Moody’s cuts Italy’s rating, Chinese stocks soar on Monday

Summary:

• Italian rating has been cut by Moody’s

• Italy expects the EU budget to be rejected by the European Commission

• Chinese stocks surge over 4% on personal tax cut plans

The China’s stock market entered the new trading week on a strong footing with stocks listed in Shanghai surging over 4% on the government’s plans to reduce household tax burden and thereby stimulate the faltering economy. A detailed draft plan for personal income tax cuts was released on Saturday and it is designed to allow consumers to claim deductions from expenses on health care, education, mortgage interest or rent. Each category will have the deductible amount ranging from 1000 CNY to 2000 CNY per month. The move was widely expected to take place after China decided to raise the personal income tax-free threshold to 5000 CNY from 3500 CNY per month. The above-mentioned changes will take effect from January 1. What do the details look like? First of all, taxpayers will be allowed to claim 12000 CNY per year for child’s education costs as well as 3600 CNY to 4800 CNY for continuing education expenditure. Parents who turned 60 will be supported by the deduction amount of 24000 CNY per year being equally split between siblings. The rent deduction will depend on where habitants live and will range between 800 CNY in small to 1200 CNY in big cities. In terms of the mortgage interest deduction, it will be applicable only to the first home with the amount of 12000 CNY per year. Finally should taxpayers’ medical expenses exceed 15000 CNY beyond the sum covered by public health insurance they can claim up to 60000 CNY per year for medical-related costs. As a result, after healthy rises on Friday buoyed by speculation from interventions from China’s authorities, the beginning of the new week is bringing a continuation of this rally. The Shanghai Composite is soaring as much as 4.6% as of 6:24 am BST whilst the Hang Seng (CHNComp) has added 3.4%.

Technically the Hang Seng could gradually increase toward the two major resistances placed at 10720 points and the bearish trend line. Note that the latter provided to support for sellers in the past and it is expected to be a hard nut to crack this time around as well. Source: xStation5

The second important topic being worth elaborating is again Italy. On Friday the country’s credit rating was downgraded by Moody’s to only one notch above junk on the back of mounting concerns with regard to budget plans. Moody’s slashed the rating to Baa3 from Baa2 and this move took place just five months after a warning signal had been made. The report said that Italy’s debt is likely to remain around the current 130% of GDP in the years to come due to expansionary policy - this “makes Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth”. Let us recall that the Italy/Germany 10Y yield spread shot up well above 300 basis points and despite a relief rally seen on Friday (the Italy’s 10Y yield declined 20 bps) the sell-off is expected to be continued after the Moody’s decision. On the other hand, pain for the Italy’s bond market could be cushioned to some extent as the rating agency’s outlook for Italy is currently stable meaning limited chances to see further downgrades for the time being. Let’s add that Fitch already cut its outlook on Italy’s BBB rating to negative while the S&P will review its assessment on October 26. As far as budget-related developments are concerned it is worth adding that Italy expects that the EU will reject the budget draft on Tuesday asking for revising it. If so, it would be the first time ever that a member state is asked to submit a revised budget.

The EURUSD trades flat on Monday but the pair managed to stay above 1.1445 which could bode well for the future. Subsequent levels bulls need to dealt with are localized at 1.1540 and 1.1620. Source: xStation5

In the other news:

• Donald Trump has reportedly no plans to de-escalate a trade war with China, instead wanting to continue ratcheting up the pressure, according to an Axions report

• Trump’s approval hit the high in a WSJ/NBC poll rising to 47%

• US dollar trades flat, the 10Y yield moves subtly below 3.2%, the SP500 futures trade 0.15% higher