Something for everybody : Italy, the Yield Curve, Currency Manipulation and Brexit

ref :- A selection from Bloomberg Markets

As the markets take a welcome breather at the end of a turbulent week, just time to point you in the direction of a few Bloomberg pieces that catch the eye this morning :

Italian Lawmakers Approve Deficit Goal as EU Showdown Nears :  Quite simply, with the two populist coalition parties holding sway in both houses of parliament you can only say "Well, they would, wouldn't they ?" Much more to the point will be the EU's reaction to Italy's proposed budget, and that has to be submitted to Brussels by the close of business Monday. The government has reined back from earlier suggestions that they were aiming a budget deficit - to - GDP ratio of 2.4% for each of the next three years by proposing a number of 2.1% for 2020 and 1.8% for 2021. All of those figures however are still some way above what the EU had thought it had agreed with the previous Italian government in an attempt to start to reduce Italy's debt mountain. Finance Minister Giovanni Tria, struggling manfully to keep both Brussels and his political masters happy, has said that higher growth will compensate for extra spending and ultimately will lead to debt reduction. Mmm .... the EU may not be totally convinced of that. Both Matteo Salvini and Luigi Di Maio, joint vice premiers and leaders of the two populist coalition parties, have made it very plain that they would not countenance subordinating what they view as best for Italy to EU rules, so plainly the potential for a bust-up is still very real .... and probably quite soon. Watch the Italy / Germany 10yr yield spread, once more out to 300 basis points ....

Wall Street Sees Treasuries Yield Curve Flattening Into 2019 : Whether it's really the most helpful measure of the difference in short-term yields and longer ones or not, the spread between the 2yr and the 10yr Treasury note is the one that grabs the headlines (you could make a good argument that a 3-month bill is a better indicator of short-term rates, for example). Still, it is what it is and an inversion of the yield curve by this measure in particular has often presaged a recession. That's why investors were getting a bit twitchy recently when the premium of the 10yr yield over the 2yr yield narrowed in to less than 20 basis points, and why there was a modicum of relief that the recent sell-off in the bond markets (which means yields going higher, of course) saw the spread out to 35bp . Not exactly a definitive move admittedly, but fundamentally (increased Treasury borrowing, unrolling of QE programmes in the US and soon elsewhere) and technically (an upside break of the 10yr yield's 3.12% high in May), there seemed (or seems?) more reason to believe that the spread would remain in positive territory. Now, there ARE specific reasons that might make one believe that an inverted (negative) yield curve should NOT signal a recession on this occasion, but it certainly wouldn't help sentiment. According to a Bloomberg survey of top banks and dealers, the AVERAGE prediction is for the 2yr/10yr spread (currently at about 30bp) to narrow to 21bp by year-end, and to 11bp by June 2019. At least five houses see the spread inverting .... and that's got to be a concern. It must be stressed that there are very cogent arguments to be made for the spread to head in the other direction, but those looking for curve inversion presumably see the Fed continuing to goose the short-end to keep the economy from overheating while longer yields stay comparatively subdued at the continued lack of inflationary pressure. And that's a legitimate call too ......

U.S. Treasury Staff Finds China Isn't Manipulating Yuan, Sources Say : We've talked about this quite a lot, but at the risk of repeating ourselves (why stop now ?) ..... In recent years there has been no evidence of currency manipulation by Beijing, despite China's dubious practices in that regard further in the past and however they may or may not have infringed accepted rules more recently. This is an irritant to President Trump in particular ..... he would like nothing more than to add currency manipulation to his list of China's wrongdoings as he ratchets up the trade war. As we said the other day, China has had no need to artificially lower its currency against the dollar, which has been strengthening across the board as a result of the US' stellar economic performance and the resulting steadily upward path of US rates (see also "Fed-bashing" in Bloomberg's Eco Day). Apparently, under pressure from the President, Treasury Secretary Steven Mnuchin  --  by inclination a more measured individual  --  may be persuaded by the White House to brand China a manipulator despite the advice to the contrary offered by Treasury officials. That could only be a blow to all those hoping for positive developments in the escalating trade conflict ......

Traders Expect a Volatile Pound Before Britain's Exit Talks with the EU : Wow ! You don't say ! Apologies, it's hard not to be flippant but this Bloomberg piece looks at the cover being taken by traders on the options market to hedge against the full range of possible Brexit outcomes. It's never happened before so you can hardly say it's unusual, but remarkably at this late stage anything is still possible ..... or rather, traders are seeing the possible outcome in binary terms : either it will a come together, lovey-dovey affair, or it will be a no-holds-barred NO DEAL. Which means that traders are taking insurance for a move in £/$ both to $1.10 and to $1.60 ..... and that IS a bit scary ......