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[PODCAST] EU Open Rundown 2nd September 2019

  • Asian equity markets traded mostly negatively after the 15% US tariffs on about USD 112bln of Chinese goods went into effect
  • UK PM Johnson reportedly issued an ultimatum to Tory rebels that they would be expelled from the party if they joined forces with Labour leader Corbyn to halt a no-deal Brexit
  • In FX, the DXY was slightly softer, USD/JPY initially slipped to below 106.00 but then gradually recovered
  • Looking ahead, highlights include EZ & UK Manufacturing PMIs, ECB’s Mersch, Lautenschlager, de Guindos & Coeure and US Labor Day Holiday

ASIA-PAC

Asian equity markets traded mostly negatively after the latest round of tariffs in the US-China trade war took effect and as the region digested mixed Chinese PMI data. ASX 200 (-0.5%) and Nikkei 225 (-0.4%) were lower with early underperformance seen in Australia’s energy sector following the recent pullback for oil prices and with Telecoms weighed after Telstra reduced its FY EBITDA guidance, while the Japanese benchmark was also downbeat but off its lows as price action was determined by a choppy currency. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (+1.1%) diverged with outperformance in the mainland despite the latest round of tariffs taking effect, as China’s state council pledged more support for the economy and Caixin Manufacturing PMI topped estimates with its first expansion in 3 months, to provide some much-needed reprieve after the miss on China’s Official Manufacturing PMI data over the weekend. Conversely, the Hang Seng lagged following further clashes between protesters and police over the weekend and as participants reacted to a slump in Retail Sales. Finally, 10yr JGBs declined despite the risk averse tone in Japan, with prices weakened after the BoJ lowered its purchase amounts of 10yr-25yr JGBs for today’s Rinban operation, while it also recently announced a reduction in its buying intentions in 5yr-10yr JGBs for the month.

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 7.0883 vs. Exp. 7.1057 (Prev. 7.0879)

Chinese Manufacturing PMI (Aug) 49.5 vs. Exp. 49.7 (Prev. 49.7). (Newswires) Chinese Non-Manufacturing PMI (Aug) 53.8 vs. Exp. 53.6 (Prev. 53.7) Chinese Composite PMI (Aug) 53.0 (Prev. 53.1) Chinese Caixin Manufacturing PMI (Aug) 50.4 vs. Exp. 49.8 (Prev. 49.9); first expansion in 2 months.

The new 15% US tariffs on about USD 112bln of Chinese goods went into effect, while China’s Customs Tariff Commission of the State Council also confirmed the first round of tariff increases on USD 75bln of US goods. (Newswires)

China’s State Council issued a statement pledging more support and stated that it attached great importance to the development of infrastructure, high-tech, traditional industrial transformation, social services and new growth regions, while China will encourage banks to use more innovative tools to replenish capital through multiple channels. (Newswires)

Hong Kong protests clashed again with police over the weekend which resulted to a disruption of flights in Hong Kong International Airport and a third of stations were said to have been damaged during the protests. In related news, China announced it is to conduct a press conference regarding the Hong Kong situation on Tuesday at 1115 local time (0415BST/2215CDT). (Newswires)

 

UK/EU

UK PM Johnson reportedly issued ultimatum to former Chancellor Hammond and other Tory rebels that they would be expelled from the party if they join forces with Labour leader Corbyn to halt a no-deal Brexit. In other news, PM Johnson reportedly cancelled on what was said set to be a showdown meeting with Tory rebels including former justice secretary Gauke due to a diary clash. (Telegraph/Sky)

Labour Party Brexit spokesperson said MPs will attempt to pass a law this week to block a no-deal Brexit. (Newswires)

UK Cabinet Minister Gove suggested that the government could ignore any new law Tory rebels pass to thwart a no-deal Brexit. (CityAM)

UK Tory Brexiteers could reportedly mount a challenge to House Speaker Bercow over claims that he is biased towards Remainers. (Times)

EU Council President Tusk that the main problem with Brexit is the internal situation in Britain, while there were separate comments from EU Chief Brexit negotiator Barnier that he is not optimistic about averting a no-deal scenario, (Telegraph/Newswires)

ECB’s Rehn (Dove) stated that it is important to maintain strong monetary stimulus and that the situation called for an effective policy package. (Newswires)

ECB’s Holzmann (Hawk) stated he is worried about further additional stimulus to the EU and lowering the deposit rate, while he suggested that if there is an adjustment in rates, it should be a hike not a cut. (Newswires) Note, Holzmann has replaced Ewald Nowotny as head of the Austrian Central Bank

German Chancellor Merkel's CDU/CSU coalition retains control in Saxony and Brandenburg regional elections although lost seats to the far-right which made significant gains in both. (Newswires)

Fitch affirmed Switzerland at 'AAA'; Outlook Stable and affirmed Norway at 'AAA'; Outlook Stable. (Newswires)

 

FX

In FX markets, the DXY was slightly softer as it continued to ease back from the 99.00 level and its strongest in more than a year amid a lack of North American participants due to Labor Day holidays and renewed criticism on the Fed by US President Trump, although its major counterparts failed to take advantage with EUR/USD dejected after a recent slip to below 1.1000. GBP/USD was also relatively uneventful as it bides its time ahead of the reopen of Parliament on Tuesday where pro-EU MPs will attempt to block a no-deal Brexit, although there were also reports the PM issued an ultimatum to the Tory rebels that they would be expelled from the party if they join forces with Labour leader Corbyn to halt a no-deal Brexit. Elsewhere, USD/JPY initially slipped to below 106.00 but then gradually recovered a majority of the losses and antipodeans were also indecisive with early weakness counterbalanced by a firmer than expected CNY reference rate setting and better than expected Chinese Caixin Manufacturing PMI data.

 

COMMODITIES

Commodities were mixed with WTI crude futures flat around the USD 55.00/bbl level as the mostly risk averse tone hampered efforts to recoup Friday’s losses, while the latest Baker Hughes rig count which showed oil drillers cut rigs for the 8th time in the past 9 weeks, also failed to spur the energy complex. Elsewhere, gold marginally benefitted from the slight pullback in USD and copper was lacklustre despite amid the predominantly risk averse tone and mixed Chinese PMI data.

Georgia governor orders mandatory evacuation of state's coast beginning midday on Monday ahead of hurricane Dorian. (Newswires)

Baker Hughes oil rig count -12 at 742, natgas unchanged at 162, total rigs -12 at 904. (Newswires)

US June crude production fell 33k BPD to 12.082mln BPD (Prev. 12.115mln bpd), according to EIA. (Newswires) 

 

GEOPOLITICS

The previously seized Iranian tanker which that was known as Grace 1 was reportedly preparing to offload its oil to Syria-bound ships which reports noted could undermine European efforts to broker US-Iran talks. (WSJ)

UK Royal Navy captain noted that its warship has faced 115 confrontations with Iranian Revolutionary Guard Corps in the Gulf since the start of July. (Times)

 

US

The T-Note traded sideways to end the week, with volumes notedly light ahead of the long weekend in the US. Strong data, namely US consumer spending, PCE, and Canadian GDP, did little to induce outflows ahead of a busy data schedule next week, and of course the panned step up of US-China tariffs; however, the largest drop in the forward-looking University of Michigan survey didn’t exactly rock the boat either. At settlement yields were slightly lower between 1-2bps with the curve itself slightly steeper. US T-note (U9) futures settled 3+ ticks higher at 131.01+.

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