Global Weekly: Oil prices on the rise

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In the beginning of this week, we saw that investors were still concerned about the possibility of a further escalating trade war between the US and China. Later in the week there was some relief, however, after rumours that Steven Mnuchin (US Treasury Secretary) had invited China to restart trade talks.

On average, equity markets did not move much. We did see a rise in oil prices, as investors were considering the impact of US sanctions on Iran and the hurricane Florence approaching the US east coast. In anticipation of the hurricane, we saw the US insurance sector lagging the broader market, while stock prices of home improvement retail stores such as Home Depot and Lowe’s reached new all-time highs this week.

Thursday, Apple held its traditional September event where it launched new iPhones and a new generation Apple Watch. Apple usually manages the expectations leading up to these events with “leaked info”, so most of it was already known. The main news is that Apple had chosen to increase its average selling price. Whereas the cheapest iPhone was EUR 309 (the SE), now, the new lowest price model is the iPhone 7 at EUR 529. The highest price is a staggering EUR 1,659. Also, iOS 12 was introduced, but many people were already running the beta version, so also no news there. All in all, the lukewarm news was met with lukewarm analyst reactions. The share price hardly reacted. We will wait for the next event on 1 November, when Apple will publish its next quarterly earnings figures.

Italy remains in the headlines

The US Beige Book was published this week in advance of the Fed meeting, based on anecdotal information collected by the 12 regional Fed banks through August 31. The Beige Book noted no less than 41 instances of the word "tariff" as the main risk to the economy. Nevertheless, we expect the Fed will likely remain on its current path given the strong financial conditions. Ten-years US Treasury notes are expected to keep trading around 3% with some room to even briefly exceed that level.

The European Central Bank (ECB) held its policy meeting on Thursday. As expected, there have not been many new findings or signals. The market reaction was therefore rather muted. The marginal economic downgrade comes at a time when the ECB is rapidly scaling down its asset purchasing programme. Accordingly, credit spreads continue their gradual and slow path of widening, with the euro area more affected than US credits.

In the meanwhile, hardly a day passes without Italy in the financial headlines. This reminds investors that a targeted budget deficit of around or under 2%, which will be passed on to Brussels on 15 October, is not a done deal yet. Obviously, the real fight for the Italian government is with the market rather than with the EU. Spreads are currently at around 255 basis points versus the ten-year Bund yields, fluctuating between 210 and 290 basis points. We think a drop near the lower end of the yield range is not impossible with positive surprises definitely ahead.

In emerging markets, there are still many factors that weigh on sentiment, besides trade tensions, more sanctions or the upcoming first round of the run-off in Brazilian elections (7 October) that may cause further volatility in emerging markets debt. Nonetheless, we do not see contagion on a fundamental basis and stay constructive on emerging markets.