Equity Sell-Off Continues, FX Market Stabilises

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Euro holds ground in Italian budget flap

Is the next crisis finally here? Asian equities erased yesterday, with Chinese markets bearing the brunt. The CSI 300 fell 2.66%, while Hong Kong’s Hang Seng gave up 3.13%. In Europe, equities are also blinking red: the EuroSTOXX 600 fell 1.05% to 356 points, its lowest level since mid-December 2016. In FX, the single currency held up surprisingly well against persistent tensions over the Italian budget. EUR/USD edged up 0.5%. Similarly, pound sterling, which rose 0.22% against the buck, trimmed losses as investors hope the European Union and UK will reach an agreement soon.

The European Commission will discuss Italy today. Italy said it would stick to its budget plans, although these breach EU rules. On Monday, Economy Minister, Giovani Tria told Brussels the budget is necessary to restore growth. Brussels usually takes a hard line against budget breaches; however, Italy insists on this one. We expect the EU Commission will reject Italy’s budget, but in a soft way that would keeps discussion open. Therefore, we do not expect a strong reaction from financial markets. We also maintain our long EUR/USD view in the medium to long-term.

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Weaker oil despite Washington-Riyadh tensions

Amidst lower Iranian exports, oil prices are dropping, pushed by mounting tensions between Saudi Arabia and the US in the wake of the Khashoggi murder. Brent Crude is below USD 80/barrel while WTI trades below USD 70, both under last weekend’s levels. Investors were hoping that Saudi, the world’s leading exporter, would use its black gold to make itself heard politically. However, Saudi Energy Minister Khalid Al-Falih confirmed intentions to produce 11 million barrels per day and its unwillingness to implement any embargo. Meanwhile, US inventories published Wednesday for the week ending 19 October are expected to remain in positive territory, where they have been since March 2017.

Still, the global landscape has not changed fundamentally. US sanctions against Iran exports start in 12 days (4 November 2018), and sanctions against Venezuela are ramping up. In the short-term, crude prices are expected to drop slightly, but looking ahead, a bounce is likely.
 
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