Markets
US markets are closed for Labour Day. The Bund eked out gains in technical trade. European markets and EM FX faced some selling pressure, resulting in some safe haven flows. We don’t draw conclusions from today’s low volume action. The eco/event calendar didn’t inspire neither. The German yield curve bull flattens marginally with yields up to 0.7 bps (30-yr) lower. 10-yr yield spread changes vs Germany are virtually unchanged with Greece underperforming (+4 bps) and Italy outperforming (-2 bps). There’s a small sell-the-rumour, buy-the-fact reaction as Fitch didn’t pull the trigger yet on the country’s BBB rating. Lega leader Salvini signaled that the Italian budget deficit will touch the 3% of GDP limit without breaching it. It remains to be seen whether Europe/rating agencies will accept this provocative stance.
Trading in the major USD cross rates was confined to tight ranges and in low volume as US markets with US markets closed. The news flow on key trade issues (US vs Canada, the EU or China tariffs) also didn’t bring much guidance for USD trading. The EMU final manufacturing PMI was confirmed at 54.6, but details from the member countries showed some worrisome developments. Especially Italian manufacturing growth almost came to a stand-still (50.1). Comments from Italian politicians on the country’s budget intentions remains diffuse, but didn’t hurt the euro. EUR/USD was paralyzed in a tight range close to, but mostly slightly north of the 1.16 big figure. USD/JPY (111.10 area) reversed modest losses from Asia, but is also holding near Friday’s closing level.
Sterling investors temporary saw the brexit glass half full last week as the UK currency enjoyed quite a strong short-squeeze. However, the sterling rebound already slowed and fortunes eroded further today. Comments from several UK policy makers during the weekend, including Boris Johnson, only confirmed that it will be difficult for PM May to secure a political majority in her own party/parliament on whatever brexit deal. At the same time, headlines from EU’s Barnier further questioned the hope that the EU might have become more conciliatory on any key brexit topics. In addition to this renewed brexit noise, the UK August manufacturing PMI unexpectedly dropped from 53.8 to 52.8 (53.9 was expected). Sterling already started the session at a weaker footing and the decline continued after the PMI release. EUR/GBP trades again north of 0.90 (currently 0.9020 area). Cable has stopped last week’s attempt to regain the 1.30 mark and trades again in the 1.2875 area.
News Headlines
Italy’s finance minister Giovanni Tria is trying hard to contain public spending and said (EU) budget stability will be respected. His Deputy Prime Minister, Matteo Salvini, on the other hand, said Italy will try to respect all the constraints Europe imposes, but “the well-being of Italian citizens comes first”.
UK’s IHS Markit’s Purchasing Manager’s Index fell to 52.8 in August, from 53.8 in July (and below market consensus of 53.9). The indicator for UK manufacturing growth unexpectedly slowed to its lowest level in two years, as export orders decreased caused by a weakening of the global economy.
Turkey’s CPI’s rose more than expected in August as the fall of the lira boosted prices. The annual inflation rate rose to 17.9% from 15.9% in July. Monthly inflation was 2.3%, against 0.55% in July. Finance minister Albayrak said its central bank is independent of government and will take all necessary steps to combat inflation.
