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PATRIS Fixed Income Weekly - 31 August 2018

31 Aug 2018

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WEEKLY COMMENTARY

 1.According to Italian newspaper La Repubblica, Fitch's Credit Worthiness report says that the fiscal risks in Italy have risen, while prospects for additional structural reforms have reduced further. Fitch also reportedly considers that the budget deficit could reach 3% of GDP next year. According to the same sources, Fitch believes that the downgrade that took place last year already incorporates the risks associated with populist parties. Nevertheless, the announcement of a negative outlook at today's rating review cannot be ruled out.

 2.ISTAT business sentiment fell in August to the lowest level since January 2017 but remains above its long-term average. Consumer confidence also declined on the month. However, this index remains close to historical highs. Business sentiment seems to remain negatively impacted by lower export demand, which has affected the manufacturing sector. Moreover, the survey suggests that widening Italian sovereign spreads and weaker equity prices may already have started to penalise business sentiment. Higher downside risks to GDP growth could represent another headwind to Italian risk assets.

 3.Economic growth in Italy may be the most important factor to follow over the coming quarters. If economic momentum slows further in Italy, the government will probably see as being more important to clash with the European Commission in order to support the economy, even if it necessary to push both the headline fiscal deficit and the government-to-GDP ratio higher.

 4.General government surplus in Germany reached €48.1bn (or 2.9% of GDP) in 1H18, a new all-time high. Revenue and expenditure both rose by 4.3%y/y. Meanwhile, the Ifo business climate index rose to 103.8 in August, from 101.7 in July. The expectations component recorded its first increase since November 2017, and reversed almost all the losses this year. Details showed that the biggest increase in August came from services (the second highest reading since survey inception in 2005), while manufacturing recorded its first increase in confidence since January. The ESI released by the European Commission pointed towards stabilising economic sentiment in Germany, while in the PMI survey, Germany improved in August.

 5.With headline risk remaining high, as Italian budget negotiation gains market attention and BTPs remain volatile, Bunds continue to be supported. Elsewhere, EM market turmoil could continue to push 10-year UST yields lower if EM economic growth continues to slowdown, despite evidence that the US economy and financial markets are not being so far negatively affected

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