Italian equities rise despite Moody’s credit rating cut
On Monday morning, Italian equities surged across the board, with financials rising the most, while treasury yields fell to a 1-month low. Last Friday, Moody’s Investors Service cut the country credit rating to Baa3, one notch above junk, amid rising concerns over Italy’s eroding fiscal strength. However, the fact that the tone of the statement remained quite positive, together with constructive comments from EU’s Commissioner for Economic and Financial Affairs, Pierre Moscivici, helped to limit the sell-off. In addition, Luigi Di Maio said that his government was open to negotiations with the European Union. The 2-year BTP-Bund spread eased to 1.72%, down from 2.14% last Thursday.
In the FX market, the single currency reacted positively. EUR/USD rose 0.30% to 1.1550 before returning to 1.1530, which suggests that investors remain on their guard. Overall, the risk sentiment had improved somewhat but investors’ confidence remains fragile following two rough weeks, which have seen equity valuations melt like snow under the sun.
Chinese stocks make multi-year gains despite slowing economic growth
Despite a slowdown in economic growth, investors remain optimistic, pushing Chinese shares higher. The slowdown in 3Q GDP growth published last Friday at 6.50%, lowest since 2009 due to a decline in manufacturing activities, was followed by joint statements from Chinese regulators which are meant reassuring.
Indeed, while Shanghai CSI 300 had its largest intraday gain since January 2015 of 4.32%, the Hong Kong Hang Seng made a gain of +2.35%, marking its largest rise since mid-September 2018. The bounce is a welcome move on the marketplace, since Chinese shares have been declining harshly since the beginning of the year (year-to-date: CSI 300: -22.23%, Hang Seng: -12.50%) amid mounting trade tensions between China and the US and EM debt contagion risk.
However, although Chinese authorities remain worried about the economic outlook of China, announcements of supportive policies (incl. flexible credit granting) and tax cuts estimated at 1% of GDP starting next year have been confirmed. Therefore, according to recent announcement, it appears that Chinese authorities are expected to favor expansionary, growth-oriented policies rather than deleveraging.
For now, the main focus remains on Trump – Xi talks during G20 meeting, which was recently confirmed by both parties. Any positive (or negative) outcome could have a strong impact on the Renminbi. But at this time, it is expected that the PBoC maintains USD/CNY 7 mark as a key threshold. Today’s PBoC fixing remains at 6.9236.
