Market movers today

Financial markets will be awaiting new developments in the trade war between China and the US after China over the weekend officially cancelled the potential trade talks between the two countries this week (and likely until after the US mid-term elections in early November) after the US announced new tariffs against China. Today, the new US tariffs on Chinese goods worth USD200bn will be implemented.

In light of the recent relatively hawkish signals from ECB board members, ECB President Draghi’s appearance at the European Parliament today will be scrutinised.

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Italy will also remain a key focus today and during this week in the run-up to the government’s presentation of its budget for 2019 on Thursday. There are likely to be contrasting signals from the various government members as Thursday approaches.

Otherwise, the week will be much about the Fed meeting on Wednesday (where we expect another interest rate hike) and the US PCE core inflation numbers on Friday.

Selected market news

On Friday, UK PMI Theresa May addressed UK citizens after the EU summit failed to make progress on the Brexit deal. May was hawkish on the Irish border discussion and awaits a counterproposal from the EU. She said that ‘no deal is better than a bad deal’ and that the UK continues to prepare in case of a no deal. Media reported that aides of PM May have been said to plan for a possible snap election in November for May to gather support for a new Brexit plan. That said, we continue to expect a 75% chance of a ‘decent’ Brexit, although in a no-deal Brexit the overall impact on the Nordic economies are somewhat small yet potentially large for specific sectors. See Harr’s View: Brexit and the Nordics – with or without a deal . The uncertainty regarding Brexit will be high and remains the key driver for GBP.

The OPEC meeting on Sunday gave little support to Trump’s recent comments on too high oil price. OPEC said that it could boost production only if consumers ask for it.

Last week, both the ECB Chief Economist Praet and ECB board member Coeuré gave speeches that seemed to have a less dovish rhetoric than we have been used to. Further, during the weekend, ECB’s Nowotny said that monetary policy should be tightened sooner than originally planned. He also argued that the current ECB crisis mode is not needed anymore as Europe is currently in a very good economic situation. We strongly doubt that Nowotny – as he also admits himself – reflects the majority at the ECB governing council.

Italy will naturally once again set the agenda as the long-awaited publication of the so-called Economic and Financial Document on Thursday will contain the updated budget and growth numbers from the Italian government. We look for a budget deficit in the range of 2.0-2.4%. We estimate that market consensus is around 2%. Even if the deficit is slightly above market consensus, it should be seen as positive for the BTP market as the risk of a 3% breach has been remove d. For more, see Government Bonds Weekly.

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