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[PODCAST] US Open Rundown 29th August 2019

  • European Indices are firmer this morning as risk sentiment was boosted by constructive US-China comments
  • Recent optimism follows Navarro saying it is unlikely anything quick will happen with trade talks
  • USD is mixed vs. its peers, while BTPs are firmer but off of peaks after Italian President Mattarella gave Conte a mandate to form a new government
  • Looking ahead, highlights include, US GDP (2nd Estimate), Core PCE Prices & Initial Jobless Claims, Banxico Minutes, Fed’s Daly, supply from the US

ASIA-PAC

Asian equity markets traded mostly lower after failing to sustain the positive, but quiet lead from their counterparts in the US where energy outperformed and the DJIA led the majors higher to reclaim 26000. ASX 200 (+0.1%) andNikkei 225 (-0.1%) were subdued with focus in Australia centred on earnings including Woolworths. Nonetheless, the downside for the broader market was limited amid gains in mining names with gold lifted by a mild safe-haven bid and after the energy complex benefitted from the recent bullish inventory data, while the Japanese benchmark gave up initial gains after succumbing to the weight of the flows into JPY. Hang Seng (+0.4%) and Shanghai Comp. (-0.1%) were also lacklustre after PBoC inaction resulted to a drain on liquidity and as China plans tighter regulations on share pledging, as well as to reduce risks for small and medium banks. The losses in Hong Kong have also been a function of weak earnings releases including China Construction Bank which was the first of the Big 4 to report and slightly missed on its FY net. Finally, 10yr JGBs received a lift from the downbeat risk tone and after similar advances of their counterparts in US where there was a strong 5yr auction and the yield inversion briefly widened again, while stronger 2yr JGB auction results also added to the upside.

PBoC skipped open market operations for a net daily drain of CNY 60bln. (Newswires) PBoC set CNY mid-point at 7.0858 vs. Exp. 7.1237 (Prev. 7.0835)

China reportedly restricted lenders investment in policy bank bonds to curb interbank funding, according to sources. (Newswires)

Hong Kong Police are to ban Saturday’s Pro-Democratic rally. (SCMP/RTHK)

China's Global Times tweeted that China urges the US to immediately cease such provocative actions to avoid unexpected events after a US Navy warship entered waters near South China Sea without China's permission, while the Global Times added that the PLA will take all necessary steps to defend China's sovereignty and safeguard peace and stability in the South China Sea. (Twitter)

China's Commerce Ministry says both US and China trade teams have been in touch, adds that China has ample retaliatory measures and are lodging solemn representations with the US over the additional tariffs, both sides are discussing the September talks and if China officials go the the US then there should be an environment created for progress in the negotiations; calls on the US to cancel the planned additional tariffs to avoid a trade war escalation. (Newswires)

US

US Treasury Secretary Mnuchin said issuance of ultra-long bonds are under very serious consideration, while he added that the US does not intend to intervene in USD for now but the administration has weighed countering USD strength. (Newswires)

White House Trade Adviser Navarro said it is unlikely anything quick will happen with trade talks, while he suggested the Fed is needed to do its job and cut rates. (Newswires)

Fed's Daly (Non-voter, Dove) said she is biased towards running economy hot amid low inflation and uncertainty regarding full employment, while she added that persistently undershooting 2% is worrisome and that the Fed may want to consider countercyclical buffer if there is an increase in financial vulnerabilities. Daly also noted that she is currently in a "watch and see" position regarding monetary policy but is convinced using tools early and pre-emptively is better than waiting. (Newswires)

GEOPOLITICS

Iran Foreign Minister Zarif said it will not be possible for Iran to engage with US unless they stop imposing a war and conducting economic terrorism, while he added the US must observe 2015 nuclear deal if it wants to meet for talks. (Newswires)

Turkey President Erdogan spoke with US President Trump via telephone regarding latest developments in Syria and bilateral issues, while Erdogan said he is in agreement with US which is a correct step towards 'safe zone' in northeast Syria. In other news, Russia and Turkey are considering creating a new fighter jet, according to Russian officials. (Newswires/Washington Post)

North Korea Parliament is conducting a rare 2nd meeting for the year today, with media speculating it is to rubber stamp a decision from leadership regarding ongoing issues with missile tests or about talks with South Korea and/or US President Trump. Yonhap)

UK/EU

UK PM Johnson could reportedly create new Bank Holidays in an attempt to thwart opposition Labour party leader Corbyn's plans to block a no-deal Brexit. (The Sun)

An EU source stated that there is a strong sense that no-deal has just become even more of a likely possibility than it was before, while there were separate reports that UK and EU agreed to intensify discussions from next week. (Twitter/Sun/Guardian)

Allies to Speaker of the House of Commons Bercow warned that PM Johnson has poked the hornet's nest by proroguing Parliament amid claims he is to assist Remainers’ attempts to pass legislation to block a no-deal Brexit. (Telegraph) Elsewhere, Leader of Scottish Conservatives Davidson steps down citing reasons being "family and Boris". (Newswires)

MEPs from across the bloc are reportedly planning to trigger investigation into UK PM Johnson's government for breaching rule of law due to his suspension of Parliament. (Independent)

Italian President Mattarella has given Conte the mandate to form a new government, with PM Conte saying the priority must now be the budget. (Newswires) Prior to this, Italy's Di Maio said that after meeting President Mattarella, he was told there was a political accord with PD that Conte should be PM, while he added that their programme remains the same as always and the League asked him to be PM in a new government but he is interested in the country not his personal ambition. (Newswires) President Mattarella is to give Conte a mandate to form another government during a meeting scheduled for 08:30BST on Thursday. (Newswires)

German Saxony State CPI YY Aug 1.4% (Prev. 1.6%)

- German Saxony State CPI MM Aug -0.2% (Prev. 0.4%)

- German NW State CPI YY* Aug 1.5% (Prev. 1.7%)

- German NW State CPI MM* Aug 0% (Prev. 0.4%)

EQUITIES

European bourses are at present firmly in the green [Euro Stoxx 50 +1.4%] in-spite of a relatively lacklustre open, until comments from China’s Commerce Ministry that the US and China sides have been in touch and that they are discussing the upcoming September talks sparked a general improvement in risk sentiment. However, while the market reaction does not reflect this there were some less positive comments as well particularly that China has ample retaliatory measures. Looking ahead, on the US-China front markets are largely awaiting an update on the timeline for Septembers talks. Returning to Europe, the FTSE MIB is the notable outperformer (+1.9%) as the bourse derives strength from the increasing prospect of an Italian coalition forming and thus the budget passing. Similarly to the indices, sectors are all in the green with no notable under/outperformer. In terms of individual movers, Micro Focus (-22.4%) are at the bottom of the table after cutting their FY19 outlook. At the other end of the spectrum are Eurofins Scientific (+7.4%) and Bouygues (+5.6%) both post earnings where the latter also confirmed their FY19 targets. Elsewhere, UBS (+1.6%) are supported after hiring Iqbal Khan, a former Credit Suisse executive.

Huawei may delay overseas sales of its upcoming 5G Mate 30 Series smartphones due to a lack of access to Alphabet (GOOG, GOOGL) services under the current US ban, according to sources. (SCMP)

FX

USD - The broad Dollar remains mixed and rangebound, with the DXY still floating above 98.000 amidst relatively benign month end selling signals for portfolio rebalancing countered by weakness/underperformance in currency counterparts. However, risk sentiment in general has been boosted by latest updates from China’s Ministry of Commerce confirming that trade teams from Beijing and Washington have been conversing and face-to-face talks in the US next month are contingent on the right atmosphere to nurture constructive negotiations. The index is currently hovering just shy of 98.322 vs 98.156 at one stage.

AUD/CAD/NZD - All now firmer than their US peer having underperformed prior to the aforementioned US-China trade update, with the Aussie paring losses post an unexpected drop in Q2 Capex and the Kiwi rebounding from lows hit in the aftermath of ANZ’s August business sentiment survey showing a further deterioration in already weak morale, as expectations fell below zero. Similarly, the Loonie has rebounded from worst levels alongside the Yuan and now eyeing Canadian data for some independent impetus later (Q2 current account and June average earnings). Aud/Usd, Nzd/Usd and Usd/Cad currently around 0.6745, 0.6345 and 1.3285 vs circa 06715, 0.6305 and 1.3320 at the other extremes.

CHF/JPY/GBP/EUR - In stark contrast to the recoveries noted above, safe-haven unwinding has pushed the Franc and Yen down further from their recent peaks, with Usd/Chf and Usd/Jpy nudging up towards 0.9850 and 106.35, and the latter through 10/21 DMAs in the 106.20-21 area that could be pivotal from technical perspective. Meanwhile, the Pound is straddling 1.2200 following all the midweek drama in Whitehall and the Euro is weighing up softer Eurozone inflation against firmer GDP and mixed sentiment indicators with little reaction/traction via confirmation that Italy’s Conte has been given the mandate to try again as PM, albeit in charge of a different coalition. Indeed, Eur/Usd has slipped a fraction deeper below 1.1100, but holding above bids seen at 1.1050 and ahead of the 2019 low (1.1027).

EM - Although risk appetite has improved overall, pre-long holiday weekend and early positioning for the final trading session of August appears to be taking its toll on the Turkish Lira, while the Argentine Peso seems destined to come under even more pressure after the Government unveiled its debt rescheduling plan. Usd/Try hovering just under 5.8300 at present and Usd/Ars closed at 57.9400 for reference.

Australian Private Capital Expenditure (Q2) Q/Q -0.5% vs. Exp. 0.5% (Prev. -1.7%). (Newswires) Australian Private Capital Expenditure 2019-2020 (Est. 3) 113.4B (Prev. 99.14B)

New Zealand ANZ Business Confidence (Aug) -52.3 (Prev. -44.3). (Newswires) New Zealand ANZ Activity Outlook (Aug) -0.5 (Prev. 5.0)

FIXED

Far from buy the rumour and sell the fact, but Italian debt has lost bullish momentum and altitude in wake of President Mattarella’s official announcement that a new Government coalition will be formed under Conte. The 10 year BTP has pared back from 147.15 to around 146.15, while Bunds and Gilts have bounced from worst levels of 178.76 and 134.54, though remain off Eurex and Liffe highs (179.36 and 134.81 respectively) alongside US Treasuries that have reversed sharply from overnight peaks on the more constructive vibes from MOFCOM on US-China trade. This has also resulted in re-steepening along the curve ahead of revised Q2 GDP, PCE price metrics prelim trade and housing data. Note also, a handy/timely concession for the final leg of this week’s T-note issuance, which may not be needed given relatively strong demand for 2 and 5 year supply, and 7 year paper usually popular amongst foreign sponsors.

COMMODITIES

WTI and Brent are in positive territory thus far, with the complex recovering somewhat from the downturn in sentiment overnight on this mornings aforementioned US-China updates. Specific newsflow for the complex has been light, though recent reports have indicated that the Adrian Dary is unloading its crude cargo in Turkey. Turning to metals, where spot gold remains comfortably above the USD 1500/oz mark but has drifted somewhat in-line with the improvement in risk sentiment thus far; to a session low of USD 1536/oz. Conversely, copper prices have derived considerably upside from the risk-on tone though prices remain constrained by the USD 2.60 mark.

Russian average oil output (August) 11.31mln BPD vs. 11.15mln BPD in July., according to two sources. (Newswires)

German Chancellor Merkel and Russian President Putin have stressed the urgency of accelerating discussions on gas transit agreements. (Newswires)

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