Overview: The US dollar is firmer against all the major currencies and most emerging market currencies, extending the recovery seen after the Federal Reserve’s rate hike. Despite the poor finish for US equities yesterday and declines in Japanese and Chinese shares today, the MSCI Asia Pacific Index eked out a small gain. European bourses were on the defensive, the Dow Jones Stoxx 600 off almost 0.5% in late morning turnover. Core bond yields are softer after, though budget uncertainty in Italy is weighing on the country’s assets, and pushing peripheral yields higher.  

Central Banks: Following the Fed’s hike, Hong Kong as widely expected matched suit with a 25 bp increase. A couple of large banks in Hong Kong lifted their prime rates by 12.5 bp. The PBOC, which on occasion this year has followed Fed hikes with a small token move, refrained from action today. The Reserve Bank of New Zealand kept policy steady, as had been anticipated. The Philippines central bank and Taiwan held monetary policy, while Indonesia delivered a 25 bp rate hike (seven-day reverse repo rate to 5.75%. The rate hike did not prevent the rupiah from edging lower.  

Euro: The single currency had poked through $1.18 at the end of last week and earlier this week. However, no follow-through buying materialized and except for a week ago (September 20), the euro has been unable to close above $1.1750.  The inability to rally left late longs vulnerable and some were washed out on the move to $1.1685 today, a five day low. There are a 1.2 bln euro $1.1700 option and a 1.7 bln euro $1.1750 option that is expiring today.   

Italy: The Italian budget is turning into a cliffhanger and investors do not like it. The outcome may not be known until well into the US afternoon. Italy’s two-year note yield is up 12 bp today, and the 10-year yield is up eight.  Italian stocks are underperforming and the 1.5% loss near midday is the largest in a month. Bank shares are 3% lower, the issue comes down to this: the Five-Star Movement and the League made campaign promises for a new transfer program for the poor and elderly and lower flatter tax, but centrists, like the president, prime minister, and finance minister want to avoid antagonizing investors, like seen in May–and submit a budget deficit of 2% or less of GDP. Separately, Italy raised 5.25 bln euro in debt instruments today, and the bid-cover looked solid. Over the remainder of the year, it reportedly needs to raise another 34 bln euros while nearly 55 bln euros in debt is maturing, providing positive dynamics unless there is a dramatic loss of investor confidence.