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Market Comment | Risk-off mood in global financial markets surged sharply


  • Riskoff mood in global financial markets surged sharply, as global concerns such as DM banks’ normalization process and US-China trade tensions finally weighed on equity indices and risk perception. Against this background, market risk measures such as implied volatility in US equity and bond markets consolidated higher levels (VIX 24 +9, Move 56 +1). Besides, equity indices tumbled in major markets, led by cyclical sectors, while defensive sectors outperformed, suggesting an increase in the cyclical risk premium.
  • As for safe haven yields, the US 10Y yield retreated slightly on flight to quality flows but consolidating levels above 3.1% even after the lower-than-expected inflation data (see). Along the same lines, the German 10Y yield remains above the 0.5% level reached last week, underpinned by the increase in the US yield, despite concerns about Italy’s fiscal policy and recent safe haven flows. Regarding this, the Italian Deputy Prime Minister, Mr. Salvini, continued with his rhetoric against fiscal consolidation (see), dragging down Italy’s bond market with the Italian risk premium widening to more than 300 bps, and its equity market declining, led by the banking sector. Contagion to Spanish and Portuguese risk premiums remains limited.
  • US-China trade frictions remain very much alive, with the US threatening to block trade talks with China at next month’s G-20 summit if China does not produce a list of trade concessions. In addition, US officials are concerned about the yuan’s slide, especially after China loosened its monetary policy, cutting the RRR. Against this background, the RMB has been hovering around the Rmb7 per USD psychological level. Nonetheless the 12M non-deliverable forward is already above this threshold, increasing concerns about the RMB’s trend.
  • Developed countries’ Central banks continue with their monetary policy normalization process. The Fed’s Kaplan commented that interest rates should move towards neutral, suggesting three rate hikes through June 2019, while the Fed’s Bullard said interest rate increases would be linked to incoming data, and added “things are looking good today”. Meanwhile the ECB’s discourse on the monetary policy normalization process remains unchanged. The Dutch central bank governor, Klaas Knot, said that the ECB would end APP this year and would then start discussing the timing of the bank’s interest rate lift-off.
  • Concerns about global growth came to the forefront as the IMF cut its forecast for global growth for both this year and next (2018 3.7%, -0.2 bps; 2019 3.7, -0.2 bps). Apart from a downward revision in its EM growth forecast, the IMF also intensified the expected growth moderation in 2019, in the US (to 2.5, -0.2) and China (to 6.2%; -0.2p), and revised Germany’s growth downwards for 2018 (to 1.9 -0.3p) and 2019 (to 1.9 -0.2p) (see.)
  • Pressure on EM FX has continued, albeit less so on those most penalized in recent months. In particular, the Brazilian real, the Argentinian peso and the Turkish lira have appreciated during the week.
  • In Brazil, the victory of the right-wing candidate Bolsonaro in the first round of the presidential elections (to face left-wing candidate Haddad in the second round) led to a short-term rally in Brazilian assets, which lost some ground however at the end of the week.

Table 1

Update 17:35 CET October 10

Fuente: BBVA Research





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Fuente: BBVA Research






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