Italy trading out of line with rating
Italy continues to lurk in the background and make headlines in financial media. This week, Italian media La Stampa said that Italy had asked the ECB to extend the QE programme to support the Italian bond market. We doubt Italy will get this kind of support and even the Italian government denied the story later in the day. Any assistance from the ECB targeting Italy specifically would come with conditionality. Tonight, Fitch will give a verdict on the Italian economy and we believe it is likely to delay a decision on a potential rating change. Since the turmoil started, the Italian 10Y bond has been trading significantly out of line with other European countries. The crucial September month will give further indication whether the Italian-German spread will compress or if rating downgrades will put Italy back in line (see chart below).
NAFTA revamp before China-US trade deal
When it comes to negotiations with the EU, Donald Trump on Thursday rejected an offer by the EU to scrap auto tariffs. On his trade confrontation with China, he stated that the US is much stronger than China, signalling he intend to continue the trade war. This suggests he will continue with tariffs on China on another USD200bn shortly after the hearing period ends on 5 September. This is set to lead to a further escalation as China retaliates.
Therefore, given this week's events relating to NAFTA, we expect to see a revamp concluded by Prime Minister Justin Trudeau and US President Trump, given positive tones from Trudeau and Trump. Trudeau added it was possible by if it is good for Canada, although he also said, 'no NAFTA deal is better than a bad NAFTA deal'. Earlier this week, the US and Mexico agreed on changes to trade.
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