Italian budget and new Brexit concerns

Market movers today

• The US Treasury is set to release its biannual report on FX manipulation. We do not expect the report to designate China a currency manipulator, as China meets only one of the three criteria.

• Today is the deadline for the Italian government to present its 2019 budget draft to the European Commission. In light of overly optimistic growth assumptions, significant fiscal weakening and many open questions on the financing side, our base case is now that the Commission will voice a negative opinion and ask for a revision of the budget.

• In terms of data released, US September retails sales and the Empire Manufacturing Index are the most interesting on the calendar today. Consumer optimism remains high in the US and we expect private consumption to remain the most important growth driver.

• Markets will also keep an eye on the Brexit negotiations, which are entering a hot phase this week, especially after the apparent stalemate over the weekend. So, it is uncertain whether an agreement will be reached ahead of the EU summit starting on Thursday.

Selected market news

The positive sentiment in the US equity market on Friday night, which saw all three major indices ending the day higher, up between 1.2% and 2.3%, has not been carried over to Asia. This morning most Asian equity indices are down more than 1%. The reaction in the US treasury market has been muted, with 10Y yields at 3.15% down less than 1bp since the US close. It confirms our view that US yields have now more consistently moved higher. In FI Strategy - Next stop is 3.5% for 10Y US Treasury yields , 15 October, we argue that 3.5% will be reached over the next three to six months.

The market is increasingly concerned about the apparent disappearance or even murder of the Washington Post journalist Jamal Khashoggi inside the consulate of Saudi Arabia in Istanbul. The US is now discussing possible sanctions against Saudi Arabia, including downgrading diplomatic ties or sanctioning Saudi officials visiting the US. The aggravation of the relationship between the Saudi and US administrations has pushed Brent oil higher to USD81.5/bbl.

Brexit negotiations have also run into new trouble, as the negotiations between the EU and the UK ended up in a stalemate over the weekend. The impasse comes just days before the EU leaders meet later this week to discuss 'the divorce'. On the one hand, media is now reporting that officials on both sides are increasingly concerned that no deal will be reached before the March break-up date. On the other hand, these kinds of 'breakdowns' are quite normal in negotiations where the involved partners have a lot at stake. Everybody needs to show that they have been fighting hard before a deal can be reached.

Today, the market is likely to focus on Italy presenting its budget to the EU commission. We have seen little contagion to Spain and Portugal from Italy during the Italy budget crisis. Importantly, Portugal regained the missing investment rating from Moody's on Friday night.

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