Global yields have continued to fall with US 10Y at 1.64% as the geo-political situation is quite complicated.

Looking at recent Broker’s estimates, the market seems to expect in US a 25bps cut in September and 25bps cut in October.

We will hear again from Powel at the important Jackson Hole on the 22nd of August.

Fears that the trade war will trigger a recession are growing.

 In US all Index have closed near intraday lows with good volumes while in Asia we had a continued weakness.

Japan is up only 2% Ytd for Nikkei and down 0.5% on Topix after it has been one of the main bullish calls for the street, not an easy one so far.

Europe is set to open small down catching with global markets.

Argentina lost 38% on the Merval Index with the ARS (Argentinian Peso) down 14.4% vs the USD as Argentina’s President  Macri unexpectedly lost a primary vote, foreshadowing a defeat in October’s presidential election and a possible return to the policies of his predecessor, Cristina Kirchner.

The local currency has possibly entered in a vicious circle as a weaker exchange rate materially increase solvency risk, feeding back into higher risk premia in the currency (more ARS weakness).

The Spanish Ibex index yesterday has underperformed because of the heavy exposure on Banks and Latam Argentina. The Index is up only 1.5% Ytd.

Let’s now focus on the Italian political situation

After the confidence vote, President Mattarella would conduct a round of consultations with the political parties with the aim of forming a new government. If this attempt is successful (quite unlikely), the President could grant any of the political leaders an exploratory mandate to form a new government.

Alternatively, two further options are on the table.

  1.  the President could grant the exploratory mandate to a technocrat, with the goal of nominating a caretaker/institutional government that would seek a confidence vote in Parliament. In the event of a positive confidence vote, this government would pass the 2020 budget law and new elections would likely be held in Q1 2020.
  2. the President could immediately dissolve the Parliament and a general election would take place within 45-70 days. In this case, the government of incumbent Prime Minister Conte (probably with. Salvini voted down as the Interior Minister pending a confidence vote against him) would stay in office and run day to day government affairs until elections are held and a new government takes office.

Because of a number of institutional steps that would need to be taken after a general election, the 2020 government budget process would likely be impaired and there would be a risk that the 2020 budget law is not passed by year-end.

In that case, VAT tax rates would automatically increase on January 1 2020 as a part of a law previously passed to cap the growth of public deficit; and a “temporary budget cycle” would be in place.

During this period that could last at maximum four months, spending capacity on each line of the budget would be capped at one-twelfth of the existing budget, for each month the temporary arrangement is in place.

Needless to say what effect will have on Italian economic situation and how this could be reflected on to the markets.

Interestingly, one of the main reasons why market has held last week in US is to do with..buybacks!

According to Goldman Sachs, corporates were buying back stock at a “furious” pace.  As we know, Corporates were coming out of black-out, but were not necessarily repurchasing stock at all-time highs in the S&P. They got better valuation with the recent correction and the typical ~$2Bn-~$3Bn a day at ‘peak buyback season’ went to ~$10Bn-$12Bn.  (To put it into context, during the Feb ’18 rout, GS’s corporate-trading desk saw the busiest buyback ever and in May’s sell-off, Bank of America’s corporate desk saw orders surge by 23% (the 8th busiest week in a decade).

At Global Macro level we had last night the US budget deficit for the month of July which widened  to $119.7 billion, a 56% increase from a year ago. That jump helped push the total 2019 fiscal shortfall to $866.8 billion in just 10 months, already exceeding the full-year figure of $779 billion posted last year.

Today there is the inflation data (CPI) in Germany and US, along with Zew survey in Germany, tomorrow: Q2 GDP Germany and Q2 GDP European Union.

Have a good day