US stocks closed lower on Friday following a Wall Street Journal report that said Fed officials would cut interest rates by a quarter percentage point rather than a half-point; the WSJ report was based on recent public statements and interviews. Expectations for a half-point cut had been increasing but fell back to 22.5% among Fed-funds futures traders according to CME Group data. Heightened tensions in the Middle East also added to the mix as Iran seized two oil tankers, including a British one, a day after President Trump said the US Navy had shot down an Iranian drone. The DOW closed 0.25% down while the S&P and NASDAQ shed 0.62% and 0.74% respectively. Yield on 10Y USTs rose 3bps to 2.0552%.
Chancellor Philip Hammond has emerged as leader of the Tory group of MPs seeking to stop a no-deal exit. The chancellor confirmed he would resign if Boris Johnson becomes Britain’s prime minister, maintaining he cannot work in a cabinet that accepts the possibility of a no-deal exit. So set is his resolve that he is even open to backing a motion of no-confidence in the government having responded that he would “not exclude anything” when asked whether he would back the motion; the move, if successful, would not only collapse the administration, but also pave way for Labour to win an ensuing general election. The pound closed lower at $1.2502 while yield on 10Y UKTs fell to 0.7331%.
The rally in Italian bonds has seemingly come to a halt as political risks resurfaced amid uncertainty over whether the country is headed for elections. Benchmark 10Y yields spiked on Friday to 1.6378 having closed at a three-year low on Thursday at 1.552%. Reports that League party leader and Deputy Prime Minister Matteo Salvini hadn’t decided whether to hold an election sent Italian bonds prompted a halt in the rally; Salvini is seen as the most powerful politician following his party’s strong performance in may’s European elections. President Sergio Mattarella is pushing Salvini to make a decision as he wants any new government to be formed in time to deal with the 2020 budget. Insiders say while Salvini is open to an early election, he wants to delay the decision as long as possible to leave less time for his coalition partner Luigi Di Maio to come up with a response before the August holidays. The spread between Italy’s 10Y bonds and 10Y DBRs widened to 192.86bps as yield on the bunds closed lower at -0.324%. The euro closed lower at $1.1221.
Asia stocks were lower in afternoon trading as investors mostly waited for definitive signals regarding US interest rates. In afternoon trading, the NIKKEI was 0.29% lower while the HANG SENG and CSI were down 0.76% and 0.778% respectively. Most of the attention was drawn to Shanghai’s Star Market, a NASDAQ-style index of 25 tech companies, which debuted to significant investor interest with shares surging as much as 520%. While this is too early to draw much opinion on the exchange, Beijing will be pleased with the interest in the Shanghai Stock Exchange-run index as they hope this will encourage investment in domestic tech companies; the listed 25 companies had already raised RMB37 billion by mid-morning on Monday.
Fitch continued its downgrade of Turkey related institutions on Friday having downgraded Tirkey’s sovereign down debt to BB- a week earlier. Friday’s ratings downgraded was levelled 14 banks, two of which are state-owned development banks. The Long-Term Foreign Currency Issuer Default Ratings were downgraded to BB- from B+ reflecting “the increased risk of government intervention in the banking sector”. The lira closed weaker at 5.6591 to the dollar while TURKEY 47s were trading higher in the low 84s.
President Mauricio Macri may have found key support that he can leverage on in the upcoming elections after US Secretary of State Mike Pompeo commended Argentina for designating Lebanese group Hezbollah a terrorist group; Macri’s government announced the decision on the 25th anniversary of Argentina’s deadliest-ever terrorist attack that resulted in the deaths of 85 people. US support at the IMF is key to maintaining confidence among investors which in turn will allow stable economic fundamentals before elections. Macri is emphasizing that the Peronist opposition will push the country towards the economic turmoil of Venezuela and is highlighting that international support will be key to guaranteeing stability, something he seems to have at the moment with a trade deal with the EU having recently been wrapped up. The peso closed about flat to the dollar at 42.4275 while ARGENT 47s rose, trading in the mid 74s.
Credit ratings agency S&P upheld Russia’s credit rating and outlook citing government steps on policy and the economy. The sovereign rating was kept at BBB- with a stable outlook as S&P said this was “supported by Russia’s commitment to conservative macroeconomic management, formidable net external asset position, low net general government debt, and considerable monetary flexibility.” Growth has however remained fragile in Russia despite the ruble being the best performing currency globally this year and the government is hoping to kickstart growth with spending on a $400 billion infrastructure programme. The ruble closed weaker at 63.0371 to the dollar while RUSSIA 47s were higher, trading in the low 112s.