The act of bending a bit can lead to greatness, trees can grow to the sky, but too much will break you. As the proverb suggests, nothing straight ever grows out of the crooked timber of humanity, writes Bob Savage Wednesday.

Overnight, moods swung positive but Asia remains mired in China/U.S. trade and growth fears while Europe bounces as Italy nears an agreement with the EU. Reports in Corriere della Sera suggest Italy's government has made concessions in order to reach a middle ground with Brussels. This helped underpin the euro (EUR) but worry remains despite indications that a narrower deficit will be pursued, by bringing the deficit from 2.4% of GDP in 2019 to 2.2% in 2020 and 2.0% in 2021.

La Stampa reported President Mattarella would refuse to sign a budget containing a 2.4% deficit over 3 years. The budget is expected to be presented to parliament today. There is a short-term easing of worries on this compromise but in the long-term, less growth from fiscal stimulus in Italy will only hurt and adds to expected ECB financial condition tightening.

If Italian politics are the positives, then the global PMI reports are the negative – with Japan Services at 2-year lows, Europe mostly lower, UK lower, and EU retail sales lower. Economic data support the view that the 4Q will reflect further pain from trade tariffs adding to the IMF warnings yesterday.

Markets are set up for more concessions into 3Q earnings as the forward-looking stories are not so optimistic given the growing view that US/China trade battles will last well beyond the November midterm elections.

Any signals for trade talks or concessions may be the upside driver for more volatility. Until then we are stuck balancing growth and politics like the wind in the trees trying to hold onto their leaves. The currency that faces the most risk today is the British pound (GBP) with the UK PM May speech on deck and Brexit views sharply changing there. The FT notes today that UK opinions have been shifting quickly. If referendums are replayed or new elections called, expect further downside risks with 1.2950 a pivot on the day for 1.2650 retests.

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