Market Drivers October 8, 2018
EUR, GBP AUD all tumble
Brexit, Italy continue to weigh
Nikkei -0.80% Dax -0.67%
Europe and Asia:
The market started jittery and only got worse as FX opened for trade this week with Brexit, Italy and the general risk-off concerns permeating every pair as EURUSD GBPUSD and USDJPY all tumbled in morning European trade.
In Europe, the concerns over Italian budget crisis have investors in a frenzy despite reassurances by deputy PM Matteo Salvini that the government has no plans on leaving the euro. Italian yields spiked to 4.5% on the benchmark 10 year – a dynamic that is only likely to make it more difficult for the country to rebound from its economic rut. The rise in Italian yields is also likely to affect the ECB which just saw its balance sheet deteriorate markedly and if these flows persist it may have to postpone plans to commence the taper despite constant assurances to the contrary.
All of these worries have driven euro below the 1.1500 and the pair shows little evidence of stabilizing as the conflict with Italy appears to be intractable and headed for a showdown with Brussels. The newly elected populist government of Italy, much like the Trump Administration is institutionally incapable of compromise and the end result may precipitate a run on Italian assets that could drag the pair to fresh yearly lows below the 1.1300 figure.
Meanwhile in the UK the endless back and forth on Brexit appears to have exhausted investors as well and with no concrete proposals on the Irish border from the Tory conference the market is getting antsy. The UK government needs to come up with a solid proposal ahead of the EU meeting next week, otherwise, negotiations will continue to go nowhere. Cable appears to have found a modicum of support at the 1.3050 level, but if no Brexit progress is made the pair could easily slip below 1.2900 as the week proceeds.
With both US and Canada on bank holidays today, the calendar is barren and liquidity may be limited. FX will continue to take its cue from equities and if stocks stabilize we could see a bounce in euro back above 1.1500, but given the rising political tensions across the globe US equities could sell off further as the day proceeds and drag FX lower with it taking GBPUSD to 1.3000 and EURUSD to 1.1450 while USDJPY could unwind below 113.00.