Markets
Comments by EU Commissioner Moscovici inspired BTP’s on Friday and changed dynamics in what had been a dull Friday trading session. He said that the EU won’t interfere in Italian economic policies and that they aren’t willing to lecture the country on its budget. The Italian 10-yr yield spread narrowed by 25 bps to 302 bps after setting an intraday cycle high of 340 bps ahead of his comments. The Greek, Portuguese and Spanish spreads narrowed by 13 bps, 6 bps and 4 bps respectively. Core bonds lost ground with Bunds underperforming US Treasuries. The German yield curve shifted 1.3 bps (30-yr) to 5.2 bps (5-yr) higher. The US yield curve bear flattened with yields rising by 2.9 bps (2-yr) to 1.2 bps (30-yr). The single currency took the upper hand on FX markets with EUR/USD eventually settling above 1.15, compared with 1.1453 on Thursday night. EUR/GBP closed north of 0.88. European stock markets weren’t inspired by the BTP rally after already failing to profit from momentum on Chinese equity markets. The latter gained ground following verbal interventions to support the market from regulatory heavyweights.
Asian stock markets trade mixed overnight with China again heavily outperforming (+5%). Rumours about income tax cut and comments by Chinese President Xi Jinping (unwavering support for the private sector) and a PBOC adviser (policy measures to support market) extend the rally. The spillover to other markets is again very limited. The US Note future and trade-weighted dollar tread water. Italian political leaders Salvini and Di Maio confirmed that they have no intention at all to leave the E(M)U. They’ll respond to the EU today to explain next year’s budget proposal in greater detail, but won’t change their plans (2019 budget deficit of 2.4% of GDP). Friday’s Moscovici comments hint that Italy might win this political battle. Moody’s as expected cut the Italian rating by one notch from Baa2 to Baa3 (stable outlook), which is one level above junk. We think that S&P will do the same at Friday’s scheduled review.
Today’s eco calendar is empty. Risk sentiment on stock markets and sentiment towards Italy will set the tone for trading. The Moscovici remarks suggest that Italy will eventually get away with its fiscal spending plans, possibly extending the short-term relief rally in BTP’s and improving European risk sentiment. That could help the euro while weighing on Bunds. Some investors might decide to stay sidelined though today, ahead of Wednesday’s PMI’s and Thursday’s ECB meeting. The US Treasury’s mid-month refinancing operation is a negative for US Treasuries this week. The Brexit story unfolds further with UK PM May addressing the UK parliament today. She is rumoured to be willing to agree remaining indefinitely within the EU customs union as a backstop, but that will be a tough sell in the House of Commons. EUR/GBP changes hands just above 0.88.
News Headlines
US President Trump signaled he might withdraw from a key nuclear arms-control agreement with Russia, a Cold War-era treaty from 1987 that required elimination of short- and intermediate-range nuclear missiles by both countries. According to Trump, Russia is not honoring that agreement .Russia already hit back at the US.
Saudi Arabia has officially acknowledged that Washington Post journalist Khashoggi was killed as a result of a fistfight in its consulate in Istanbul. They said Saudi’s Crown Prince bin Salman wasn’t aware. US Congress said the US must impose sanctions. Germany signaled it might suspend exports of military equipment to the country.
UK PM Theresa May faces parliament today as she is facing growing criticism over her willingness to extend the transition period beyond the current proposed end date of December 2021. This way, the whole UK will stay tied to EU customs rules, which is opposed by many of May’s Conservative party.
