Moody’s has slashed its rating on Italian sovereign debt to Baa3, which is its lowest investment-grade rating and just one notch above junk. However, it kept the outlook “stable.”

Normally, moves by credit rating agencies leave financial markets indifferent. However, the barrier between "investment" grade and "subinvestment" grade credit status (or "junk" status) does still matter as some funds cannot invest in subinvestment-grade debt.

The outlook for Italy was said to be stable and offered support to financial markets.

In the meantime, Austrian Chancellor Sebastian Kurz has urged the European Commission to reject Italy’s budget and has said in an emailed, joint statement with Finance Minister Hartwig Loeger: “Austria isn’t ready to stand in for the debt of other states while those states are actively condoning market uncertainty. If there are no amendments, the European Commission must reject the budget.”

The EU has once again “internal” problems.

Now, for investors it is worth stressing that the “metaphorical” Italian grandmother can finance Italy’s debt three or four times. Italians are extremely wealthy, richer than the Germans, and that private sector wealth ultimately is the key to solving the public sector indebtedness.

There was a small regional election in Italy over the weekend where the coalition partner, the populist “League Party” saw a substantial increase in support.

U.S.-China Trade Tensions Continue

White House economic adviser Larry Kudlow last week blasted China’s lack of cooperation in the U.S. attempt to forge a trade deal.

The Financial Times has published an interview with Mr. Kudlow in which he accused Beijing again of doing “nothing” to defuse trade tensions ahead of a likely meeting between Donald Trump and Xi Jinping at the G-20 in Argentina next month, damping hereby expectations of a truce in the economic warfare between the U.S. and China saying that China had offered no sign that it was willing to meet U.S. demands in a way that could lead to a breakthrough between the countries.

“We gave them a detailed list of asks, regarding technology for example, [which] basically hasn’t changed for five or six months. The problem with the story is that they don’t respond. Nothing. Nada. It’s really the president and the Chinese Communist party, they have to make a decision, and so far, they have not, or they have made a decision not to do anything, nothing. I’ve never seen anything like it,” Mr. Kudlow said.

Kudlow also said he believed the weakness of the Chinese currency, the yuan (CNY) recently was because of market forces rather than any deliberate policy.

For their part, Chinese officials have complained of a lack of flexibility on the U.S. side, as well as unpredictability and lack of a single voice within the Trump administration.

Anyway, all this does not suggest a resolution of the trade dispute between the U.S. and China anytime soon and the risk that U.S. consumers will face even more taxes on goods partially made in China becomes more credible by the day.

Interestingly, Chinese President Xi meanwhile has promised ‘unwavering’ support for the country’s private sector, which has pleased the equity market in China as also a plan to cut personal income taxes has been announced.

The Shanghai Composite Index rose more than 4 percent, the biggest increase since March 2016.

Oil Prices and the Killing of Saudi Journalist Khasoggi

Oil prices are slightly higher in the wake of Saudi Arabia admitting that the journalist Khasoggi was killed in the Saudi consulate in Istanbul, Turkey.

Trump has used the words "deception" and "lies" to describe the Saudi approach to the issue. 

The market concern would be U.S. sanctions coming from Congress and Saudi reprisals for sanctions. However, the chances for reprisals via the oil market are relatively limited given that Saudi Arabia needs oil revenue. 

A unilateral Saudi retaliation would likely mean the oil revenue would be hurt more by the volume decline than it would benefit from the price increase.

Brexit - Theresa May is To Say 95 percent of the Brexit Deal is Settled

The interminably tedious process of excluding the European Union (EU) from the United Kingdom’s (UL) single market is 95 percent done, which says UK Prime Minister May. The last 5 percent may be even more tedious, and there are the normal mutterings of resentment from within the governing Conservative Party.

A deal is likely to be done, but only at the last minute and we are not at the last minute that is still some weeks away.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.