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News for November 20

European debt market was in the focus of investors again due to the ongoing tensions between Italy and the European Union. The story continues with additional pressure from Brussels on Italian government because of too optimistic budget for the next year. The spending part of it seems to be too large for EU officials and Italy has exceeded the European norm of the budget deficit. Italian government bonds were sold off recently and the yields surged after investors run out of the toxic assets. However, the 100% growth in yields this year is extremely attractive for the fixed-income market players and investors started to come back to Italian securities. Several huge funds like M&G Investments and BlueBay announced an increase of the long positions for mid-term Italian government debt. That flow was joined by the retail investors who usually keep holding bonds till expiration. According to many strategists, the risk of Italy to leave the European Union was overestimated and the budget situation is not so bad as it was previously anticipated. Moreover, the same outcome for the debt market was seen in other countries which have elected populists - Greece and France - and the market managed to get out of the turmoil without any significant consequences. A similar scenario is expected in the EU - Italy negotiations with a compromise to be found shortly.

Falling oil price is a huge concern for Saudi Arabia. The kingdom’s energy minister announced oil production cut by 500 thousand barrels per day as early as in December. He also tried to push on OPEC allies, calling them to decrease the supply in order to support the price of oil which has been falling like a rock recently on the negative outlook for the global demand. The situation with Iran did not help the black gold speculators to start buying oil futures. Despite a significant cut in Iranian oil supply due to a new round of sanctions imposed by the U.S., the oil bears kept controlling the market. The current price of $56 per barrel is not the best-case scenario for Saudi Arabia which has an awful lot of budget spending plans for 2019. That’s why the kingdom considers cutting the supply for another million barrels per day starting from January 2019. However, such an outcome is not acceptable for Donald Trump, who’s facing additional political pressure after Democrats won the majority in the House after the mid-term elections. The U.S. President used his favourite tool - Twitter - to force Saudis refusing that plan, warning allies from cutting oil output. According to Trump’s words, the price of oil has to be influenced by supply-demand rules and it’s not the best case for him if gasoline price will grow in the United States.

One of the largest German hedge funds has been also caught on manipulation recently. German prosecutors started an investigation against U.S. hedge fund BlackRock which is suspected in the largest fraud since World War II. Law enforcement agencies conducted a search in the Munich office of BlackRock within the framework of the investigation which covers deals in the period between 2007 and 2011. The main subject of the investigation is the tax breaks which has been received by members of a syndicate of banks, investors and hedge funds. Those intruders were using an illegal scheme of trading shares between the group participants which was misleading the government, presenting several owners of the shares with the condition that every one of them had to get dividends and payouts. As the result, a huge damage in the volume of 5 billion Euro was caused to German budget. BlackRock faced a suspension for 2 billion Euro for similar deals in Denmark. German Finance Minister Olaf Scholtz urged the European Union to strengthen the fight against tax frauds.

Global economic slowdown concerns BNP Paribas Asset Management. The investment department of one of the largest European Bank suggests that the U.S. dollar will strengthen on trade war tensions, the Federal Reserve tightening cycle and the decreasing risk appetite among investors worldwide. In contrast, bank’s strategists consider shorting the single European currency versus the greenback. The outlook is negative for the Eurozone, according to BNP Paribas economists, due to the political uncertainty in the region, the Italian debt crisis and EU economy slowing down its growth. A more dovish European Central Bank is also a negative factor for Euro, as analysts predict. Several other currencies are not in favour of the Investment Bankers. They keep shorting Taiwan dollar, Korean Won, Singapore dollar and Thai Bat versus the U.S. dollar, expecting that those currencies could be damaged by the trade war with China.

BNP Paribas
Source: courrierinternational.com

Russian Central Bank keeps hiking the interest rates due to the external pressure escalating and inflation acceleration. Chairwoman Nabiullina underlined the need of the regulator’s tightening and expressed the readiness for further measures needed to withstand the growing financial turbulence. The main target of such aggressive steps is also to support the economic growth despite the sanctionary pressure from the U.S. However, Central Bank urged investors and businesses to continue the capital expenditure increase and not to be scared of the monetary policy tightening. The regulator officials consider the neutral interest rates in the range of 2 - 3%. The key interest rates at the level of 7.5% and inflation forecast in the range of 5 - 5.5%, the key interest rates will remain in the target range. At the same time, Nabiullina stated that the monetary policy should start softening by the end of 2019 - the beginning of 2020 and the latest measures are tackling inflationary pressures. She also added that preventive steps lower the likelihood of larger measures in the future.

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