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[PODCAST] US Open Rundown 28th August 2019

  • European bourses are softer with the exception of the FTSE 100 on Sterling weakness as prorogation becomes possible
  • PM Johnson is attempting to prorogue parliament from September 9th until October 14th , leaving around a two week period to prevent a no-deal Brexit
  • Italy’s PD party have backed Leader Zingaretti’s request for a mandate to form a coalition, Italian 10yr yield at record lows
  • Looking ahead, highlights include, DoEs, Fed Beige Book, Fed’s Barkin & US USD 41bln 5yr auction

ASIA-PAC

Asian equity markets struggled for direction after the subdued performance on Wall St, where the major indices failed to sustain initial gains amid the recent mixed signals on US-China trade and as the US yield curve inversion deepened. ASX 200 (+0.4%) was led higher by strength in tech and miners although gains were capped by weakness amid telecoms as and with earnings in focus, whileNikkei 225 (+0.1%) also lacked firm direction amid an uneventful currency. Hang Seng (-0.2%) and Shanghai Comp. (-0.3%) traded tentatively and failed to benefit from the government’s recent announced measures to boost consumption with markets wary after the recent flip-flopping in the US-China trade saga, while a neutral PBoC liquidity operation and deluge of earnings ahead of the Big 4 bank results added to the cautious tone. Finally, 10yr JGBs were slightly higher as super-long yields declined to multi-year lows with both 30yr and 40yr JGB yields at the lowest since July 2016, while the moves also followed the bull flattening seen in their US counterparts where the 2s/10s inversion briefly widened past -5bps.

PBoC injected CNY 60bln via 28-day reverse repo for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 7.0835 vs. Exp. 7.1027 (Prev. 7.0810)

China issued 20 directives to boost domestic consumption which reportedly will make it increasingly difficult for the US to press China to make concessions including gradually relaxing and removing restrictions on auto purchases, as well as building more shopping malls and rolling out state-of-the-art methods for consumers to spend money. (Global Times)

US Federal Register confirmed the US is to raise tariffs on USD 300bln of Chinese goods to 15% from 10% beginning on Friday, while there were separate reports that China will to take in the 2nd batch of tariff exemption applications on September 2nd. (Newswires)

US President Trump’s credibility has become a key obstacle for China with respect to them reaching a deal with the US., according to Chinese officials. (Newswires)

GEOPOLITICS

Photos reportedly suggested North Korea could be building a submarine capable of launching nuclear missiles. (NBC)

US House of Foreign Affairs Committee tweeted that US President Trump must sanction Turkey over its purchase of the S-400 air defense system as required by US law. (Newswires)

Russian and Turkey are reportedly discussing the deliveries of russian made SU-35 and SU-57 aircraft to Turkey., according to RIA citing a Russian Official. (Newswires)

UK/EU

Surmising UK Parliament updates: PM Johnson is to attempt to prorogue parliament from September 9th for around 5 weeks to return on October 14th for the Queens speech and then subsequent debates and votes on the speech. In terms of the context, this essentially leaves the two weeks from Parliaments return on September 3rd to pass legislation to prevent a no-deal Brexit. Full analysis available here

UK opposition Labour Party leader Corbyn urged Tory MPs to help block no-deal Brexit, while it was separately reported that former chancellor Hammond plans to spearhead efforts to block a no-deal and intends to advocate a cross-party plan to force a Brexit delay by several months. (Newswires/Telegraph)

UK government is reportedly planning to declare an intention to raise public spending beginning September 4th. However, there were separate reports that UK Chancellor Javid will warn today that the government will not break fiscal rules heading into the Brexit and will not issue blank cheques to Whitehall departments. (FT/Telegraph)

Italy’s PD party have back Leader Zingaretti’s request for a mandate to form a coalition (Newswires)

Prior to this, Italy Deputy PM Di Maio said the 5-Star leadership will support a new government only if party members approve it through an online vote planned by next week. PD are willing to accept Conte as PM of a new government, although they wish to limit the role of current Deputy PM Di Maio (5SM), according to a PD Official. Italy's PD Deputy Leader Orlando says that the nation's next deputy PM should come from their party and not the 5SM, according to a Tweet (Newswires)

EQUITIES

European equities are lower across the board [Eurostoxx 50 -0.6%] with the exception of the FTSE 100 (+0.3%) as exporters benefit from a weaker Sterling amid reports that UK PM Johnson is said to be moving to block attempts by pro-EU MPs from making a no-deal Brexit impossible. Sectors are mostly in the red with underperformance seen in the IT sectors, potentially amid reports that Permira is planning a Frankfurt listing for software company TeamViewer GmbH this year which could be the Germany’s largest IPO in almost 20 years. Meanwhile, the energy sector is the marked outperformer as oil prices are underpinned by a larger-than-forecast draw in API crude inventories. In terms of individual movers, H&M (+4.4%) shares are at the top of the Stoxx 600 amid an upgrade at RBC. Meanwhile, losses in UK homebuilders exacerbated amid the aforementioned move by UK PM Johnson. Elsewhere, AstraZeneca (+1.2%) trades higher after an FDA granted an orphan drug designation and after its Breztro Aerosphere Phase III trial met its primary endpoint.

Alphabet (GOOG, GOOGL) to shift Pixel smartphone production from China to Vietnam, according to Nikkei. (Nikkei)

 

Toyota (7203 JT) & Suzuki (7269 JT) are to reportedly enter a capital alliance, via NHK, Toyota to invest around JPY 96bln in Suzuki for a stake of around 5%. (Newswires)

FX

GBP - A week may be a long time in politics, but for Sterling 24 hours is all it has taken to turn from major outperformer to laggard as Brexit positivity evaporates and the prospect of a no confidence vote in the UK Government rises on the back of PM Johnson’s request to the Queen to suspend Parliament. In short, the move is being framed as a tactical decision to head off legislative attempts to stop a no deal Brexit by curtailing the amount of time between the now delayed Queen’s speech (October 14 from 7 originally) and October 31 Article 50 extension date. In response, Cable tumbled from just under 1.2300 to circa 1.2156 and not far from technical support around 1.2150 in the form of the 21 DMA at 1.2149, while Eur/Gbp rebounded almost a full point towards 0.9125 before the Pound pared some lost ground.

USD - The Dollar is obviously deriving indirect impetus from Sterling’s demise, but also firmer against all G10 counterparts bar the Euro that is holding close to 1.1100 on more progress towards a new Italian political partnership between the PD and 5-Star Movement. Hence, the DXY is consolidating above the 98.000 level, albeit within a confined 98.173-003 range ahead of a couple of Fed speakers and the latest Beige Book.

NZD/CAD/AUD/JPY/CHF - As noted above, all weaker vs the Greenback, albeit to varying degrees as the Kiwi slips back below 0.6350 and towards 1.0650 against the Aussie that is pivoting 0.6750 and only partially impeded by overnight data showing considerably weaker than forecast Q2 construction work. Meanwhile, the Loonie is still straddling 1.3300 as fragile/weak risk sentiment offsets firm crude prices, with the Yen and Franc regaining some safe-haven allure, but remaining off recent peaks, as Usd/Jpy hovers near 105.75 and Usd/Chf meanders between 0.9810-30. Note, several hefty option expiries could have a bearing on direction into Wednesday’s NY cut including 1.8 bn in Eur/Usd at the 1.1100 strike, 1 bn in Aud/Usd from 0.6700-10 and 1.1 bn in Usd/Jpy between 105.75-80.

EM - Broad weakness vs the Buck, but the Lira deriving comfort from another significant improvement in Turkish sentiment and this time on the consumer front. Indeed, Usd/Try is probing 5.8000 support even though Turkey and Russia are pressing ahead with more arms deal plans and the US House of Foreign Affairs Committee is urging President Trump to sanction Turkey. Conversely, the Rouble and Rand are not benefiting from the rebound in Brent and latest SA economic package respectively.

Australian Construction Work Done Q2 -3.8% vs. Exp. -1.0% (Prev. -1.9%, Rev. -2.2%). (Newswires)

FIXED

Gilts and BTPs are extending earlier gains, and perversely or ironically, as the UK Government is on the brink of shutdown in contrast to a new coalition getting closer to fruition in Italy. The former hit 134.65 and latter 145.79 with corresponding 10 year yields plumbing lows of around 0.45% and 1.025% respectively. Meanwhile, Bunds have now surpassed Monday’s Eurex high, at 179.24 vs 179.21, while the US Treasury curve has flattened/inverted further with the 2-10 spread at -6 bp earlier and long bond down to 1.91%.

COMMODITIES

WTI and Brent futures are higher as prices are underpinned by last night’s API crude inventory data which printed a significantly larger-than-forecast draw in API crude stocks (-11.1mln vs. Exp. -2.1mln). WTI futures reside north of 55.50/bbl ahead of its 200 and 50 DMAs at 560.7/bbl and 56.53/bbl respectively, whist its Brent counterpart remains just above 60/bbl. ING point out that the WTI/Brent Arb has narrowed further after initially feeling pressure from China’s 5% tariff on US oil. Elsewhere, gold prices remain flat just under the 1550/oz mark whilst copper are modestly firmer with the red metal back above the 2.55/lb mark. Finally, Dalian iron ore prices fell to the lowest in 2 ½ months as falling steel prices continue to raise concerns regarding iron ore demand.

Morgan Stanley lowers oil demand growth forecasts: 2019 to 800k BPD (Prev. 1.0mln BPD), 2020 to 1.0mln BPD (Prev. 1.4mln BPD), Brent prices are now expected to fluctuate around USD 60/bbl (Prev. USD 65/bbl)

- Lowers WTI Q3 and Q4 forecasts to USD 55.0/bbl vs. Prev. USD 58.0/bbl

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