Caterpillar adds weight to Italian drag

Given current jittery conditions, static Caterpillar guidance has been sufficient to worsen stock market sentiment further.


Given current jittery conditions, static Caterpillar guidance has been sufficient to worsen stock market sentiment further.

Battening down hatches

That Italy’s sovereign yields are resurgent despite positive developments at the start the week underscores that there will be no smooth return to ‘normal’ conditions. Investors are also shrugging off decent indications that conduits for contagion between Italian banks with the most perilous capital positions and the rest of the financial system are less exposed than feared. Hence, persistent inclination to remain on the safer side of tail risk speaks volumes about wider and compounded perceptions.

Messenger ignored

On that basis, it’s not surprising that investors, after a brief acknowledgement, are looking through reports by Rome’s Il Messagero that the coalition government might be prepared to adjust its 2019 draft budget. Two- to 10-year yields had tacked on some 4 basis points before the news and the latter rescinded almost 10 in reaction. The higher probability of what happens next doesn’t favour a sustained ease off. The coalition’s stance on ‘gentlemen of the spread’ and intent to push through fiscally expansive expenditure is well baked in. Indeed, the briefing was being wound back by deputy PM and Lega Nord leader Matteo Salvini by the afternoon.  The spread between Italian and German 10-year paper eased to as low as 299.7 basis points earlier but was just now back above the ‘magic’ 3% at 306.2bp. The European Union’s official response to Italy’s draft budget remains ahead.

Attempted euro bid

The euro made a better fist of the attempted olive branch offer. The single currency is testing air around and even above $1.148, prices it has struggled to best since falling below the region twice since last Thursday. The bid lacks conviction. The pair is currently flat and has been little higher than 10-15 pips on the day. Charts provide a visible technical reasons as to why. Momentum would have to be sufficient to ensure not just a breach of currently in-focus resistance, but also to sustainably crack a clean enough declining trend line that connects highs between late September and one that was tagged on Monday.

Technical analysis chart: EUR/USD – two-hour intervals

Source: Refinitiv/City Index

Yuan backdrop fades

Euro’s weak bid is quite allied with deeply negative sentiment across European shares. It’s also in keeping with rejection of a third day of advances against the grain by Chinese equities which lost almost as much as they had gained on Monday. The mood is mirrored by yuan buyer’s inability to sustain, for a third session, momentum that followed co-ordinated verbal stimulus by financial and monetary authorities. Renminbi stalled no higher than its 6.936 per dollar close on Monday. It is currently toying with losses of 80-100 pips, to stand near 6.947. The week’s 6.95 highs remain in sight, ultimately maintaining risks that the behaviourally charged 7-yuan level will be reached before too long.

Treasury price uptick

Yen firms in unison in its usual safety guise and the circle of aversion that encourages flight from stock markets is complete. U.S. stock index futures indicate an open in the same direction as the wider global trend. One chink of light for would be risk seekers: current pricing of dollar pain—via benchmark borrowing costs—are seeing a moderate lull. There’s been another dip in Treasury yields from two-year maturity upwards. It may prove to be cold comfort. The benchmark rate is still comfortably hugging the 3% handle (3.126% at last look from Thursday’s 3.217% high). Still, it’s an avenue that Treasury sensitive buyers of Nasdaq shares and other riskier assets may take. Huge commitment is unlikely, at least whilst yield support at 3.1235% holds. It was last corroborated on 11th October.

Caterpillar heavy

Earnings are continuing to trump macroeconomic data as key scheduled event risk this week before Thursday’s European Central Bank announcements. Caterpillar’s third quarter earnings beat forecasts with progress across most end markets. But the tone of the report made clear earnings momentum was not the main story in the quarter. The impression was compounded by 2018 earnings forecasts remaining untouched, for the first time since two straight quarterly upgrades. CAT shares were 7% lower in pre-market orders just now. It’s a similar story with smaller and less rugged industrial 3M. Its shares face a similar opening loss after it downgraded full-year adjusted earnings. The total negative effect for Dow futures from the pair approaches 150 points. To the extent that the earnings slate circumstantially backs the story that a strong dollar and deteriorating trade relations are beginning to impact earnings growth, stock markets could be buffeted accordingly in coming days. The release schedule hots up considerably on Wednesday when Boeing, UPS, and AT&T reports are the highlights during normal trading hours followed by Microsoft, Visa and Ford after the U.S. close.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.