Details Cookies
Important margin product information

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

Cookie policy

This website uses cookies to offer you a better browsing experience by enabling, optimising and analysing site operations, as well as to provide personalised ad content and allow you to connect to social media. By choosing “Accept all” you consent to the use of cookies and the related processing of personal data. Select “Manage consent” to manage your consent preferences. You can change your preferences or retract your consent at any time via the cookie policy page. Please view our cookie policy here and our privacy policy here

background image background image background image

The perfect beach read: Central banks, #Trumpolitics and Italy

Althea Spinozzi

Senior Fixed Income Strategist

This week, even the land of Vikings has seen the so-much-anticipated 30 degrees Celsius. And it is when the majority of your colleagues are out of the office and the remaining ones are daring to come to work wearing flip flops that you come to the conclusion that summer is finally here. 

Although many of you may be more concerned about tanning or building the perfect sandcastle on the beach, in the background, financial markets will continue humming away and will not be affected by the summer heatwave. 

While it is fair not to expect much volatility during the next few weeks as many are away, central banks and politicians continue with their agendas and if we are not careful to assimilate news as it comes out, it will be more difficult for us to get back to work once we return. This is why in this article I will touch upon the most relevant things to watch out for this summer, so that while you are relaxing under the sun your brain will still have food for thought.

Central banks policies from easing to tightening

With rumors that the Bank of Japan is to change its policy at the end of the month, investors are starting to realise that central bank monetary policies worldwide will continue to be one of the biggest theme for the rest of this year and the next. 

Across the Atlantic Ocean, pressure to tighten the economy is clear as the chairman of the Fed,  Jerome Powell, continues to be bullish on growth and fears that inflation will get out of control. This year the Fed  hiked interest rates twice and it is expected to hike twice again before year end. If this is the case, this will put upwards pressure on the front end of the yield curve, causing yields in the short part of the curve to rise faster than the yields in the long part of the curve. 

Central bank policies have already weighted a lot on USD bond performance this year, as a matter of fact we started 2018 with the 2-year Treasury bill yield at 1.87% yield and now it is trading +75bps wider at 2.62%.  At the same time the yield on 10-year Treasuries moved up only by 50bps, resulting in an overall flattening of the US yield curve.

Although the European Central Bank and the BoJ are yet not in tightening mode, they already started to taper their purchases, meaning that overall there is less and less money in the global financial system compared to the past ten years. If the trend of central banks to taper and gradually move towards tightening continues, we can expect bond prices to lack support, causing episodes of volatility in the fixed income space, especially the emerging markets. 

This is why it is important not to lose sight of central bank monetary policies, especially now that the market has become increasingly sensitive and a change of policy by the BoJ might mean that there would be a considerable repricing of sovereigns worldwide.

Watch out for the following dates: The European Central Bank will meet on July 26, the Bank of Japan on August 31 and the FOMC is to meet on August 1.

US yield curve flattening leaning towards inversion

Concerns regarding a Fed overtightening brings us back to the financial market’s biggest fear: a possible inversion of the US yield curve which could predict the coming of a recession. In the past, recessions have been preceded by an inverted yield curve and now that the spread between 10-year and 2-year Treasuries is around +30bps, the market is growing more and more cautious. As we have outlined in Saxo Bank’s Q3 Outlook, we believe that an inversion of the yield curve will be likely by the end of this year and the beginning of the next, however, a recession might not happen until the second half of 2019. This is a key topic for bondholders to monitor and while we believe that an inversion of the yield curve is a negative sign, opportunities can arise, especially in the short part of the curve.

It is important to note, however, that central bank policies worldwide heavily weight on the direction of the US yield curve. A change of policy by the BoJ might cause the US yield curve to steepen as liquidity in the long part of the curve would diminish.


The market rightly fears an escalation of an unnecessary trade war with US trade partners such as Canada, Mexico, China and the European Union, and it is news regarding this topic that can dramatically change the performance of our portfolio.

However, from a fixed income point of view a bigger issue may be getting started: the growing attention that the president of the USA is giving to Fed policies. As a matter of fact, he recently commented negatively on the Fed decision to raise rates and although the president doesn’t have any power over monetary policy, his comments may still provoke volatility in this space.
Watch out: today for the meeting between Trump and the EU's  Juncker where tariffs are going to be discussed.

Italian government

Leaving central banks policies and Trump aside, the two biggest risks that we are facing in Europe concern news coming out of Italy and the United Kingdom (click here for our our recent article on the increasingly tortuous Brexit saga).

Although in the Mediterranean country summer has arrived, it is important to note that the newly formed Italian government is already turning its attention to its spending plan. On one side, the Northern League wants to introduce a flat tax rate of 20% and 30% for both companies and individuals, and on the other side the five-star party is looking to increase benefit spending and to establish income support for low-income citizens. These policies are in contrast with European budgetary rules as an increase in spending would mean that Italian deficits would shoot above EU restrictions. Deputy premier Matteo Salvini seems to be getting ready  to get into a fight with the EU as on Monday he told reporters that “for the good of Italians” he will not hesitate to surpass the limits set by the EU. 

We believe that as we are getting closer to the presentation of the 2019 budget in Autumn volatility in Italian sovereigns and corporates will resume and short term maturities and subordinated bonds of domestic financial institution will most likely be affected.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.