Global core bonds are trading mixed with US Treasuries outperforming German Bunds. European equities were unable to continue yesterday’s rally. Investors looked ahead of the Autumn Economic Forecasts of the European Commission and the FOMC rate decision of tonight. The Commission lowered the 2019 euro-area GDP prediction from 2.0% to 1.9% this morning, a move substantiated by growing tensions in the global economy, Italy’s fiscal battles and the risk of an overheating US economy. Italian BTP’s edged lower at opening in the run-up to the EC forecast. It projects that Italy’s economy will expand only 1.2% in 2019, whereas Rome projected growth at 1.5%. This will cause the deficit to reach 2.9% next year and 3.1% in 2020, in breach with the EU fiscal rules. Italy’s government has until November 13 to resubmit its budget proposal, but FM Tria responded that the Commissions forecasts are not correct and reiterated that Italy has no intention to alter its 2.4% deficit for 2019. Italian BTO futures underperform, pushing Italian yields higher. The Italian 10-yr yield moves back north of 3.4%. German yields are mixed and close to opening levels. Moves vary between -0.1 bps (2-yr) and +0.3 bps (30-yr). The US yield curve bull flattens ahead of tonight’s Fed meeting with changes ranging from -1.2 bps (2-yr) to -3.2 bps (30-yr). Spreads over the German 10-yr yield remain little changed, with the exception of Italy (+8 bps).

The outcome of the US midterm elections turned out quite neutral for US yields and for the dollar. An initial decline in both variables was reversed towards the end of yesterday’s session. The US risk rally slowed in Asia this morning. European equity markets failed to extend gains. The market focus turned to the EC autumn forecasts and, even more to this evening’s Fed policy decision/statement. The ECB expects EMU growth to slow down to 1.9% next year and 1.7% in 2020. The Commission also openly rejected the growth forecasts of the Italian government with negative impact on the country’s budget deficit and debt metrics. The forecasts weighed on BTP’s, but there was little reaction of the euro. EUR/USD hovered in a sideways range in the lower half of 1.14. FX markets are counting down to this evening’s Fed policy statement. We expect the Fed to maintain its assessment on the economy and to signal further policy normalization. We don’t expect Powell and co to give too much weight to the recent rise in market volatility. Such scenario could support a further increase in US yields and in the dollar.

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Sterling recently enjoyed a nice rally as markets reacted to ‘rumours’ that the UK and the EU are close to a Brexit deal. It looked like this rally could continue as PM May was said to broker a Brexit deal text within her cabinet. However, the GBP-rally finally slowed without additional positive news from the political scene. EUR/GBP tested the 0.87 big figure, but no sustained break occurred. The pair trades currently again in the 0.8725 area. Cable lost a few ticks and hovers near the 1.31 big figure, but this move was partially due to USD strength.

News Headlines:

EUR/SEK dropped below 10.285 support this morning. Comments by Riksbank governor Ingves triggered the break. He said the central bank needs to be vigilant when it comes to inflation, a reference ex-ECB president Trichet often used to flag an imminent rate hike. The Riksbank said until now that it could start its tightening cycle either at the December of February policy meeting. Ingves comments suggest a December hike (65% market implied probability).

The EC expects growth in the EMU to slow in the coming years with risks ranging from US economic policies over Brexit to fiscal stimulus in high-debt countries. The EMU is expected to grow 2.1% this year, 1.9% in 2019 and 1.7% in 2020. The EC was more pessimistic than Italy on growth and deficit which was quickly rebuffed by the Italian government as a sloppy and outdated analysis.


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