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Risk Aversion Hits ahead of Italy’s Showdown in Brussels

Brexit jitters hit the Pound, with Italy’s budget delivery to the EU later today weighing on the EUR, as risk aversion returns to the markets.
Bob Mason
European Union and Italy.

Earlier in the Day:

Economic data scheduled for release through the latter part of the Asian session are on the lighter side this morning, with key stats limited to new loan growth numbers out of China and finalized August industrial production figures out of Japan.

Out of China, expectations are that September will see a rise in new loans, an easing in lending standards anticipated to offset the negative effects of the ongoing trade war between the U.S and China. While loan growth will be considered a positive, there will be some concern over any rise in China’s corporate debt levels, particularly following the IMF’s latest downward revision to economic growth forecasts.

For the Japanese Yen, industrial production is forecasted to rise by 0.7% in August, which would be in line with prelim figures, whilst reversing July’s 0.2% decline. We would expect the stats to have a muted effect on the Yen however, with market risk aversion at the start of the week overshadowing the numbers.

At the time of writing, the Japanese Yen was up 0.12% to ¥112.08 against the U.S Dollar, risk aversion driving demand for the safe haven at the start of the week. Elsewhere, the shift in risk appetite left the Aussie Dollar and Kiwi Dollar in the red, the Aussie Dollar down 0.13% at $0.7105 and the Kiwi Dollar down 0.08% at $0.6502.

In the equity markets, the sell-off resumed in earnest, with the Nikkei and ASX200 sliding by 1.59% and by 1.07% respectively at the time of writing, with the Hang Seng and CSI300 down 1.15% and 0.82% respectively, the losses coming in spite of Friday’s gains in the U.S, with the U.S futures pointing to a return to the red.

Concerns over the state of the global economy weighed at the start of the week, with negative sentiment over the weekend influencing risk appetite through the session, an IMF-World Bank meeting over the weekend ending with a call for countries to be prepared for risks ahead, stemming from rising geo-political tensions and the ongoing trade war between the U.S and China.

The Day Ahead:

For the EUR, there are no material stats scheduled for release through the European session to provide direction for the EUR, leaving direction through the day hinged on how the European Commission responds to the Italian Coalition government’s budget, the deadline for submissions being today.

At the time of writing, the EUR down 0.11% to $1.1547, with an early reversal reflective of market angst over today’s budget delivery in Brussels.

For the Pound, it’s a quiet day on the economic data front, leaving the markets to focus on Brexit, the week ahead considered to be a make a break for the British government, a resolution to the Irish border and an initial outline of trade terms needed to ease market fears of a “no deal” departure from the EU.

At the time of writing, the Pound was down 0.36% to $1.3106, a lack of progress on Sunday between Brexit negotiators over the Irish border weighing early in the day, with Brexit chatter to influence through the day.

Across the Pond, economic data out of the U.S includes August business inventories, September retail sales figures and October’s NY Empire State Manufacturing Index.

While we expect the retail sales figures to be the key drive from a data perspective, we can expect some market sensitivity to the business inventory numbers and manufacturing figures as the markets look for any signs of an unusual build-up in inventories to combat trade tariffs and a fall in manufacturing sector activity to affirm recent rumblings out of corporate America over the effects of trade tariffs on margins and profitability.

Outside of the stats, expect risk aversion to drive demand for U.S Treasuries, with any chatter from the Oval Office also of influence, much of the risk aversion and concerns over the global economic outlook attributable to Trump’s trade war with China.

At the time of writing, the Dollar Spot Index was up 0.12% to 95.335, with today’s stats and chatter from the Oval office needing consideration through the day.

For the Loonie, there are no material stats scheduled for release, leaving the Bank of Canada’s business outlook survey to provide the Loonie with direction later today.

The ongoing U.S – China trade war and concerns over the global economy may muddy the monetary policy waters for the BoC, today’s business outlook survey significant in terms of understanding how corporate Canada view the current environment and what lies ahead following the wrapping up of the USMCA.

The Loonie was down 0.01% at C$1.3025 against the U.S Dollar at the time of writing.

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