Safe-haven assets rise

After a painful last week, equities fell further on Monday with Asian markets blinking red across the screen. The Nikkei fell 1.87%, while Hong Kong’s Hang Seng slid 1.50%. In Europe, the atmosphere is not much better as most indices headed lower, with the exception of Italian equities that barely kept their heads above water. However, the uncertainty created by the clash between Italy and the European Union regarding Italy’s budget is far from over. It will likely continue to weight on equities and especially financials. In FX, investors don’t where to stand against the backdrop of tense Brexit negotiations and Italian budget jitters. The greenback has erased partially last week’s losses but still trades with a clear downtrend bias. The single currency edged slightly higher on Monday morning with EUR/USD rising 0.03% to 1.1563. The currency pair currently sits on the 1.1558 support, implied by the 50% Fibonacci level of its August-September rally.

We expect US rates will stabilise as investors finish pricing in the US Fed’s hiking cycle, which should end in 2020. On the long-end of the curve, the pace of the Fed balance sheet unwinding will be closely monitored. Nevertheless, the US central bank has already well communicated about this matter and no surprises are expected.

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Pounds struggles as Brexit dangles

British pound optimism is over. EU chief negotiator Michel Barnier’s optimistic rhetoric is now sounding more concerned. After meeting with Brexit Secretary of State Dominic Raab in a one-hour meeting on Sunday, the tone of the negotiations has drastically changed. No further talks are planned until Wednesday 17 October, thus leaving one single day for both EU and UK negotiators to reach a deal that will be voted on by all 27 EU members the day after. According to Prime Minister Theresa May, the current terms are not agreeable. There is a risk that EU leaders decide during the Thursday, 18 October meeting to reject the extension of a special Brexit summit in November, which would damage the UK economy and lead to a no-deal Brexit in March 2019.

The fate of Brexit depends more than ever on decisions of EU policymakers, thus pushing further pressure on GBP. Additionally, will PM May be able to sell the agreement (if any) to UK MPs in December? GBP/USD is struggling to maintain its gains from a 1.3230 high (11 October). The currency pair is approaching 1.31.