Swiss Franc Dives on Easing Italian Budget Worries, Franc Crosses Could be Reversing

Swiss Franc tumbles broadly today as easing concerns over Italy’s budget narrows Italian-German yield spread notably. Italy Economy Minister Giovanni Tria’s comments over the weekend were well received by the markets. Euro also strengthens broadly, except versus Australian Dollar and Sterling. Aussie is merely in consolidation, digesting recent steep, trade war triggered losses. Sterling is mildly firmer as 3-month GDP growth hit the highest rate in nearly a year. Canadian Dollar is the second weakest and there is no end in sight on NAFTA negotiation.

At the time of writing, 10 year Italian yield is down -0.0972 at 2.947, back below 3.000 handle. German 10 year bund yield is up 0.014 at 0.405, back above 0.400. Spread at 300 now looks rather distant. European stocks are trading generally up, paring last week’s deep losses. FTSE is up 0.35%, DAX up 0.61% and CAC up 0.67%. Asian markets clearly under performed with China SSE lost -1.21% to 2669.48, Hong Kong HSI dropped -1.33% to 26613.42, Singapore Strait Times fell -0.43% to 3120.92. Raising trade tension between US and the rest of the world is weighing down sentiments. But Japanese Nikkei buck the trend and gained 0.30% even though Japan is clearly Trump’s next target.

Technically, now there is realistic chance of bottoming in USD/CHF, EUR/CHF and even GBP/CHF. 0.9766 in USD/CHF, 1.1319 in EUR/CHF and 1.2665 in GBP/CHF are the levels to watch. Break of these levels will be strong signal of near term reversal. It should be noted that while EUR/USD recovers ahead after breaching 1.1529, the recovery is very weak so far. 1.1529 remains rather vulnerable and bring will confirm completion of rebound from 1.1300. Dollar is consolidating against both Australian and Canadian Dollar for now. But its rally could resume any time.

UK 3-month GDP grew 0.6% in July, highest in nearly a year, but production drags

UK GDP grew 0.3% mom in July, above expectation of 0.2% mom. For the three months to July, GDP grew 0.6%, met expectations. The three month growth rate was the highest since August 2017. Growth was driven by services (0.45%) and construction (0.20%), with small drag from production (-0.07%).

Rob Kent-Smith , the head of GDP at the Office for National Statistics said: “Growth in the economy picked up in the three months to July However, production fell back, with manufacturing again slipping a little while energy generation and supply fell due to reduced demand. The dominant service sector again led economic growth in the month of July with engineers, accountants and lawyers all enjoying a busy period, backed up by growth in construction, which hit another record high level.”

Also from UK, visible trade deficit narrowed slightly to GBP -10.0B in July. Industrial production dropped -0.2% mom, rose 0.9% yoy versus expectation of 0.4% mom, 1.0% yoy. Manufacturing production rose 0.1% mom, 1.1% yoy versus expectation of 0.3% mom, 1.5% yoy. construction output rose 0.5% mom in July versus expectation of -0.4% mom fall.

Former junior minister Baker warns catastrophic Conservative party split on Chequers Brexit plan

Steve Baker, a former junior Minister at the Department for Exiting the European Union, warned that there will be 80 or more MPs voting against Prime Minister Theresa May’s Chequers Brexit plan at the party conference. And, the part will suffer from “catastrophic split”. Instead, he urged May to go for the route of a free trade agreement with the terms laid down by European Council president Donald Tusk.

And he added, “if we come out of conference with her hoping to get Chequers through on the back of Labour votes, I think the EU negotiators would probably understand that if that were done, the Tory party would suffer the catastrophic split which thus far we have managed to avoid.” Baker resigned earlier this year in opposition to the Chequers’ plan. The party conference will be held on September 30 to October 3.

In response to Baker’s comment, May’s spokesman said that “Chequers is the only plan on the table which will deliver on the will of the British people while avoiding a hard border in Northern Ireland. The prime minister is working hard to secure a deal and hopes all MPs (members of parliament) will be able to support it.” And, May will hold a cabinet meeting on Thursday to discuss preparation on “no-deal” Brexit

Eurozone Sentix Investor Confidence dropped to 12.0, emerging markets and US trade disputes weigh

Eurozone Sentix Investor Confidence overall index dropped to 12 in September, down from 14.7, below expectation of 13.8. Current situation index dropped to 35.0, down from 37.3. Expectations index also dropped to -8.8, down from -5.8. Sentix noted that “the weakness of the emerging markets, especially in Asia and Latin America, is weighing on economic assessments. But also homemade European problems.”

Sentix also noted that two developments are “particularly noticeable in the search for the causes” for the deteriorations. One is “weakness in the international arena”, in particular in Asia and Latin America. And, “due to the solid US dollar and political crises, the emerging markets are in the crossfire.”

For Europe itself, there are problems “especially at the political level”. Also, “external, international catalyst, which is also intensified by the trade dispute between the USA and almost the rest of the world, is now having a noticeable negative impact.”

Italian EM Tria: Makes no sense to borrow more on higher yields

Italian Economy Minister Giovanni Tria pledged on Sunday that the coalition will respect EU fiscal rules. And, more progressive budget plans would only be introduced gradually. The programs include both a new welfare tool advocated by the Five Star Movement and tax cuts promoted by the League. But he emphasized that “almost all reforms will start to be implemented gradually.” And, “we are looking into Italy’s big state balance sheet to find financial resources to be shifted toward these measures.”

Also, he acknowledge the need to bring down the 130% debt to output ratio, which is the second highest in Eurozone. And such reduction “may bring about a strengthening and consolidation of Italy’s presence on financial markets, which will free up resources and attract investments.”He added “it makes no sense to seek two or three billion euros of extra deficit if we then have to pay three or four billion more due to higher yields”. Further, “as the government puts words into actions, the (bond yield) spread will return to more normal levels.”

Japan PM Abe: Trade fights no benefit anyone, will proceed with sale tax hike

Facing trade threats from the US, Japanese Prime Minister Shinzo Abe kept his cool today and note that trade fights do not benefit any country. Japan is clearly the next trade target of Trump, who pull out of the Trans Pacific Partnership as the first “achievement” after taking office. Japan has been clear in insisting on promoting multilateral frameworks despite requests from the US on bilateral trade deals. Trump warned on Friday that “if we don’t make a deal with Japan, Japan knows it’s a big problem.”

Additionally, Abe would proceed with the planned sales tax hike in October 2019 and carry out fiscal reforms. He said that “we will carry out fiscal consolidation and want to raise the sales tax as planned” to 10 percent, in a kick off news conference for his LDP leadership campaign. Abe added that he’s learned a lesson from the 2014 sales tax hike and pledge with measures to ease consumptions.

Released from Japan today, Q2 GDP was finalized at 0.7% qoq, revised up from 0.5% qoq. GDP deflator rose 0.1% yoy, unrevised. Current account surplus narrowed to JPY 1.48T in July.

China pledges retaliation again if US imposes new tariffs

China Foreign Ministry spokesman Geng Shuang said in a regular press briefing that “If the U.S. side obstinately clings to its course and takes any new tariff measures against China, then the Chinese side will inevitably take countermeasures to resolutely protect our legitimate rights.” That came after public hearing on 25% tariffs on USD 200B in Chinese goods ended last week. Trump is ready to start imposing the tariffs any time. Meanwhile, he raised the stakes further and threatened to put tariffs on additional USD 267B in Chinese imports.

No further elaboration or comments were given by Chinese officials yet. But it’s believed that China is also ready for retaliation to the tariffs on the USD 200B goods. China has already unveiled a list of 5207 product lines, in USD 60B of value, with tariffs from 5% to 25%.

EUR/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.1174; (P) 1.1209; (R1) 1.1236; More…

EUR/CHF rebounds strongly today but it’s kept below 1.1319 minor resistance. Intraday bias is turned neutral first. Outlook is unchanged that strong support is expected from 1.1154/98 to bring rebound. On the upside, break of 1.1319 resistance will indicate short term bottoming. In such case, intraday bias will be turned back to the upside for 1.1452 resistance next. Break of 1.1452 will add to the case that whole correction from 1.2004 is completed. On the downside, however, sustained break of 1.1154/98 will carry larger bearish implications.

In the bigger picture, for now, the price actions from 1.2004 medium term top is seen as a correction only. Downside should be contained by support zone of 1.1198 (2016 high) and 61.8% retracement of 1.0629 to 1.2004 at 1.1154 to complete it and bring rebound. This cluster level is in proximity to long term channel support (now at 1.1196) too. A break of 1.2 key resistance is still expected in the medium to long term. However, sustained break of the mentioned support zone will mark reversal of the long term trend. In that case, 1.0629 key support will be back into focus.

Economic Indicators Update