Summary
Italian markets have resumed their role as a counterweight to risk appetite.
Italy yields alight
As suspected, it didn’t take much to ignite the mixture of incendiary rhetoric and highly-strung yields in Italy. There’s an outside chance a remark by a senior Northern League official (who appears largely side-lined in government) was off the cuff. Either way, the effect widened the gap between benchmark bund and 10-year BTP yields to 297.4 basis points, the most since March 2013. The yield itself returned to an end-March 2014 peak of 344.20bp. As per the coalition’s frequently observed pattern, Claudio Borghi, the league’s economic head was busily walking back his comments at last check. Having mused that “most of Italy's problems would be solved” if it returned to its own currency, he is now keen to remind that leaving the euro is not part of the government’s plans. Further provocations of the EU by Italian politicians can keep the pot boiling for the short term. League leader Salvini’s suggestion just now the coalition is “ready to ask for damages” added a few 10-year BTP/10-year bund ticks lifting the spread further towards the sensitive 300bp level. Judging by their communication strategy, there appears to be a tacit awareness among Lega/MS5 that upsurges like the current one need to be applied in limited fashion for effect. We may still be only mid-way through the current instance.
Euro, shares capped
Point made, and damage done, particularly to bank shares as typical anxieties on BTP-laden Italian lenders fan out to the wider European sector. The euro can hardly find its feet during such episodes either. An attempt rebuild a base upon which it could inch back up to $1.16 was summarily halted and it last traded at $1.1518, threatening to lose the $1.15 handle having just about avoided doing so during the second half of August. In equities, whilst the NAFTA boost was clearly petering out, renewed Italy diversions, however fleeting they turn out to be, are an effective cap on reloaded risk-seeking. Major European bourses remain in the red late in the morning. U.S. futures show Wall Street could join the swoon.
Oil support fades
Consolidating oil prices translate to further equity index weight. OPEC’s moderate supply lift in September combines with Russian output hitting a post-Soviet high notably driven by Rosneft projects. Speculative positioning continues to indicate the market is sceptical that replacement supply can offset Iran’s exit from the output picture early next month. Hedgers will either be proved essentially correct, enabling further Brent progress en route to $90, or if, on the wrong side of supply, expect downward pressure to $80-plus peaks in April and September. Forecasts of builds in the U.S. already predominate ahead of Tuesday’s API stats. As crude oil prices are another unreliable prop for equities, Tuesday could remain a losing session for shares.
Yen in safety mode, cable
Support from risk-sensitive USD/JPY has also frayed, as yen’s safe-haven characteristics return. Political turmoil still supports the dollar, though with key exceptions. With help from NAFTA, the Canadian dollar’s run back down to the huge falling wedge (2015 to date) shows the upper descending line might still be ‘magnetic’ despite the greenback’s two-quarter flight top side. The pair looked heavy at C$1.2832, just now. Overall, major FX remains balanced by geopolitical volatility and signs of fundamental and chart exhaustion. For sterling, after a stop run through $1.30 to as low as $1.2955, the most obvious downside risks are high-$1.28 reversal lows from early September. A similar spike low on 11th September at $1.2967 caps the pair now.
Wednesday’s ISM next data to watch
Among fundamental catalysts, the only release of broad interest may be this evening’s auto and truck sales that may shine a light on demand as higher import duties filter into pricing. Wednesday’s slate will be more pivotal as the customary hunt for NFP clues begins in earnest. The broader of ISM’s two industrial demarcations, for the service sector, will be on deck. After ISM’s manufacturing employment gauge inched past forecasts on Monday, chances that its services counterpart could follow are the main watch. The non-manufacturing employment PMI printed at 56.7 in August, the second consecutive rise.
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