Markets: What is most important in the week ahead? – Nordea Markets

According to analysts at Nordea Markets, on top of the Brexit woes, the EU will also have Italy high on the agenda this week, as the EU Commission publishes its opinion on the Italian revised 2019 budget on Wednesday.

Key Quotes

“BTPs have remained fairly calm for a month in a row know. Remember that 10yr Italian bond yields were already above 3.50% at the beginning of October. While we don’t see any noteworthy concessions from the Italians on the cards, the risk of a dramatic re-escalation of the turbulence also seems limited at present. The Italians want a budget deficit of 2.4% for 2019. That we now already know.”

“While Italy matters very little for the financial markets in times of calm, eg the DAX versus Italy – German bond spreads’ correlation turns towards -1, as soon as Italian budget woes hit the wires. In case of re-escalation of the tensions on Wednesday, it should matter for both European equities and the EUR. Such risks though are contained for now. In the medium term they are likely to re-emerge, also when the mountain of Italian bank sector financing via the TLTRO loans will get more attention in the spring of 2019.”

“The topic of TLTROs and a potential bridge solution could be an important topic already at the ECB meeting minutes out on Thursday. The big focus on both Brexit and Italian woes should keep the upside pressure on Bund and Treasury yields contained for now.”

“On Friday, we will get the latest news from the European purchasing managers, and while the ECB continues to blame all sorts of temporary factors for the downturn in the European growth momentum, our model suggests downside risks to this month’s figure once again. No, it is not influenza-driven, ECB!”

“The early consensus expects a drop of 0.2 index points in the Euro-area composite PMI to 52.9. Our model suggests a reading on the downside of that. Peter Praet, the ECB chief economist, though also said this week that a substantial downturn in the economic momentum was needed before the ECB would pull out the unconventional policy guns again. A reading around 52.5 in the composite PMI is not nearly bad enough to prompt any such policy changes.”