Italy close to new PD-M5S coalition Government
Germany Ifo data points to recession ahead
China denies call with President Trump
A very much light-in-volume session as traders take a step back from Fridays volatility without big surprise, if not for the Chinese administration to hear that Xi has called Trump to restart trade talks. What happened on Friday is something that the market really need to assess thoroughly. The President of the Free World, marking China and the Fed Chair as "enemies" is not necessarily something that would make investors sleep well at night. There is the President credibility at stake - the same that has brought the market to believe that "trade war are easy to win, that "China needs a deal much more badly than US" and that the US and/or China is bluffing. Things don't look very good for risky assets, which are expected to struggle as long as further escalations between US and China remain the likely outcome.
On the other side, we need to put recent moves into perspective. Despite a deterioration in the global economy outlook and escalation in US-China tensions, SP500 trades 5% away from its all time high, stuck between its 50 and 200 DMA. More concerning signals are to be found elsewhere. Gold continues to extend gains after four consecutive positive weeks trading firmly above 1500. The 2s10 US yield curve inverts the most since the Financial Crisis. Crude Oil is set to end its second consecutive month in red.
Reasons behind the resilience in risky assets could be also found in the incredibly low level of yields across the board, which as inevitably pushed up valuations and allow company to borrow money at very low levels. On the other side, US data look good if compared to the rest of the world economies, having shown great signs of resilience to political and economic turmoil in Emerging Economies and Europe.
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