Summary
Lasting changes to risk appetite might be showing.
Tail of the yield spike
Stock markets declined to immediately rush on to the front foot during an 11 hour pause in Treasury selling. A shallow sea of red in European indices has lasted most of the session.
Apparent rotation of interest returns banks to favour. Energy remains in play as the latest hurricane to strafe the Gulf of Mexico shuts down about 40% of production there. The near-term supply outlook, chiefly after resumed restrictions on Iran, is largely assessed by guesswork. As the storm moves further west, the price prop will fade and probably leave WTI and Brent risks to the downside. Without further clarity on what happens after Tehran is re-sanctioned, crude oil contracts look to be rising on vapours near four-year highs.
Speaking of props, energy has been amongst the handful stock markets have enjoyed in recent weeks. Without it, the pattern of recent slides could set in. Wall Street is currently primed to track Europe with a lack of follow-through on Wednesday, despite the Dow paring losses to almost nothing overnight whilst the Nasdaq took a break from leading the downside.
BTP relief tails off
Investors are making better use of a window of opportunity in Europe’s yield saga. The 10-year BTP spread to counterpart bunds is on a third daily retreat; last at 2.926% having closed at 3.028 on Monday, the widest in about five years. The BTP yield has eased to the 3.4% handle from 3.712% on Tuesday, falling the most in one session since at least 18th September.
The FTSE MIB thereby outperforms Europe. Relief looks anything but underpinned. Italy’s beleaguered Telecom Italia (MI:TLIT) leads heavyweights in Milan, followed by embattled banks. And yield upticks around mid-session coincide with the stock market growing pensive again to stand just 0.1% higher a short while ago, from almost 1% higher earlier.
Tria seeks stability
Economy minister Giovanni Tria’s assurances that the government seeks a return to stability helped. Such comments are well within the pattern of ministers stepping forward with more ameliorative tones, followed by backward step when deputy PMs Di Maio or Salvini confront Brussels anew.
Furthermore, talk of replacing Tria is reportedly open enough. Such a move is likely to wait till Monday at least, the date when Rome must submit Budget proposals to Brussels. With both political leaders reiterating an unwillingness to back down, relative market calm is likely to fade as the date approaches.
Euro re-enters downtrend
Awareness that stability may be short-lived caps the euro under $1.150, with buyers unwilling to face another BTP/Bund spread crush. Technically, EUR/USD is now respecting a line drawn across the declining highs since late August quite well, making a valid trend. As momentum stalls around current prices, well within the line, risks point back to $1.146, support on 3rd and 8th October, before the collapse earlier this week that bottomed at $1.1429.
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