Geopolitical stress in the Middle East disturbed what could otherwise have been an uninspiring session ahead of Wednesday’s FOMC meeting. The Iranian(-backed) (?) attack against Saudi Arabia’s oil infrastructure sliced the Kingdom’s production. First signs indicate that repairments could take weeks or months. Saudi Arabia and the US will tap their strategic reserves to stabilize the market in the short run with the Saudi’s unwilling to let other OPEC members pump more and take market share. Apart from being a negative supply shock, which the fragile global economy won’t welcome, the incident also raises the threat of war in the region. US President Trump said to be “locked and loaded”. Brent crude prices eventually ended the day around $69/barrel, a 15% daily increase. US and European equity markets lost 0.5% to 1% with Europe underperforming. Core bonds gained ground with US Treasuries outperforming German Bunds. US yields fell by 4.1 bps (2-yr) to 5.3 bps (30-yr) across the curve while the German yield curve bull flattened with yields down 1.8 bps (2-yr) to 4.4 bps (30-yr).

The Japanese yen opened stronger yesterday, but pared gains throughout the session despite the risk-off climate. Higher oil prices (Japan being importer) diminish the currency’s safe haven appeal. USD/JPY eventually closed near Friday’s close around 108.15. EUR/USD developed its own trading dynamics. Failure to take out 1.1112 resistance last week triggered some dollar shorts to closing positions ahead of the Fed which could be less dovish than anticipated by markets. EUR/USD declined from 1.1073 to 1.1001. Sterling managed to hold on to Friday’s momentum. UK PM Johnson met with top EU-officials trying to fetch a last minute Brexit deal. Apart from showing goodwill, there’s no real progress yet. EUR/GBP closed at 0.8852.

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Today’s eco calendar contains German ZEW investor sentiment and US industrial production data. ECB Villeroy, Lane and Coeur√© are scheduled to speak. We don’t expect the agenda to be determining for trading. The split within ECB thinking is clear by now. Apart from developments on oil markets and some risk aversion, investors are eying Wednesday’s FOMC meeting. We expect another 25 bps rate cut with the new dot plot pointing to one additional easing step in Q4.

News Headlines

Former Italian PM Renzi is rumoured to leave the Democratic Party (PD) in order to create his own, Macron-like, centric party. He is supposed to unveil the new party today. His decision gives a first blow to the freshly installed PD-5SM coalition. The PD was/is internally divided between team Renzi and a more left-leaning group around party leader Zingaretti.

EU Trade Commissioner Malmstrom said she expects the US to impose new tariffs on EU exports over subsidies to Airbus. Washington hinted at tariffs on $11bn in annual exports. The move is linked to a long-running commercial dispute over subsidies to aircraft manufacturers. The US filed complaint against Airbus and the EU against Boeing. The WTO is expected to set a final sum to which the US is entitled as soon as September 30. The case against Boeing was filed 9 months after the one against Airbus.

US President Trump said that Washington stroke new trade agreements with Japan (tariff barriers and digital trade). Neither agreement requires a vote in US Congress under the “fast track” approval process. The US President stopped short of assuring that the US won’t install tariffs on Japan’s vital auto sector.


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