After a volatile trading session on Friday, it was announced earlier this morning that the U.S. and Canada have agreed a new Trade deal. This has resulted in an unchanged Dollar but the US Equity Markets as measured by the Futures Market is set to open sharply higher this afternoon. Meanwhile The populist coalition government in Italy announced it was targeting a 2.4% fiscal deficit, much larger than the 1.6% being promoted recently by Finance Minister Tria. Italian bond yields spiked higher, while European equities and the Euro fell. The Milan stock exchange fell 3.72%, while European bank shares were down 2.8%, notable Italian bank names down by 6-9% on the day. The bout of risk aversion was reasonably contained to Europe though, with little contagion to US equities or US Treasury bonds (both ending little changed on the day). The US KBW Bank Index closed down 0.9%.
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Italian bond yields jumped after the Italian government announced a Budget deficit target of 2.4% fiscal deficit for each of the next three years. The two coalition partners, Five Star and the League, overruled Finance Minister Tria, and now seeking to push through campaign promises including a ‘’citizens income’’ for the poor, tax cuts, and a rolling back of the retirement age for the state pension. Italian 10 year yields rose 27 bps, backing up to 3.147%, having been rallying in recent weeks on expectations of a less-stretched budget position.
The scene is now set for a clash with the EU, when Italy formally presents its budget to the European Commission (EC) in mid-October. EC Vice President Dombrovskis said on Friday that the budget ‘’does not seem to be in line with the stability and growth pact.’’ The EU wants Italy to show fiscal restraint so the country’s debt-to-GDP ratio, which currently sits at over 130%, starts declining towards the EU’s target of 60%. Also, Italy is rated BBB by all three major rating agencies (two notches above junk), but on negative outlook at Fitch and Moodys. If Italy were downgraded to junk, it would drop out of the major global bond benchmarks used by global fund managers, and this could further pressure. Note also that the ECB’s QE is now being phased out.
Currencies:
After trading at around 1.1650 through most of the APAC session, the Euro dropped three quarters of a big figure in the first part of the European session, the EUR/GBP clambering back above 0.89 as a result of Italian budget news. Also weighing on the Euro was a weaker than expected Core CPI result for August for the Euro-Zone, coming in at 0.9% y/y, below market expectations of 1.1%. This series has been very choppy over recent months and it is very hard to discern a clear trend. It has been as low as 0.8% and as high as 1.1%, having averaged 1.0% last year and this year). ECB Governing Council member Lane downplayed the core CPI miss saying the ECB was ‘’fairly sure’’ core inflation was on an upward path and that wage growth data had been ‘’increasingly positive’’.
The USD finished the week a little stronger but it was not home grown. Friday’s Personal Income and Spending report for August revealed income and spending growth broadly in line with expectations (real consumption grew 0.2% as expected), while the Core PCE deflator was flat in August (the market was expecting 0.1%), but annual growth remained at 2.0%, though it was a low 2.0%. No inflation danger bells ringing there.
New York Fed President John Williams (who has been on the hawkish side and now an on-going FOMC voter now at the helm of the NY Fed) offered some seemingly less-hawkish comments that while he expected inflation ‘’to edge up a bit above 2 percent’’, he does not see any signs of greater inflationary pressures on the horizon. Williams said the Fed was ‘’going to learn a lot along the way’’ as to whether the US economy could sustain a super low Unemployment Rate without generating meaningful inflation or financial imbalances, and policy would be need to be increasingly data-dependent.
CAD weaker this AM as late NAFTA Agreement reached. The CAD had rallied Friday as US-Canada NAFTA talks continued and both sides seem tight-lipped on whether a deal will be nutted out. There remain several sticking points, including dairy and autos, important for both sides. Canada’s Ambassador to the US McNaughton has been saying in Ottawa that the talks are making progress and finally reached an agreement earlier this morning.
China PMIs mixed
Released over the weekend, China’s official PMIs for September (and the Caixin Manufacturing PMI) revealed weaker than expected Manufacturing PMI at 50.8 from 51.3, a miss and the lowest since February and among the lowest for two years enlivening expectations of more macro policy support for the Chinese economy. The Export Orders component slipped from 49.4 to 48.0, playing to the thematic of US tariff impact. The Caixin measure also missed at 50.0, down from 50.6. Adding a measure of comfort, the Non-Manufacturing PMI beat expectations at 54.9, up from 54.2 and 54.0 expected. The AUD is trading steadily this morning.
This morning on the Economic Front we have Euro-Zone, UK and US Manufacturing PMI at 9.00 am, 9.30 am and 2.45 pm respectively. Finally we have US Construction Output at 3.00 pm.
December S&P 500
The S&P had a volatile trading session on Friday as yet again the buy the dip paid dividends. The S&P traded lower to my 2909 buy level before rallying 28 handles to this morning’s 2936 high print. Unfortunately I covered this position at my revised 2913 T/P level and I am now flat. Now that we are in October which is traditionally one of the weakest months of the trading year it is incredible to see the three main US Indices at or near all-time highs. If we can get through the next few weeks unscathed then I am expecting a further move higher into year-end and the first Quarter of 2019. Today I will again look to buy the S&P on any dip lower to 2913/2921 with a 2906 stop.
EUR/USD
Shortly after I posted on Friday I was stopped out of my 1.1630 long Euro position at 1.1595 and I am now flat. Today I will again look to buy the Euro on any further dip lower to 1.1510/1.1550 with a 1.1470 stop.
December Dollar Index
I am still flat the Dollar which continued to rally on Friday. Today I will raise my buy level to 94.00/94.40 with a 93.55 stop.
December DAX
The worsening political situation in Italy saw an aggressive sell-off in the DAX on Friday. The market traded the whole of my buy range for an average long position at 12207. As I did not want to hold this position over the weekend I exited at my revised 12215 T/P level and I am now flat. This morning the DAX is only trading slightly higher despite the 200 point move in the Dow. The DAX has strong support from 12050/12130 and today I will be a buyer on any dip to this area with a 11995 stop.
December FTSE
My FTSE plan worked well on Friday with the market trading lower to my 7440 buy level before rallying to my 7470 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 7390/7430 with a 7345 stop.
Dow Rolling Contract
Frustratingly the Dow just missed my 26300 buy level by 30 points before rallying over 300 points off this low print. One consistency all year is never go home short the Dow over a weekend as most Monday’s we awaken to a higher gap opening. I am still flat the Dow and today I will now raise my buy level to 26320/26480 with a 26230 tight stop. I still do not want to be short the market at this time.
December NASDAQ
I am still flat the NASDAQ as the market nears my 7750/7800 target level as mentioned on Friday. Today I will now raise my buy level to 7570/7610 with a 7535 tight stop. I will be a small seller on any further rally to 7790/7840 with a 7885 stop.
December BUND
I am still flat the Bund and today I will now raise my buy level slightly to 157.90/158.30 with a 157.60 stop.
Gold Rolling Contract
Gold continues to underperform Silver at this time which is a major worry. If Gold cannot hold the August low of 1160 then we will see lower prices. Today I will raise my Gold buy level to 1170/1178 with a 1163 stop.
Silver Rolling Contract
In contrast to Gold, Silver rallied hard on Friday with the market trading just below the key 14.80 pivot point. I am still flat and today I will now raise my buy level to 14.00/14.40 with a 13.55 stop which is just below the December 2015 low of 13.62.
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