European equity markets finished higher yesterday despite spending much of the day in the red. 

The political situation in Italy is the dominant story in Europe, and seeing as the coalition government in Italy seem keen to disobey Brussels and raise the budget deficit to 2.4%, we could be heading for a political clash. The cost of borrowing for the Italian government has risen as investors are fearful the administration in Rome is planning on racking up even more debt. The credit rating agencies will be paying close attention to developments in the country and any negative reviews could send Italian government bond yields higher and eurozone stocks lower. Italy is the third largest economy in the eurozone, so the stakes are high, and if a crisis does erupt, the fallout could be enormous.

The yield on the US 10-year government bond traded above 3.25% - its highest level since 2011. Dealers are predicting the Federal Reserve will continue on their path of monetary tightening. The US central bank has hiked rates three times in 2018, and we could see four more hikes in the next 12 months. Equity traders have gotten used to very loose monetary policy in recent years, and that was a contributing factor in the rally we have seen. The prospect of higher rates could put pressure on stocks as higher borrowing costs could hurt company’s profit margins. The Dow Jones and S&P 500 finished marginally lower last night.

The greenback had a good run during the middle of the session yesterday, but it handed back a lot of the gains. The chatter of more rate hikes form the Fed is making the US dollar attractive. At 1.30pm (UK time), the US will release the PPI and core PPI reports, and the consensus estimate is for 2.8% and 2.5% respectively. An increase in prices at factory level could bring about higher CPI down the line as costs could be passed on to the end consumer. Yesterday we heard from Robert Kaplan of the Dallas Federal Reserve, and he announced the US should keep tightening monetary policy, and doesn’t see ‘sudden or substantial’ rise in inflation. 

The IMF cut its growth global growth target for this year and next to 3.7%. Trade uncertainty was cited as a reason for the downgrade. The US and China are no closer to ending their trade spat. A report revealed yesterday that there is further evidence that a Chinese technology company tampered with chips that were bound for the US, and the aim was to carry out surveillance. This is likely to attract more tariffs from the US, not less. President Trump was keen to rebalance its trading relationship with Mexico and Canada, and he might look to do something similar with the EU. Germany posted a 15% rise in its trade surplus, and is likely to have gone unnoticed in Washington DC.

Oil price finished higher yesterday as traders remain fearful about supply levels. Exports from Iran fell at the beginning of the month, and traders worried that trend will continue as we get closer to November – when the US sanctions are implemented. Hurricane Michael is approaching the US and roughly 20% of operating capacity in the Gulf of Mexico has been shut, and that is fuelling buying too.  

At 9.30am (UK time) the UK will release several economic reports. Third-quarter GDP on a quarter-on-quarter basis is expected to be 0.6%. Industrial production and manufacturing production are both tipped to show 0.1% growth, while construction output is anticipated to fall by 0.5%. The goods trade deficit is predicted to widen to £10.9 billion from £9.97 billion. Sterling will also be in focus as Andy Haldane of the Bank of England will give a speech at 10am (UK time).

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1632 – the 100-day moving average.

GBP/USD – has broadly been pushing higher since mid-August and if the positive move continues it could target the 1.3300 region. A break below 1.3000 could put 1.2895 on the radar.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8725. A bounce back could run into resistance at 0.8839 or 0.8900.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found in the 112.15 region.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.