Stocks move down, Italian PM Conte resigns

Summary:

• US indices finished yesterday’s session lower, Asian indices are mixed a while before the close
• PM Giuseppe Conte hands his resignation to President Mattarella
• Donald Trump hints at possible rate cuts without congressional approval

Stocks move down

US indices closed Tuesday’s trading broadly lower with the SP500 falling as much as 0.8% and other indices finishing only a touch better. Gloomier sentiment has also been shared among Asian investors, however, overall performance has varied so far - while Shanghai Composite, Hang Seng and KOSPI are trading slightly higher, NIKKEI and Australian S&P/ASX200 are trading lower. Caution may have something to do with FOMC minutes due to release this evening where market participants are expected to look for any clues whether the latest rate cut was just a “mid-cycle adjustment” or something more, hence they should be prepared for subsequent rates cuts. As for now, it seems the latter is more probable and everybody should be aware that Jerome Powell may decide to clarify his outlook during his speech in Jackson Hole on Friday. What does it mean for the dollar? We reckon that risks are tilted to the upside for the greenback because market-based expectations remain elevated, hence Powell may find it hard to beat them enough to push the buck lower. There is no doubt that the weaker currency is something the Fed as well as Trump’s administration need right now - the Fed would hope it could help boost inflation while the White House would see pressure on exporters to ease.

The US100 remains quite safely above its important support nearby 7390 points being underpinned by the bullish blue trend line. Source: xStation5

Blurry outlook for Italian politics

There are two options left on the table after Italian Prime Minister Giuseppe Conte handed his resignation to President Sergio Mattarella, both of them depend on what Mattarella will do. The first one assumes that Italy’s President gives Conte another opportunity to form a majority, albeit this option seems to be possible only if President judges a new majority could offer some stability to the country. It is highly uncertain if a coalition between the Five Star and the PD would offer any stability to the country’s politics. On the other hand, Giuseppe Conte is unwilling to have snap elections which could be a second option President Mattarella may choose. Consultations with Italian President are expected to start today. A market response to the news was really positive with the Italian 10Y bond yield touching 1.31% on Tuesday, the lowest level since 2016, and the spread to German bonds dropping to 200 basis points. This reaction may have taken place due to the fact that parliament dissolution lowers the chance of generous tax cuts promised by Salvini (50 billion EUR).

The USDJPY is trading somewhat below its important resistance as traders are awaiting FOMC minutes. Source: xStation5

In the other news:

• Donald Trump said on Tuesday that he always looked at tax cuts adding that such cuts could be delivered by indexing capital gains to inflation without congressional approval; such a move would mostly benefit the wealthy

• Norway’s unemployment rate increased to 3.6% in July from 3.4% in June

• New Zealand’s credit card spending fell 1.8% MoM in July after rising 1.5% MoM in June