Wednesday, 03 October 2018

P. 1

Rates: Italian worries aren’t over yet

The Italian/German 10-yr yield spread closed above 300 bps for the first time since June 2013. The new Italian budget proposal for 2020 and 2021 won’t bridge the gap between Italy and the EU. The Catalan independence urge resurfaces. German Bunds will probably remain in demand, outperforming US Treasuries. The US eco/event calendar heats up.

Currencies: EUR/USD downside test of 1.15/1.1525 support rejected, for now?

Yesterday, the euro initially suffered from EU-Italian budget bickering. However, a test of intermediate downside support was rejected. Today, global sentiment on risk and the Italian budget debate will probably continue to outweigh the data as a driver for FX trading. Uncertainty on Italy isn’t over, but the euro has already discounted some bad news.

Calendar

• US equity markets closed Tuesday’s session in red, with the exception of DOW

JONES (+0.46%) closing at an all-time high. Asian markets are opening with losses. Japan is underperforming, while Chinese markets remain closed.

• Italian media is reporting that the Italian government would be willing to (partly) give in to the EU by reducing its budget deficit to 2.0% in 2021, reversing plans to maintain the 2.4% deficit over the next three years.

• UK PM May has presented a post-Brexit immigration proposal which focuses on workers’ skills rather than origin. The UK wants to attract the people with the skills that are needed. EU citizens will no longer have any preferential status.

• Fed chairman Powell has defended the bank’s careful approach to rate hikes. He said rising wages do not suggest an overheating of the jobs market since the link between tight labour markets and inflation has been “greatly reduced”.

• Ahead of next week’s IMF annual meeting, IMF Managing Director Christine Lagarde expressed her concerns over the health of the global economy. She said the IMF’s official economic forecasts have become less bright.

• Catalan President Torra warned Spanish PM Sanchez that his pro-independence party won’t support Sanchez’s budget proposal in parliament unless he makes a proposal to head into the direction of independence for Catalonia.

• Today’s eco calendar contains the ISM Non-Manufacturing and ADP employment report in the US and Retail Sales in the EMU for August. Multiple Fed governors speak today. German markets are closed for Unity Day.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 03 October 2018

P. 2

BTP spread above 300 bps for 1st time since June 2013

Global core bonds ended in positive territory yesterday. The biggest move occurred at the European opening and was Italy-related. The Eurogroup send technocrat FM home to work on his 2019 budget proposal, which was greeted domestically with a “no way” by 5SM Di Maio and references to an own currency by head of the budget committee Borghi. Anyway, initial BTP weakness didn’t persist as Italian political heavyweights smoothed comments throughout the day and capped core bond gains. Choppy, but sideways trading characterized the rest of the eco/event empty calendar. German yields dropped by 2.1 bps (2-yr) to 5 bps (10-yr) on a daily basis. US yields recorded declines between -0.8 bps (2-yr) and -2.0 bps (10-yr). Peripheral yield spreads vs Germany widened by 20 bps for Italy, 14 bps for Greece and 6 bps for Portugal and Spain. The Italian/German 10-yr yield spread closed above 300 bps for the first time since June 2013.

Most Asian stock markets trade weaker overnight with Japan underperforming (-1%). China and Korea are closed. The US Note future is marginally lower while EUR/USD veered up after a Corriere story that the Italian government wants to change its draft budget proposals for 2020 (2.2% deficit from 2.4%) and 2021 (2% deficit from 2.4%). Next year’s deficit would still be 2.4% of GDP which is way out of line with Europe. We won’t buy into any possible sucker BTP rally at the start of trading as this won’t bridge the divide between Italy and Europe at all. Peripheral sentiment could be soured further by reports from Efe that the Catalan government has given the Socialist national government a 1-month deadline to agree on an official independence referendum or withdraw support for passing next year’s budget. The latter could topple the Sanchez’ minority government. Spanish bonds resisted last year’s (unofficial) referendum storm rather well, but feel some selling pressure as well in current sentiment. Italian/Spanish developments suggest that the Bund may remain in demand, outperforming US Treasuries. Volumes could be lower today with German financial markets closed for Unity Day.

Today’s eco calendar heats up in the US with an avalanche of Fed speakers (Evans, Barkin, Brainard, Mester, Powell), the ADP employment report and non-manufacturing ISM. Individual Fed governors’ views are interesting, but not market-determining as the Fed set out the near term future at the September FOMC meeting. The data are expected to remain strong although hurricane Florence could show a negative (one-off) impact on ADP.

Rates

US yield -1d2 2,81 -0,015 2,96 -0,0110 3,06 -0,0230 3,23 -0,02

DE yield -1d2 -0,56 -0,025 -0,14 -0,0410 0,42 -0,0530 1,05 -0,04

German 10-yr yield failed to close above key resistance last week following Italian-related safe haven flows

Italian (black) and Spanish (orange) 10-yr yield spread vs Germany: Italian spread exceeds 300 bps. Worrying development

Aff

Wednesday, 03 October 2018

P. 3

EUR/USD: downside test rejected, for now?

EUR/GBP: Sterling traders await end of Tory conference. Will

tensions ease in the days to come?

EUR/USD looking for a ST bottom?

Yesterday, the dollar profited from an early session risk-off sentiment. Some EM currencies stayed under pressure and the euro was haunted by ongoing tensions between the EU and Italy on the countries 2019 budget proposal. EUR/USD extended losses as Europe sent Italy’s Tria home to redo the budget homework. Initially, Italian officials flexed muscles indicating that they wouldn’t give in to EU requests, but the tone eased later. Global sentiment improved slightly/temporarily as US traders joined, helping the euro to rebound off the intraday lows. EUR/USD set an intraday low just above 1.15, but finished at 1.1548 (from 1.1578). The USD/JPY rally also lost momentum. The pair closed the day at 113.65 (from 113.93). Overnight, Asian markets mostly remain in risk-off modus. EM currencies like the IDR and the INR are still fighting an uphill battle, amongst other factors due to the ongoing rise in oil prices. Mainland China and Korean markets are closed. Some more comforting headlines from Italian policy makers on the budget policy are easing pressure on the euro. EUR/USD trades in the 1.1585 area. Global uncertainty also blocks the recent USD/JPY ascent. The pair is drifting away from the 114 top (currently 113.71). Today, the eco calendar is moderately interesting with the final EMU PMI’s, the US ADP labour report and the Non-Manufacturing ISM. Preliminary EMU services PMI were better than the manufacturing indices. ADP job growth is expected to rebound to 184 000. The non-manufacturing ISM might ease slightly to 58. The data might be neutral to marginally USD supportive (ADP). However, global risk sentiment will remain the FX key driver. The jury is still out, but this morning’s price action suggests that tenisons on Italy might ease, at least temporarily. Maybe EUR/USD found at a ST bottom as the test of the 1.1500/1.1526 support was rejected. The USD/JPY shows signs of fatigue.

Yesterday, sterling initially held a negative bias as markets awaited the speech of Boris Johnson. He rejected May’s Chequers Brexit plan, but didn’t formally attack her leadership. Today, the UK services PMI is interesting, but the focus will be on May’s speech in Birmingham. EUR/GBP gained a few ticks this morning, but this was euro strength. Markets might consider that the EU and the UK will try to make some progress once the Tory conference is out of the way. This might at least temporarily ease the pressure on sterling.

Currencies

R2 1,2155 -1dR1 1,1996EUR/USD 1,1548 -0,0030S1 1,1510S2 1,1448

R2 0,91 -1dR1 0,9052EUR/GBP 0,8897 0,0019S1 0,8628S2 0,8548

Wednesday, 03 October 2018

P. 4

Wednesday, 3 October Consensus Previous German financial markets closed for Unity Day US 13:00 MBA Mortgage Applications -- 2.9% 14:15 ADP Employment Change (Sep) 184k 163k 16:00 ISM Non-Manufacturing Index (Sep) 58.0 58.5 Japan 02:30 Nikkei Japan PMI Services (Sep) 50.2A 51.5 02:30 Nikkei Japan PMI Composite (Sep) 50.7A 52.0 UK 01:01 BRC Shop Price Index YoY (Sep) 0.2%A 0.1% 10:30 Markit/CIPS UK Services PMI (Sep) 54.0 54.3 10:30 Markit/CIPS UK Composite PMI (Sep) 53.9 54.2 EMU 10:00 Markit Eurozone Services PMI (Sep F) 54.7 54.7 10:00 Markit Eurozone Composite PMI (Sep F) 54.2 54.2 11:00 Retail Sales MoM/YoY (Aug) 0.2%/1.7% -0.2%/1.1% Italy 10:00 Deficit to GDP YTD (2Q) -- 3.5% Events 08:20 ECB’s Mersch speaks in Riga, Latvia 12:30 Fed's Evans Speaks in London 14:05 Fed's Barkin Speaks at Economic Conference in West Virginia 20:00 Fed's Brainard Speaks in Chicago about Payment System 20:15 Fed's Mester Speaks at Community Banking Conference 22:00 Fed's Powell Speaks in Washington

Calendar

Wednesday, 03 October 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,06 -0,02 US 2,81 -0,01 DOW 26773,94 122,73DE 0,42 -0,05 DE -0,56 -0,02 NASDAQ 7999,547 -37,76BE 0,81 -0,04 BE -0,47 -0,01 NIKKEI 24110,96 -159,66UK 1,53 -0,06 UK 0,80 -0,04 DAX 12287,58 -51,45

JP 0,14 0,01 JP -0,11 0,00 DJ euro-50 3388,99 -25,17

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,05 3,04 1,26 Eonia -0,3650 -0,00205y 0,37 3,07 1,41 Euribor-1 -0,3710 0,0000 Libor-1 2,2651 0,000010y 0,97 3,12 1,61 Euribor-3 -0,3180 -0,0010 Libor-3 2,3981 0,0000

Euribor-6 -0,2680 0,0000 Libor-6 2,6063 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1548 -0,0030 EUR/JPY 131,23 -0,67 CRB 199,97 2,18USD/JPY 113,65 -0,28 EUR/GBP 0,8897 0,0019 Gold 1207,00 15,30GBP/USD 1,2979 -0,0063 EUR/CHF 1,1363 -0,0031 Brent 84,80 -0,18AUD/USD 0,7188 -0,0036 EUR/SEK 10,4021 0,0445USD/CAD 1,2823 0,0009 EUR/NOK 9,4391 0,0021

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