DAX slips over Italy debt, trade war tensions

The DAX index continues its losing ways this week. In the Tuesday session, the index is at 11,336, down 1.63% on the day. On the release front, there are no major events. German WPI gained 0.5% in September, its highest level since May. The eurozone will release consumer confidence, which is expected to post a second straight reading of -3 points. On Wednesday, Germany and the eurozone release Manufacturing PMIs.

The ECB holds its next policy meeting on Wednesday, and the bank is expected to hold the course with interest rate levels, which have been pegged at a flat 0.00% for almost three years. However, there are plenty of trouble spots, including the spike in Italian bond yields, the Brexit impasse and continuing volatility in global equity markets. Despite these issues, the ECB is expected to end its massive stimulus program in December. The markets are now looking ahead to 2019, focusing on the timing of a rate hike. The ECB has adhered to the line that rates will stay on hold “through the summer of 2019”. However, it’s unlikely that policymakers can ignore the issue of a rate hike, which would be a historic move, as the bank last raised rates in 2011. The head of the Dutch central bank, Klaas Knot, recently said that the ECB will have to initiate discussions over the timing of a rate hike in January. Investors will be keeping a close eye on the ECB, and any hints of an interest rate move could send the euro upwards.

There was some good news out of Italy on Friday, as the Moody’s credit rating agency maintained the outlook on Italy’s credit rating as ‘stable’. There had been fears that Moody’s might downgrade Italy’s debt to ‘junk’, after it lowered its rating to Baa3, its lowest grade. The yield on Italian 10-year bonds dropped to 3.30%, its lowest level in two weeks. Italy’s draft budget has become the latest crisis for the European Union. The budget boosts public spending and cuts, and sets a budget deficit goal of 2.4%, which would be higher than last year, in breach of EU law. Italy’s debt stands at an astounding 132% of GDP, and there is a real risk that the country’s financial woes could destabilize the entire eurozone.

• Desperately seeking stability

• Commodities Weekly: Oil at five-week low on uncertain demand outlook

• Markets remain shrouded in a thick blanket of risk.

Economic Calendar

• 2:00 German PPI. Estimate 0.3%. Actual 0.5%

• 10:00 Eurozone Consumer Confidence. Estimate -3

• 3:30 German Flash Manufacturing PMI. Estimate 53.5

• 3:30 German Flash Services PMI. Estimate 55.5

• 4:00 Eurozone Flash Manufacturing PMI. Estimate 53.1

• 4:00 Eurozone Flash Services PMI. Estimate 54.5

• 4:00 Eurozone M3 Money Supply. Estimate 3.5%

• 4:00 Eurozone Private Loans. Estimate 3.2%

Previous Close: 11,524 Open: 11,368 Low: 11,227 High: 11,395 Close: 11,336