UNITED STATES

US Stocks closed lower, retreating from morning gains as optimism for a breakthrough in the US-China trade war began to fade. This followed remarks by a spokesperson for China’s Foreign Ministry that no call had been made to US officials as President Trump had stated. The DOW slid 0.47% while the NASDAQ and the S&P closed 0.34% and 0.32% lower. The yield spread between 2Y and 10Y USTs further inverted with the 2Y note closing lower at a yield of 1.5223% while the 10Y note closed at 1.4711%. In another ominous sign, yield on 30Y notes fell below that of 3-month bills closing at 1.969% and 1.9501% respectively.

UNITED KINGDOM

Prime Minister Boris Johnson’ insistence that his only concern is to scrap the Irish backstop will set him on a warpath with hardline Tory Eurosceptics who are calling for a major Brexit renegotiation. During his talks with EU leaders Boris reassured them that changes to the backstop would not lead to demands for a wider rewriting of the exit deal including even the £39 billion exit payment. The apparent easing of demands by the Boris administration should be welcome news to the EU as UK’s Brexit negotiator David Frost goes to Brussels for a meeting on Wednesday. With the prospect of a no-deal still open, Brexit party leader Nigel Farage announced his support for the disruptive exit even signaling openness to a pact with Tories at the next general election should a no-deal exit pass. Yield on 10Y and 30Y UKTs closed lower at 0.5001% and 1.0375% respectively while the pound firmed to 1.2290 against the dollar.

EUROPEAN UNION

Italian bonds surged after talks between the Five Star Movement and the Democratic Party gained momentum. The momentum swung out of the blue as Monday’s talks, which went well into the early hours of Tuesday, threatened to collapse over jostling for positions. Tuesday’s talks saw the parties agree to keeping Giuseppe Conte as the premier but with a lesser role for Five Star Movement leader Luigi Di Maio as Conte is considered to be a Five Star figure. The Democrats ruled out such roles as deputy premier or interior minister for Di Maio with the deputy premiership position, serving as the only one, reserved for them. Italian bonds rallied with yield on 10Y BTPS touching 1.1189%, the lowest level since September 2016 before closing at 1.1356%. President Sergio Matarella met with Five Star’s Roberto Fico, speaker of the lower house, as part of his two days of consultations to see if a viable alliance exists or fresh elections are needed. Yield on 30Y BTPS likewise shed 18bps on the day to close at 2.1979% while the euro was slightly weaker at $1.1090.

ASIA

Asian markets made modest moves on Wednesday following Wall Street losses as the Treasury yield curve further inverted. The ASX and the NIKKEI led the gains in the afternoon with the ASX 0.42% higher while the NIKKEI was up 0.15% despite an escalation of Korea-Japan tensions after the downgrade of South Korea’s trade status came into effect. The HANG SENG was about flat at -0.01% while the CSI recovered somewhat from morning losses to trade 0.12% lower in the afternoon.

TURKEY

Turkey is set to go on a warpath with its NATO allies, particularly the US, as it snuggles closer to Russia for defence cooperation. President Erdogan was in Russia for the MAKS 2019 International Aviation and Space Salon where compatriot President Putin showed off his latest stealth fighter jets. Putin told reporters that Russia was ready to discuss further sales and even joint production of defence machinery including the latest Su-57 jet following Turkey’s purchase of the S-400 missile defence system. Erdogan would welcome the deals as this would allow him to get back on the F-35s he will no longer get from the US as well as the suspension from the programme to help build the F-35s. The lira closed slightly weaker at 5.8278 to the dollar while TURKEY 29s and 47s closed lower, trading in the low 102s and mid 81s respectively.

LATAM

Brazil’s current account deficit widened sharply in July as the country was saddled seasonal interest payments on debt coupled with a lower trade surplus. According to a central bank report, the deficit widened to $9 billion, the worst result for a single month since January 2015 and 50% higher than the median forecast of $6 billion in a Bloomberg survey. Meanwhile, the central bank governor Roberto Neto touted the country’s reserves addressing a Senate Committee on Tuesday. Neto said the country has about $389 billion in reserves and this, in addition to a desired inflation outlook and prospect of fiscal reforms, should put the economy in good stead to withstand external shocks. The real closed former at 4.1305 to the dollar while BRAZIL 29s and 47s were higher, trading in the high 105s and low 114s respectively.

RUSSIA

Non-resident holdings of OFZs grew at the slowest pace for the year in July according to the latest release by the Central Bank of Russia. Foreign holdings of OFZs only grew 25 billion rubles in July compared to a peak of 220 billion rubles bought in May; sanctions imposed on Russia for the death of a former agent in the UK may have played their part to scare some investors despite them not targeting OFZs. With OFZ market size having grown 299 billion rubles in July, the non-resident market share in turn fell to 30.0%. Wednesday’s auction sees the Ministry of Finance offer 20 billion rubles in two equal tranches maturing in 2022 and 2024. The ruble was weaker at 66.4427 to the dollar while RUSSIA 29s and 47s rallied to trade in mid 107s and mid 118s respectively.

SSA

President Buhari warned of fiscal challenges to come in Africa’s largest economy in a query to the revenue chief Babatunde Fowler over poor tax collections. According to the IMF even though Nigeria’s debt to GDP ratio is safe at 21% this could increase to almost 36% by 2024 if revenue reforms are not enacted. Current tax contribution to GDP is 7% which represents one of the lowest in the world and an avenue to plug government income shortfall which was 51% at May. Meanwhile, South Africa’s challenged state-owned power utility company, Eskom, has announced that it could sell some of its coal-powered plants to raise $29billion as it seeks to carry out its strategy to reduce its crippling debt exposure which is also draining the governments purse strings and stay afloat. The ZAR was trading for 15.328 against the greenback while the yield on SOAF 26 was 4.26% at the open of markets today.