The combination of US and political risks has eroded much of the positive sentiment seen after the Fed's decision to delaying tapering two weeks ago. However –
1. Current expectations now believe that Italy is less of a problem then the US – As many as 20 senators from former Italian PM Berlusconi's PDL party are rumored to be ready to form a breakaway party in order to hold the Italian government together.
2. Italian Pro-coalition news is strongly EUR positive. Dollar selling may continue into today's 11am fix with month and quarter end rebalancing a focus.
3. Euro equity markets have steadied after an early sharp selloff – investors accustomed to Italian political shenanigans decline to make a "wholesale sprint to the exit doors."
4. With the US heading towards a partial government shutdown continues to squeeze the greenback – there are still no concrete signs of a budget funding deal before tonight's midnight shutdown deadline.
5. China's Manufacturing Sector expands slightly, supported by overseas demand – further evidence that the Chinese economy continues to recover. This is a boost for risk currencies – AUD (A dovish RBA tomorrow may impede the Aussies drive higher), NZD and CAD.
6. Euro-zone inflation rate falls to a three-year low. This would suggest that there is little to stop the ECB from adding more liquidity. With Euro periphery yields backing up, event risk has bunds better bid earlier this morning – benign inflation worries has investors also searching for yield.
7. Germany's biggest parties will meet this Friday for exploratory coalition talks to form the next German government. German Retail Sales disappoint – Sales rose in August from July, although by less than forecasted (+0.5%) after two consecutive months of declines. German "high street" businesses remain moderate.
8. Aiding the yen's drive higher was Japans industrial production (-0.7%) and retail sales (+1.1%) disappointing overnight ahead of the crucial PM Abe decision on consumption tax increase later this week. Investors will get a better understanding on how Japan is performing with the quarterly Tankan data release from the BoJ tomorrow.
9. Italian sovereign debt has pared some of their steep opening losses this morning – benchmark 10′s were +7bp higher at +4.64%, down +6bp from its three-month high at +4.70%. US Treasury 10-year yields declined as much as -4bp to +2.59%, the least since Aug. 12, after falling 11 basis points in the five days to Sept. 27.
10. Gold futures remain on the back foot, joining a broad selloff in commodities. Investment demand remains lackluster – CFTC reports suggest that covering "short" positions rather than fresh buying drove the yellow metals recent mini-bounce.