What started off as a sleepy session after a day in which US traders ignored the market and focused their attention on the Kavanaugh confirmation hearing, resulting in a 50% drop in Thursday trading volumes, quickly escalated with risk-off and a sea of red dominating the board in reaction to Italy settling on a 2.4% deficit/GDP target, which in turn led to a bloodbath for Italian assets over fears that the Italian government is now on collision course with Europe. 

Amid the Italian budget chaos, reports initially suggested that President Mattarella had asked Economy Minister to not resign; Tria then followed up these reports by stating that he will stay in the position to avoid ‘chaos’. Italy’s new budget sees debt/GDP to fall in 2019 as according to League lawmaker Bagnai. Italian Deputy PM Di Maio said that the new budget includes €15BN in investments, and he is not worried about the market reaction and spread. When asked about the EU rejecting their budget Italian Deputy PM Salvini said that “they will press ahead”

Observing Italy’s defiance, Europe’s Stoxx 600 Index dropped, led lower by the Italian FTSE MIB which tumbled -3.8%, the biggest one day drop since June 2016, led by the Italian bank index which plunged by 6.8%.

Italian BTP futures gapped lower, with cash 10y yields higher by ~36bps, the biggest jump in 4 months, with the BTP curve bear flattening.

Italy’s planned fiscal deficit of 2.4% for 2019 is “a much more expansionary budget that not only risks some push-back by the European Commission, but also may risk seeing both ratings agencies and investors question the Italian government’s debt sustainability,” said ING Bank’s Viraj Patel.

While no sharp activity was observed in FRA/OIS to indicate acute risk, and no large widening of credit spreads either, the action in Italy today is certainly concerning and unless the ruling populist coalition finds a way to soothe markets, it will likely continue into October.

Safe haven bunds rallied from the open and accelerate higher after a surprisingly low core euro-zone CPI, while US Treasury futures dragged towards yesterday’s high.

Amid growing fears that Italy could once again jeopardise the future of the common currency, the Euro accelerated its 2-day selloff, pushing below 1.16, a 3-week low.

Meanwhile in Asia, there was a brief spike higher in yuan due to activity in front-end of the forward curve, with quarter-end and upcoming week-long China market closure cited as drivers.

S&P futures fell to session lows as US traders walked in to their trading desks greeted by a sea of red, and observing the chaos in Italy and certainly the dramatic declines in Italian banks, such as the 7.3% beating Intesa Sanpaolo is taking.

Meanwhile, treasuries and the dollar jumped to the highest level since September 12. The Bloomberg Dollar Spot Index was set to post a second straight quarterly increase for the first time since 2015 as month-end flows supported the U.S. currency.

The pound touched a two-week low after U.K. yearly GDP data missed estimates and the current-account deficit widened more than economists forecast.

There was more cheer in Asia, where the yen’s slide to the weakest level this year amid quarter-end portfolio rebalancing weighed on the currency and helped stoke Japanese stocks as Asian equities advanced from Sydney to Shanghai; Mrs Watanabe was happy as the Nikkei hit a fresh 27 year high, if still 38% below its 38,916 all time high in 1989.

Japanese yields rose after the Bank of Japan paved the way to reduce purchases of super-long bonds. Oil remained on course for the longest run of weekly gains in four months as energy giants to Wall Street banks predicted the return of $100 crude on an impending supply crunch.

In Brexit news, former UK Foreign Minister Johnson called on PM May to scrap her Brexit proposals in which he stated it would leave UK “half in and half out” of the EU and proposed a six-part alternative plan for Brexit. Separately, teports in the Times suggests that Conservative policymakers are struggling to figure out how to counter Jeremy Corbyn’s populist message at their upcoming party conference.

In geopolitical news, a senior Iranian Cleric says US regional bases would not be safe if Washington does something wrong.

As Bloomberg summarizes, political risks have returned to the top of investors’ agenda at the end of a quarter dominated by central banks and emerging-market crises. In Italy, populists won their battle to fund costly campaign promises, while infighting over Brexit is embroiling the U.K.’s Conservative Party ahead of a conference next week. In the U.S., the confirmation of President Donald Trump’s Supreme Court pick, Brett Kavanaugh, has turned toxic amid allegations of sexual assault. Data on consumer spending, income and inflation may return the focus to the American economy later Friday.

Commodity markets were less exciting, with oil trading within a thin range heading into the week’s end, with Brent and WTI hanging just below the USD 82/bbl and USD 72.50/bbl areas. The gold market is also lacking any major catalysts, with the yellow metal languishing around the 6 week lows set in Thursday’s session. The most significant moves in commodities markets has been seen in steel and coke, where Shanghai rebar fell by over 2% and  both materials hit 2 month lows amid speculation that China has shelved blanket production cuts for winter, stoking the flame for more expected output.

Vail Resorts, BlackBerry are due to report earnings. Economic data include U. of Michigan survey, personal spending

Market Snapshot

  • S&P 500 futures up 0.02% to 2,920.50
  • STOXX Europe 600 down 0.3% to 385.31
  • MXAP up 0.3% to 165.37
  • MXAPJ down 0.02% to 525.73
  • Nikkei up 1.4% to 24,120.04
  • Topix up 1% to 1,817.25
  • Hang Seng Index up 0.3% to 27,788.52
  • Shanghai Composite up 1.1% to 2,821.35
  • Sensex down 0.5% to 36,133.04
  • Australia S&P/ASX 200 up 0.4% to 6,207.56
  • Kospi down 0.5% to 2,343.07
  • German 10Y yield fell 2.8 bps to 0.501%
  • Euro down 0.2% to $1.1621
  • Brent Futures up 0.2% to $81.87/bbl
  • Italian 10Y yield rose 2.8 bps to 2.527%
  • Spanish 10Y yield rose 1.4 bps to 1.519%
  • Brent Futures up 0.2% to $81.87/bbl
  • Gold spot up 0.08% to $1,183.81
  • U.S. Dollar Index up 0.2% to 95.09

Top Overnight News

  • China is preparing to issue a sovereign dollar-denominated bond next month, its first in almost a year, according to people familiar with the matter
  • Italy’s bonds may fall at the start of Friday’s trading after the government set next year’s budget deficit target at 2.4 percent, wider than the market originally envisaged.
  • Leading indicators for China’s economy show growth continued slowing in September amid the escalating trade war with the U.S. The data suggest the dispute was weighing on economic activity even before the latest round of tariffs, which took effect this week
  • Nicky Morgan, who chairs Parliament’s Treasury Committee, threatens to explore new regulations for “market-sensitive polling” unless pollsters overhaul their own standards as lucrative polls conducted in secret for hedge funds, revealed by a Bloomberg investigation into the 2016 Brexit vote, “risk damaging the reputation of U.K. financial markets”
  • The U.K. current-account deficit widened more than economists forecast in the second quarter, raising fresh questions about the sustainability of the shortfall as Britain prepares for Brexit
  • Swiss asset manager and commodities trader Tiberius Group AG is stepping into the $215 billion digital coin market by offering a new token backed by seven metals in a sale set for Oct. 1

Asian stocks traded mostly higher following a spur in risk-appetite and an upbeat lead on Wall St where bourses ended the day in the green, and Nasdaq outperformed its peers amid the strength in the IT sector, after Apple rallied on the news that JP Morgan sees a 23% upside in their shares. ASX 200 (+0.4%) was lifted by resources and IT names, while Nikkei 225 (+1.4%) outperformed its peers and breached YTD highs to print levels last seen in 1991 amid currency effects and optimistic retail  sales. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp. (+1.0%) also gained as trade concerns faded and the positive sentiment dominated the region ahead of next week’s National Day Golden Week holiday. Finally, 10yr JGBs were lower amid the heightened risk appetite although found support ahead of 150.00 while the 2yr JGB auction was uninspiring.

Top Asian News

  • How Indian Credit Raters Missed an Epic Fail at a Financier
  • BOJ Paves Way to Cut Purchases of Super-Long Bonds in October
  • China Prepares for $3 Billion Dollar Bond Sale in October
  • Hong Kong Property Shares Decline on Sales Slowdown Concerns

European equities are once again being guided by updates from Italy, where the Government agreed to a 2.4% debt/GDP ratio. Italian stocks are leading the losses, with Italian bank stocks (Ubi Banca -6.0%, UniCredit -6.3%, Intesa Sanpaolo -6.3% and BPER Banca -8.0%) dominating the bottom of the Stoxx 600, as Italian 10 year bond yields continue rising above 3%. This weakness is spreading to banking names in Europe with all of Commerzbank, Credit Agricole and SocGen shares trading at a loss of over 3%, and the financial sector the marked sector underperformer. RSA (-10%) is at the foot of the index as the insurer provided poor Q3 underwriting results. the FTSE is the index outperformer for the second straight session, and is being aided by a weaker GBP.

Top European News

  • U.K. Current-Account Deficit Widens; Business Investment Falls
  • Knorr-Bremse Plans IPO Valuing Brake Maker Up to $16 Billion
  • Buy Europe Value Stocks as Italy Concerns Will Subside, MS Says
  • Germany: U.S. Sanctions on Nord Stream May Come in Early Nov.

In FX, the USD index has extended post-FOMC gains to just over 95.000, but the Greenback is not bid across the board by any means even though some rebalancing models for the end of September are pointing to a mild bid.  EUR/GBP/JPY/NZD – The major laggards, as the single currency continues to bear the brunt of Italian budget concerns that have intensified following the coalitions Government’s decision to test the EU boundaries with a 2.4% deficit for 2019. Eur/Usd is only just  holding around 1.1600 having breached a series of chart supports and the 30 DMA at 1.1646. Cable is also looking precarious close to its 21 DMA and double bottoms all around 1.3055 following a brief dip below on the back of weaker than forecast UK GDP data. Usd/Jpy has broken higher again, and more convincingly through a tech level at 113.24, which could be pivotal on a closing basis given month, quarter and Japanese half year end. The Kiwi looks hampered by ongoing RBNZ policy neutrality and also anchored by a big option expiry at the 0.6600 strike.

In commodities, the oil market is uneventful and trading within a thin range heading in to the week’s end, with Brent and WTI hanging just below the USD 82/bbl and USD 72.50/bbl areas. The gold market is also lacking any major catalysts, with the yellow metal languishing around the 6 week lows set in Thursday’s session. The most significant moves in commodities markets has been seen in steel and coke, where Shanghai rebar fell by over 2% and  both materials hit 2 month lows amid speculation that China has shelved blanket production cuts for winter, stoking the flame for more expected output.

US Event Calendar

  • 8:30am: Personal Income, est. 0.4%, prior 0.3%; Personal Spending, est. 0.3%, prior 0.4%
  • 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.1%; PCE Deflator YoY, est. 2.2%, prior 2.3%
  • 8:30am: PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 2.0%, prior 2.0%
  • 9:45am: Chicago Purchasing Manager, est. 62, prior 63.6
  • 10am: U. of Mich. Sentiment, est. 100.6, prior 100.8; Current Conditions, prior 116.1; Expectations, prior 91.1



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