov Ohlsson
• 05:30 (ZA) South Africa Sept Sacci Business Confidence: 89.0e v 90.5 prior
• 05:30 (DE) Germany to sell €3.0B in 0.25% Aug 2028 Bunds
• 05:30 (PT) Portugal Debt Agency (IGCP) to sell €0.75-1.0B in Oct 2028 OT bond
• 05:30 (GR) Greece Debt Agency (PDMA) to sell 13-week bills
• 06:00 (PT) Portugal Aug Trade Balance: No est v -€1.2B prior
• 06:00 (CZ) Czech Republic. to sell 2033 Bonds
• 06:45 (US) Daily Libor Fixing
• 07:00 (US) MBA Mortgage Applications w/e Oct 5th: No est v 0.0% prior
• 07:00 (BR) Brazil Oct IGP-M Inflation (1st Preview): 1.1%e v 0.8% prior
• 07:00 (RU) Russia to sell RUB5B in weekly OFZ bond auction
• 07:30 (CL) Chile Central Bank Economists Survey
• 08:00 (RO) Romania Central Bank (NBR) Sept Minutes
• 08:05 (UK) Baltic Dry Bulk Index
• 08:30 (US) Sept PPI Final Demand M/M: 0.2%e v -0.1% prior; Y/Y: 2.7%e v 2.8% prior
• 08:30 (US) Sept PPI (Ex Food and Energy) M/M: +0.2%e v -0.1% prior; Y/Y: 2.5%e v 2.3% prior
• 08:30 (US) Sept PPI Ex Food, Energy, Trade M/M: 0.2%e v 0.1% prior; Y/Y: No est v 2.9% prior
• 08:30 (CA) Canada Aug Building Permits M/M: +0.5%e v -0.1% prior
• 10:00 (US) Aug Final Wholesale Inventories M/M: 0.8%e v 0.8% prelim; Wholesale Trade Sales M/M: 0.5%e v 0.0% prior
• 11:30 (US) Treasury to sell 3-year notes
• 12:00 (US) DOE Short-Term Crude Outlook:
• 12:00 (IS) Iceland Sept International Reserves (ISK): No est v 684B prior
• 12:00 (CA) Canada to sell 2-year notes
• 12:15 (US) Fed’s Evans (non-voter, dove) on Economy and Monetary Policy
• 13:00 (US) Treasury to sell 10-year Notes
• 16:30 (US) Weekly API Oil Inventories
• 18:00 (US) Fed’s Evans (non-voter, dove) on Economic Outlook