Italian PM Conte addressed the Italian Senate yesterday. He blamed Lega leader Salvini for strongly irresponsible actions which caused an August political crisis that might pave the way for an Autumn vote. He later offered his resignation to Italian President Mattarella. The latter will today and tomorrow hold formal consultations with key political actors. One of the options that likely will be explored is to form a coalition between the current government party 5SM and centre-left opposition party PD. In theory, they might be able to get a majority, but both parties are internally divided on linking up with each other. Another option is a temporary caretaker government. Both solutions would serve to come up with a 2020 budget. If those options fail, Italians might be heading to the ballots in Autumn. From a market point of view, this is the least favourable outcome with polls suggesting that an (extreme) right link up between Lega and Fratelli d’Italia might be on the verge of reaching an absolute majority. Italian assets underperformed yesterday upon the moment when PM Conte started his speech in the Senate. Especially BTP’s rallied impressively. The Italian 10-yr yield tested the recent low (1.32%) and the spread vs Germany narrowed by 2 bps. Given the uncertain political outcome of this process, we are still inclined to shun BTP’s at this stage. EUR/USD or Bunds weren’t effected by yesterday’s Italian political drama.

The two-day risk rebound already ended yesterday. Core bonds yields, stock markets (-0.5%) and USD/JPY (106.23 close) turned south again. The underlying market theme remains a (global) recession fear. The most important element for a more sustained upgrade of market sentiment are improving eco data. Core bond yields fell by 3.3 bps (2-yr) to 5.1 bps (10-yr) in the US and by 0.8 bps (2-yr) to 4.2 bps (30-yr) in Germany. US Treasuries underperformed after US Secretary of State Pompeo told CNBC that Huawei isn’t the only Chinese company that poses risks. EUR/USD spend most of the day in a confined range between 1.1070 and 1.1090 before dollar weakness in US dealings sent the pair back towards the 1.11 handle. EUR/GBP showed quite some intraday volatility, but stays north of 1st support around 0.91.

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Asian stock markets are mixed this morning, but core bonds and USD/JPY suggests a small improvement in sentiment. US President Trump confirmed that he’s looking into tax breaks (payroll tax, capital gain tax) while nonvoting Fed governor Daly joins Rosengren in arguing that a recession isn’t imminent. FOMC Minutes, released tonight, will center around the rhetoric that the July rate cut isn’t the start of an easing cycle and are thus outdated, ignoring market stress since. Friday’s speech by Fed chair Powell will give a more accurate update on Fed thinking.

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The FT reports that the US and Japan are close to a “mini trade deal” in anticipation of a more comprehensive deal to be closed later on. Japanese economy minister Motegi meets with US trade representative Lighthizer today for pivotal talks. US President Trump and Japanese PM Abe can than dot the i’s and cross the t’s at this weekend’s G7 Summit. The deal would involve Japan further opening up its agricultural market to US goods in exchange for some cuts to US industrial tariffs and some form of immunity against possible tariffs on cars.

Two financial regulators yesterday approved changes the Volcker rule, part of the 2010 Dodd-Frank financial law. Trading restrictions for midsize banks will be relaxed while biggest banks get limited relief on compliance rules. If the changes get the expected remaining approvals, they will be effective on Jan 1st 2020.

The UK Treasury said that more than 88 000 companies will be automatically granted an “Economic Operator Registration and Identification number” by the UK tax authority to make sure they can trade with the EU in case of a no deal Brexit by October 31. The automatic process only applies to companies that are VAT-registered.


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