Safety is the priority

Seldom do we suddenly fall on demise but rather, advance towards it by slight degrees. However, nothing could be further from the truth when it comes to the Euro’s disintegration over the course of the last 24 hours. Forget about juxtaposition with Greece as this potential crisis is monumental in comparison. Italy’s economy is ten times the size of Greece, not to mention is burdened with fourth most massive public debt in the world. And given an imminent Italian election may very well amount to a referendum on the Euro, there is a flight to safety from European assets beyond the Italian borders sending and Italian Tsunami warning across global markets. European capital markets are in chaos as it may end up being more than just Rome that is burning.

US equity market losses mounted throughout the day as the latest in a line of top billing European political melodramas greeted traders returning from a three-day weekend. Indeed, not a pretty picture as uncertainly breeds investor anxiety as default fears have the blue-chip Financials buckling, as a crisis of confidence takes hold of financial markets.

And with contagion spreading to international markets, investors are exiting the EURO en masse. In addition to loading up on US Treasuries; investors are seeking shelter under the US dollar and Yen umbrella awaiting the dust to settle in Europe.

Oil Markets

OPEC supply rebalancing continues to be the primary focus and will continue to be in the lead up to next month’s OPEC meeting in Vienna. But finding consensus among the cartel might not be as straightforward as it seems as there appears to be a bit of a trade-off (the US pull out of Iran Nuclear Deal) in the works between Saudi Arabia and the US after President Trump blamed OPEC price manipulation for high US gasoline prices last week.

But also weighing on oil prices to a degree is the political drama in Europe which is hitting the markets at a time when many were already questioning the global growth storyline. So, chalk up another towering hurdle for global growth to overcome.

And while the technical overlays look incredibly bearish below $ 65 per barrel WTI, the market is not naive enough to realise that if there is a collapse in oil prices both Saudi Arabia nor Russia would be less inclined to add supply, given both nations vested interest in higher oil prices.

Finally, while Middle East risk premiums have temporarily deflated, they have not evaporated as Iran remains a very unpredictable wild card in any nuclear deal discussion which should underpin longer-term views on oil prices. 

Gold Markets

Conflicting signals abound with Italy contagion fears causing an uproar in the global capital market but offset by the enormous haven demand for US dollar which is creating headwinds for gold prices.

While rising political uncertainty in Italy and growing U.S.-China trade tensions should see gold holding a bid, but with the yellow metals sensitivity to the US dollar is on full display, its unlikely Gold will move significantly higher until we reach the EU ” Crisis Zone” which we are nowhere near at this stage.

Asia Markets
Italian political unrest remains in focus and has risk assets quivering which usually translates into regional losses. Indo, Thai, Malaysia, sing all return to action today after celebrating Vesak day so we should expect some catchup on the downside on the cash market. And while e certainly can’t overlook USTR final decision on Section 301 tariffs looming. but the Italian story will most likely be the overriding focus for the day

CNH continues to move higher as the PBoc is putting up few protests and allowing the Yuan to freely adjust to the surging DXY, which should be a significant driver in local FX sentiment. Chinese authorities are showing little concerns t as CNH Spot sliced through the 6.40 barriers like a hot knife through butter. But realistically the Yuan has been sagging since this month weaker than expected retail sales data; it’s the unexpected meltdown on the Euro that has marched us above the 6.42 level overnight.

MYR: The Malaysian Ringgit will continue to be in the no-trade zone for foreign investors who were showing little appetite for Malaysia bond and equities prior the Italian meltdown and are even more unlikely to do so with the risk aversion gripping market. And one look at the technical overlay on oil prices should reinforce that view.

Currencies

EUR: EURUSD continues to buckle on haven USD flows given the heightened Italian political risk., While near-term growth dynamics based on the recent run of weak economic data in the EU are also providing tailwinds for the USD. But if this crisis continues, it will bring in to question even the ECB desire to reduce QE.

JPY: Risk aversion coupled The Nikkei dynamics looking fragile continues to weigh on USDJPY sentiment. The question is, are we just seeing the tip of the iceberg which makes the current move all that more dangerous to fade despite history telling us the market has a way of influencing European voter sentiment. I fear that Italian voters are wearing far too many emotions on their sleeve suggesting safety is the priority.