The markets remain on cautious positive mood. MSCI for Asia-Pacific region adds 0.4%, continuing gently recover for the second day in a row. American markets feel more confident. On Thursday S&P 500 added 0.8%.
However, moderate growth in demand for risks looks like a development of profit-taking rather than evidence of a sustainable markets turnaround. The negative tendencies can again come to the forefront, resuming escape from risks.
The growth of markets is facilitated by the early start of negotiations between China and the United States on trade issues for the first time since June. It is worth noting that the status of officials involved in the negotiations is not very high, which eliminates the possibility of breakthrough decisions in the near future. Obviously, there will be more necessary rounds of negotiations at the highest level to resolve the trade disputes fully. The dynamics of the Chinese offshore yuan is a good indicator of investor sentiment. After yesterday powerful increase by 1.3% to the dollar, CNH have stabilised near 6.87 on Friday morning.
The Turkish lira has added on Thursday in response to the tightening of the country’s Central bank policy and the promises of assistance from Qatar and Germany. Panic has stopped, but still there are not enough reasons for long-term optimism. The U.S. have made it clear that the sanctions imposed on steel and aluminium are a “security issue” and will not be lifted even if the Turks release the American pastor, moreover they threatened with new sanctions. Against this backdrop, the Turkish lira has stopped the recovery rollback and is trading near 5.8.
Could Italy become a new Greece?
The single currency has added 0.4% to the dollar on Thursday, having calmed to the beginning of Friday trading near 1.1380. As in the case of China and Turkey, the euro rebound masks an unpleasant trend in Italian bonds. In the past month 2-years notes yield has increased from 0.6% to 1.4%. This is a clear indication of the concern of investors around the country's considerable debt burden.
For comparison, the yield of German bunds with similar maturity almost did not change in this period, remained at the level -0.63%. The dynamics of the debt market may be ignored for some time by a single currency that looks unduly oversold against the backdrop of Turkey's problems.
However, the further yield growth on the Italian bond market could come to the markets focus very soon and exert considerable pressure on the common currency, as it was with Greece case 7 years ago. The situation looks very similar: weak growth for many years, excessive debt burden and populist government. Especially disturb the fact that the economy of Italy is almost 10 times more than Greek.
Alexander Kuptsikevich, the FxPro analyst