Europe waits watches Italy

Summary


Italy manoeuvres again

Italy is the fulcrum in Europe again. According to this week’s mood music, by Thursday morning, independent-minded Economy Minister Giovanni Tria ought to have been quietly presenting carefully composed thinking as to why a Budget within EU fiscal rules was possible, prudent and politic. It appears the market was taken off guard by the coalition leadership’s capability for manoeuvres. Reports of a delay have latterly been quashed by Deputy PM and 5 Star leader Luigi Di Maio, though not before Tria’s ministry had to deny reports that he threatened to resign. Further hints of a nasty turn in relations between Italy’s political leaders and the technocrat executive. This brings a sharp end to a decent spell of BTP/Bund spread tightening. The opposite trend resumes. Investors in Milan equities see a reason to book a three-week 6.7% FTSE MIB gain. The alternative was a challenge of 21900, just over 200 points away at Wednesday’s close. 

Euro, sterling stall

Euro challenges duly re-escalate; failure to hold post-Fed highs close to $1.18 might have been a harbinger. A similar model holds for sterling as speculated impetus from the Comcast/Sky deal begins to ebb. Against the dollar, the pound is back at the mercy of Downing Street. The Prime Minister’s office has been relatively quiet on Brexit blueprints for a couple of days, hence the move down towards Tuesday’s low for the week at $1.3092 was mostly a Fed reflex. Sterling is now slightly less off on the day. A near-seven session $1.3053/$1.319 range is intact and may not break without fresh developments.

A word from the Fed

The backdrop was a lack of new Federal Reserve guidance overnight. Yet after meeting expectations of a 0.25% hike, FOMC policymakers successfully telegraphed a modicum of further tightening, albeit distant. By offering the market a totemic symbol – a single word – instilled with residual loose policy, and then removing it, new guidance, was, apparently communicated. This sort of thing is too sensitive for prices. The dollar’s advantage lasted the blink of an eye. The greenback steps back across the threshold to the rising side on Thursday less due to new rate differentials than political relapses. These include a new left-field angle in the U.S./China conflict—President Donald Trump accused China of meddling in the mid-term elections. The administration says it will substantiate these allegations on Thursday, though qualification seems more likely. 

Yuan’s quiet reversion

The material takeaway for investors is that there is still no clear way back to normal. (There are still no negotiations scheduled between Washington and Beijing). Consequently, flagging risk appetite in Europe and briefly flashed in U.S. stock futures should lead global sentiment lower into the end of the week. The Fed distraction has passed, and the shift of focus back to broader themes is sobering. The Aussie dollar as proxy for APAC, particularly China, embarks on its fourth daily fall of five. Offshore yuan leads on the downside with a fifth straight slide to ¥6.87, on track for September’s $6.892 low. Rising hopes that renminbi could reach and hold above 6.8221 have been dashed. That reinstates a fairly clean USD/CNH rising trend line since July. The pair eyes ¥6.91 at least, ever closer to the symbolic ¥7, unwanted by China’s foreign exchange rate agency. Expect the approach to it to stir more EMFX flux.

Durable Goods key

U.S. Durable Goods orders will join quarterly Personal Consumption Expenditure, Wholesale Inventories and final GDP (all at 1.30 PM BST), in that order of importance, as the remaining economic releases of note. GDP is relegated due to the ‘final’ tag. Still, notable industrial orders last month – including 487 total net orders at Boeing in August—could conceivably lift the GDP sales component by a tick from 5.3%. They will almost certainly show up in headline durable goods orders, which are expected to swing up by 2% after a 1.7% fall in July. Participants may pay most attention to PCE. Whilst less volatile on a quarterly basis, the core reading, currently running at 2%, is a mini risk event. The dollar needs a run of on-target or better data to offset the recent effect of the opposite.