Short-lived relief in Italy

Allan von Mehren Danske Bank A/S

Market movers today

It is a very light calendar day, so market focus will remain on Italy and the situation in the Middle East and the killing of the Saudi Arabian journalist.
Yesterday, Italy sent a letter to the EU Commission reaffirming its fiscal stance but opening up for a dialogue with the EU on the budget for 2019. As a result, our base case is that the Commission will give a negative opinion on the Italian budget draft and ask for a revision, maybe as soon as today. The relief rally in the Italian government bonds yesterday did not last long as 10Y Italian government bond s reversed the gain in the morning and ended more or less unchanged.
Pressure is increasing on Saudi Arabia to give full details behind the death of journalist Khashoggi. Yesterday, Germany said they would block arms sales and the US expressed dissatisfaction with the account given by the Saudi government. The tense situation in the Middle East may have an impact on oil prices if tensions increase further.
Overnight in Japan, we will get manufacturing PMIs. The manufacturing sector has shown some weakness recently amid global trade tensions and several natural disasters.
In Denmark , the consumer confidence number is being released today and we expect the Danes to be more positive about both the future and the current situation after a steady decline over the summer. We expect the indicator to climb to 8.0 in October.

Selected market news

Equity markets have traded lower again in Asia, ending the strong rally in Chinese stocks yesterday. The rebound on Monday was probably partly due to Chinese state-backed funds buying, which is rarely enough to turn the market around. While we do see value in the Chinese market, we should expect continued high volatility as long as the US-China trade war is unresolved. However, more Chinese policy easing (tax cuts etc.) and reform announcements and a fairly strong housing market should support Chinese stocks as it reduces the risk of a hard landing.

In the US, President Donald Trump has promised that Congress will pass a 10% tax cut for middle income earners after the mid-term elections. It may be an attempt to put pressure on the Democrats, who seem likely to win the majority in the House. It would challenge them going into the election as well as afterwards if they sit with the House majority and will not vote it through. The news took many Republican Party leaders off guard.

In another sign that a new cold war is brewing, Trump warned yesterday that the US intended to build up its arsenal of nuclear weapons against Russia and China . It comes two days after he warned that the US would withdraw from the Intermediate-Range Nuclear Forces Treaty. If implemented, it could mark the start of a new arms race. Some critics say the move would damage diplomatic pressure on Russia to comply with the Treaty without bringing clear military advantages.

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Author

Allan von Mehren

Danske Bank A/S

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