European open – Yield curve, Italy, gold, oil

Markets stable despite recession talk

Europe is currently positioned for a flat start to trading on Wednesday, taking its cue from Asia overnight after the yield curve once again became the talk of the town.

Source – Thomson Reuters Eikon

US stocks reversed earlier gains on Tuesday, as the 2-year yield rose to five basis points above the 10-year for the first time since 2007. I fear yield curve inversions are going to become the dinner table bitcoin chat of 2017 in the coming months as prophecy becomes self-fulfilling and we blindly wander into a recession.

Obviously the timing of this is no coincidence, coming so shortly the US and China decided to step it up a gear and inflict additional tariffs on one another. Naturally this was accompanied by fighting talk from Trump, the usual bashing of the head of his central bank and then some very mixed messages from both sides regarding a phone call that may or may not have happened.

With stock markets flat today, we’re clearly not yet seeing widespread panic about the latest recession warning but the heightened sensitivity to it may eventually take its toll. In much the way that people are questioning whether talk of recession makes one inevitable, the impact on stocks could become self-fulfilling.

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Italy may avoid Autumn election

Italy may avoid an Autumn election after talks between the anti-establishment Five Star Movement and the Democratic Party – an example of a mainstream party the group was formerly staunchly opposed to – progressed well. It would appear the PD has dropped its opposition to Conte continuing as Prime Minister which could pave the way for a new coalition government.

Five Star’s link up may scupper Salvini’s plans for an Autumn election and League-led government but their tie up with an established party may benefit the party longer-term if they’re seen abandoning their cause. Markets will likely cheer the partnership though as it avoids an election and possibly a long stand-off with Brussels later this year around the budget.

Gold looking a little tired

Gold is marginally lower in early trade today, as it continues to take a breather following Friday’s surge. While it seems silly to call a top in the yellow metal given the run its on, it is now making new highs on weaker and weaker momentum, which suggests the trend may be a little tired.

This comes as gold trades within the $1,320-1,360 range that was key to it in the 2011-2013 period when it last traded around these levels. Perhaps this is contributing to the profit taking we appear to be seeing now, although in this environment, another surge higher wouldn’t surprise me in the slightest.

Gold Daily Chart

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Oil buoyed by inventory data

All this recession talk has taken its toll on oil prices recently, with the yield curve inversion triggering repeated safe haven dashes, much to the detriment of black gold. It was given a boost on Tuesday by the API inventory report, which blew away expectations, recording an 11.1 million barrel decline. This comes ahead of today’s EIA report – which is generally more respected – who’s forecasts may need revising given the expectations of only a 2.8 million barrel decline.

Brent Daily Chart

Economic Calendar

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