It’s not been a particularly good week thus far for European markets, as concerns about rising yields, and continued disagreements between the Italian government and EU authorities undermine investor confidence in the economic and investment outlook.
Having rallied off multi-month lows yesterday European markets have turned lower again this morning after the rebound in US and Italian bond prices yesterday, gave way to further selling this morning on the back of further belligerent rhetoric from Matteo Salvini, Italian deputy Prime Minister on Italian radio this morning.
The US 10 year yield hit its highest level since 2011, while the Italian 10 year yield retreated from levels last seen in 2014, before backing off these levels into the close yesterday.
The rally in Italian bond prices came about in response to comments from Italian finance minister Tria that the Italian government remained committed to financial stability, however it is slowly becoming apparent that for all Tria’s good intentions he isn’t the one calling the shots.
This morning, deputy PM Matteo Salvini once again reiterated that the latest Italian budget would not change, and this has seen Italian yields start to rise again as the Italian bond markets reacts to the constant to and fro of political rhetoric.
The pound has had a decent week thus far on optimism that we could get an interim Brexit deal as soon as next week. Recent economic data has been generally supportive of a fairly decent performance in Q3 with manufacturing PMI’s generally positive, though in other areas, recent data has shown that consumers are becoming more cautious.
Today’s manufacturing and industrial production data for August highlighted a mixed picture as manufacturing declined 0.2%, while industrial production expanded by 0.2%.
Monthly GDP for August showed a slowdown from July’s 0.3%, coming in at 0%, though the three month average came in at 0.7%, driven primarily by an index of services expansion of 0.7%, and an adjustment of 0.1% higher in both the June and July GDP numbers.
In summary June and July much better than expected for the UK, however August seems to have hit a little bit of a slowdown after a sun induced summer bump.
In company news Patisserie Valerie shares were suspended after the company announced that it was undergoing an investigation into “significant, and potentially fraudulent accounting irregularities” to the tune of a potential £20m misstatement of the company’s financial health. Finance Director Chris Marsh has been suspended and while there is no suggestion of impropriety on his part the key questions being asked are likely to be how long these irregularities have been going on, and why did it take so long to pick up on them.
It also raises other questions as to the competence of the accounting profession at a time when there are growing calls for a break-up of the bigger firms, as concerns rise about the integrity of company accounts after several high profile scandals including Carillion earlier this year, where bad practice could have been overlooked, or kept hidden by way of layers of complexity.
At its most recent trading update the company posted a first half profit of £11.5m on revenues of £60.5m which means on a best case scenario the company may find that its profits for the year could well get wiped out.
US markets look set to open slightly lower this morning despite US 10 year yields retreating from levels just north of 3.25% yesterday. US President Trump once again expressed his criticism of the Federal Reserve’s policy of incrementally raising interest rates, over concern that the US central bank might be going too fast, thus derailing the current pace of expansion in the US economy.
Certainly the pace that the Fed is moving is something that investors are concerned about particularly with respect to emerging market economies, and it is something that appears to have caught the attention of the IMF who, as expected, downgraded their forecasts for global growth yesterday, at their latest meeting in Bali.
The fund cited increased trade tensions between the US and China, as well as rising oil prices and weaker currency.
On the data front US factory gate prices or PPI for September are expected to show that price pressures moderated slightly, coming in at 2.7%, down slightly from 2.8% in August.
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