Relief, But Not-So-Great Expectations.

The risk-on tone set Friday by the blockbuster U.S. payrolls report that Trump leaked more than an hour ahead of time spilled over into Monday with global markets buoyant despite the myriad risk factors in play.

Over the weekend, the “G6 + one” (as it’s apparently now known thanks to Trump isolating America from other wealthy nations with his Navarro-inspired trade policies) issued a rather harshly worded rebuke of the U.S., asking Mnuchin to go ahead and let the President know that everyone is “unanimously concerned and disappointed” with him. I’m not sure if global finance leaders are aware of this, but we all gave up on expressing our “unanimous concern and disappointment” with Trump about six months ago – he doesn’t care about that. They could try spanking him with a magazine though. He responds well to that.

For now, markets are going to just wait and see how this develops or, more to the point, wait and see if something prompts Trump to swing back to favoring the moderates in his administration over the shrill rhetoric of Peter Navarro and against the professed wishes of Steve Bannon who, you’re reminded, accused Mnuchin of selling out the U.S. to Beijing just days after Steve secured a truce of sorts after meeting with Chinese vice premier Liu He. Notably, the yuan is sitting near its lowest levels since January.

Over in Europe, Italian bonds rallied for a fourth day.


As did Spanish bonds (the theory in Spain seems to be that the specter of new elections is outweighed by the assumption that the prospects for fiscal deterioration just aren’t there and neither is a discernible euro-skeptic bent).

“The spread between 10-year Italian and Spanish bonds will become the benchmark for how much compensation bond investors will be demanding for holding BTPs in the months ahead,” Bloomberg’s Mark Cranfield writes, adding that “until last month, the post-2012 crisis peak for the spread was 73bps and that’s now likely to act as a floor between the two yield.”


Also worth noting is the sharp drop in the June Sentix Investor Confidence index, which fell from 19.2 in May to 9.3 in June, its lowest since 2016:


Perhaps even more notable here is the expectations index, which plunged to its lowest since August of 2012. Here’s Sentix:

The new government in Italy is giving investors fears for the eurozone. For no other region in the sentix survey, eco- nomic expectations are falling more sharply. Economic expectations for the Euro zone fell by more than 11 points to – 13.3. This is the lowest level since August 2012, the month after Draghi’s famous “whatever it takes” speech.


One last thing. When you think about the fact that Italy managed to carry out some auctions last week and when you think about the market attempting to differentiate between the situation in Rome and the situation in Madrid and also when you think about all of this in the context of CSPP wind down, the following from JPMorgan (out on Friday) about the corporate bond market during the flare up is interesting:

There were perhaps somewhat greater signs of contagion in corporate bond spreads, where there appeared to be less differentiation. Spreads for Italian and Spanish companies’ EUR-denominated investment grade debt rose by broadly similar amounts and to levels last seen during the credit market sell-off in early 2016. This is shown in Figure 2, which shows the spreads of EUR denominated bonds in the JPM GABI IG Credit index for Italian and Spanish companies as well as Western European countries more broadly.


What about primary markets? While sovereign issuance by Italy took place [during the] week, though the 6-month auction on Tuesday was very weak even compared to the 2011 period, Euro corporate primary markets were effectively closed as the crisis escalated, with no new deals being priced in either investment grade or high yield markets this week. Our colleagues in European credit research note that the pipeline remains unchanged from the previous week with issuers looking for the right execution window to enter the market.


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