Markets:
The two-day risk-on correction ended already. Global recession fears remain the underlying market force. The leap in core bond yields grinded to a halt and even went into reverse. European stock markets lose up to 1% and USD/JPY fell again prey to the law of gravity. Gold excels. There were no obvious trading items on the agenda. Markets were mainly in waiting mode ahead of developments in the Italian Senate, EMU PMI’s (Thursday) and Fed Chair Powell’s address at the Jackson Hole symposium (Friday). Markets fear data will reinforce recession fears with Powell expected to leave his “hawkish rate cut language” from July behind and turn into a more firm accommodation mode. Italian PM Conte is currently addressing the Italian Senate. He blames Lega leader Salvini for strongly irresponsible actions which caused an August political crisis that might pave the way for an Autumn vote. Conte will offer his resignation to Italian President Mattarella later today. The political outcome afterwards remains very uncertain ranging from a caretaker government, a grand coalition to fresh elections. German yield decline by 1 bp (2-yr) to 4.2 bps (10-yr) at the time of writing. Changes on the US yield curve vary between -4.5 bps (2-yr) and -5.5 bps (10-yr). 10-yr yield spread changes vs Germany widen by up to 2 bps. Italian BTP’s are rallying during PM Conte’s speech. EUR/USD trading remained confined to a narrow 1.1070-1.1090 trading range. Sterling is still slightly in the defensive after the EU rebuffed UK PM Johnson’s alternative for the Irish backstop. EUR/GBP changes hands north of 0.9150.
News Headlines:
The EU responded to UK PM Johnson’s letter in which he laid out plans to replace the Irish backstop with a “legally binding commitment” not to build infrastructure or carry out checks on the border. They welcomed his engagement, but said that the letter does not provide a legally operable solution to prevent the return of a hard border on the island of Ireland, it does not set out what alternative arrangements could be, and in fact it recognizes that there’s no guarantee that such arrangements will be in place by the end of the transitional period.
The Confederation of British Industry’s (CBI) monthly order book balance rose more than expected in August, from -34 to -13. That’s still “below normal”. Export demand remains weak. Manufacturing suffers most from the looming no deal Brexit without alternative trade arrangements in place. SME’s suffered more than large companies. The CBI’s gauge for expected selling prices dropped from 12 to -2, the lowest level since February 2016.
Reuters and Japanese media report that, according to a government official, there will be no official joint communique after this weekend’s G7-Summit in France. It would be the first time since meetings began since 1975. Major stumbling block is US President Trump’s “America First” trade policy.
