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PATRIS Fixed Income Weekly - 7 September 2018

7 Sep 2018



 1.At next week's ECB meeting, the Governing Council may recognise that the weakening trend seen in 1H18 appears to have been halted, in spite of some recent data remaining mixed. New staff forecasts will be released for GDP growth and inflation. The ECB could highlight Emerging Markets as a source of downside risks. The risk of a trade war with the US could also be stressed, after President Trump considered an EU offer to reduce car tariffs to zero as insufficient. The ECB is expected to discuss the policy of reinvestments over the coming meetings. If questioned on rates, Mario Draghi will likely comment again on current market rate expectations.

2.10-year BTP-Bund spread narrowed sharply on preparatory work for the budget process, given the more prudent and less confrontational stance from Lega, when compared to 5 Stelle. Nevertheless, the 2019 budget will still imply a deviation compared to the previous fiscal targets. A compromise with the EU Commission is expected to be reached, but only if it does not jeopardise the desired downward trajectory of the debt-to-GDP ratio. Meanwhile, Spanish and Portuguese peripheral spreads remained relatively unchanged, probably reflecting the risk-off backdrop for risky assets.

 3.The Italian state sector budget posted a surplus of €1.3bn in August. In the first 8 months of 2018, the state sector borrowing requirement stood at €29.5bn, €11.8bn lower than in the same period of 2017. This data shows that the fiscal position in Italy continues to improve, reflecting the positive evolution of nominal GDP.

4.Fitch revised the outlook on Italy's BBB sovereign rating to negative from stable last Friday, reflecting weaker fiscal trends, higher policy uncertainty and a lower probability of the government pushing forward with new structural reforms. Fitch is the second rating agency with a negative outlook. Moody's (Baa2/Negative) is reviewing Italy's for downgrade. The end of the review should only take place after the completion of the current budget negotiations.

5.A public-comment period ended yesterday in the US, which leaves the door open to further tariffs on additional US imports from China. This could afterwards lead to retaliation coming from China. EM turmoil and weak equity prices continue to support some flight to safe assets such as Bunds and Treasuries.

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