Europe Surged As Italy Blinks On Its Budget; Oil Helped And Dow Future Soared

The European market (Stoxx-600) is currently trading around 357.16 in the pre-US session Monday, surged by almost +0.89% as Italy blinks on its budget deficit target rhetoric. Europe was in deep green on renewed hopes of Italian budget truce as Italy’s Salvini hints at tweak to 2019 budget deficit goal and may lower it to 2.0-2.1% instead of 2.4% in his “games of chickens”. The European market was also helped by energies as oil rebounded to some extent after almost 8% plunge on black Friday.

On Monday, Salvini’s economic adviser and a junior Italian minister Siri also echoed Salvini’s budget truce optimism and said: “a little fine-tuning’ of the budget is possible” (as Italian/German spread jumped again to almost 335 bps last week!). But Siri clarified that: “Only some budget measures can be changed as Italian voters expect promises to be kept. Italy could consider ‘fine tuning’ its deficit goal to avoid market turbulence and it will be up to the PM and his deputies (two) to decide”.

On the weekend, there was a report that Salvini & Co, who are in actual charge of Italy, dialed back some of their earlier rhetorics (Italy won’t “change a comma” on the budget). On Saturday, Salvini was asked whether the 2.4% budget deficit number was set in stone, he answered: “Nobody is fixated on this; if there’s a budget that makes the country grows, it could be 2.2% or 2.6%”.

On Monday, in line with Salvini’s comments, the Italian government “source” confirmed that the coalition government is discussing reducing the budget deficit to 2.0% – 2.1% of GDP from current 2.4% target. Italy’s Di Maio said, “Budget deficit reduction is not a problem as long as budget measures remain the same”.

On Monday, Salvini again popped up with his latest bytes and warned: “Italy is not fixated on 0.1% extra or lower on deficit target, but the EU cannot take government or Italians hostage. The government has had positive feedback from the European Commission on lowering the 2019 budget deficit”, although he declined to talk about the numbers involved. Italy’s technocrat FM Conte pointed out that “constructive dialogue with European Commission will help reassure markets”.

Another Italian minister Lezzi said she thinks the 2019 deficit target can be lowered below 2.4% target (of GDP) after spending review and it’s important to moderate the tone of budget debate with Brussels.

Overall, Italian political risks have subsidized to some extent amid all these political “game of ping-pong” and hopes of a budget truce. The yield on Italy’s 10-year government Bund tumbled to over 1-month low of 3.17% after Italy’s populist government said it is studying scenarios for a lower 2019 budget deficit target after talks with EU negotiators. The spread between Italian/German Bund yields plunged to a low of 283 bps from around 333 bps a few days ago.

Although, Italian leader Salvini and Di Maio did not dispute these reports, at the same time avoided the focus on the exact budget deficit number, noting that they are more interested in making sure that fiscal policy would be stimulative next year. But, it’s too early to call a clear budget truce despite their conciliatory tone, which is a reflection of higher spreads and domestic political compulsions. They are trying to make a fine balance between spreads and political rhetoric to drag this Italian budget drama till the next EU/EC election, looking for “regime change”. Thus the overall European/Italian risk-on sentiment was quite limited.

The European banks were also helping as bank stocks in Greece rallied as political risks eased after Greece’s Eurobank Ergasias SA said it plans to sell about EUR 7 billion of bad loans and merge with real estate fund Grivalia Properties REIC.

Italy 40

Italy’s 10Y Bund yield is now trading around 3.28%, while the stock market (FTSE MIB-40) is currently jumped to 19195, up by almost +2.57%, but well off the high of 19320.50 as Italian political and budget suspense is far from over. And the EC/EU may not accept even a 2% budget deficit and such an “unorthodox” negotiation tactic by Italian populist (Eurosceptic) leaders, with an eye on the spread and political populism.

Italy 40 Chart

Pivot: 18950 Support: 18700 18400 18350Resistance: 19050 19200 19565 Scenario 1: STRONG ABOVE 19000 Scenario 2: WEAK BELOW 18950-18900 Comment: NEAR TERM RANGE: 18350-19565/19605

EUR/USD

The rally in European stocks was also undercut by higher local currencies (EUR/GBP). The US dollar index (DXY) edged down -0.16%, while EURUSD and GBPUSD surged by around +0.30% and USDJPY also gained +0.30% on dovish comments by BOJ’s Kuroda and a subdued Japanese manufacturing PMI for November.

EURUSD recovered from a 1-week low and jumped to a high of 1.1421 on ease of Italian budget tensions and after ECB Executive Board member Lautenschlaeger said the ECB might raise interest rates “in the summer or in the autumn” next year.

But EURUSD was also undercut by some dovish comments by ECB’s Chief Economist Praet, who said: “factors related to protectionism, financial market volatility, and vulnerabilities in emerging markets are creating headwinds that are becoming increasingly noticeable”.

EURUSD was also undercut by a subdued and weaker than expected German Nov IFO business climate, which fell to a 4-month low.

EUR/USD Chart

Pivot: 1.14 Support: 1.136 1.12995 1.121Resistance: 1.143 1.15 1.157 Scenario 1: STRONG ABOVE 1.14000-1.14300 Scenario 2: WEAK BELOW 1.14950-1.13850 Comment: NEAR TERM RANGE: 1.12100-1.15000

US 30

Dow Future is now trading around 24488, surged by almost +225 points (+0.94%) on an ease of Italian budget tensions (positive global cues) and an upbeat black Friday sales coupled with Cyber Monday sales optimism and hopes of a solid holiday season sales in December. Energies are also helping on higher oil on talks of “clandestine oil output cut” by OPEC+ led by Saudi Arabia, hopes of US-China trade/cold war truce is also boosting the overall risk-on sentiment (ahead of Trump-Xi meeting on 1st Dec).

Overall Asian cues were positive, supported by retailers, some rebound in techs, energies, banks & financials and real estate and higher USD. Nvidia is also helping on analysts’ optimism and upgrade. But Dow future is well off the session high of 24566.00 as Europe retreats to some extent.

US 30 Chart

Pivot: 24775 Support: 24675 24400 24240Resistance: 24800 24975 25200 Scenario 1: STRONG ABOVE 24775 Scenario 2: WEAK BELOW 24725-24675 Comment: NEAR TERM RANGE: 24000-25520

WTI Oil

In commodities, oil (WTI/Jan-19) is currently trading around 51.55, surged by almost +2.30% as oil may have got some support on a late Friday report, suggesting that “OPEC+ led by Saudi Arabia is quietly mulling clandestine oil output cut to placate Trump, that doesn’t look like a production cut: Under such a scenario, OPEC would announce plans to retain current output targets, first set in 2016. That move would imply a production pullback because Saudi Arabia is overproducing by nearly 1 mbpd”.

In other words, at the 6th December OPEC+ meeting; it may not announce a cut directly, but would commit to current levels of production (i.e. 100% production cut compliance). At the moment, Saudi Arabia is overproducing by nearly 1 mbpd (as per Trump’s request to counter Iran short supply for sanctions) and Saudi Arabia will not produce that extra 1 mbpd, equivalent to Iran’s normal supply.

In turn, the Saudis would stick to the quota, bringing down de facto production. Now, this additional 1 mbpd Saudi supply is creating an imbalance between excess supplies and lower demand as Iran’s actual exports are not so much affected due to Trump exemption/waivers to Iran’s top customers (eight countries) including China and India.

WTI Oil Chart

Pivot: 50.5 Support: 49 48.5 46.5 Resistance: 52.25 52.85 54.75 Scenario 1: STRONG ABOVE 50.50 Scenario 2: WEAK BELOW 50.00 Comment: 50.00-54.75/55.0

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