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[PODCAST] EU Open Rundown 28th October 2019

  • Asian equity markets began the week with a positive tone amid trade hopes after China signalled that a partial agreement may be within reach
  • EU is reportedly preparing to allow a 3-month Brexit extension to January 31st 2020 with an option to leave earlier
  • UK’s Liberal Democratic party have drawn up a bill which would fix an election for December 9th, SNP are said to back the bill
  • In FX, DXY traded relatively stable, GBP/USD was subdued, USD/JPY and JPY-crosses traded uneventful
  • Looking ahead, highlights include EZ M3 Money Supply, ECB’s Draghi & BoE’s Tenreyro
  • Earnings from AT&T, Alphabet, T-Mobile, Loews
  • Reminder, UK clocks moved back 1hr such that the London-New York time gap is 4 hours

ASIA-PAC

Asian equity markets began the week with a positive tone after trade hopes were spurred by the recent top-level call between US and China negotiators in which the sides were said to be close to finalising some sections of the phase one deal. This lifted all US majors on Friday and saw the S&P 500 approach to within less than half a point of its record high, fuelled by outperformance in the trade sensitive sectors, although the gains in the Asia-Pac region were mostly moderate amid calm before this week’s storm of risk events. ASX 200 (Unch.) and Nikkei 225 (+0.3%) marginally benefitted from the trade optimism and as commodity-related stocks kept the Australian index afloat, while the advances in Japan were limited by the recent mixed performance in its currency. Elsewhere, Chinese markets outperform amid encouraging earnings from some of China’s Big 4 banks including ICBC and with Hang Seng (+1.1%) also underpinned by the inclusion of dual class listed stocks in the Stock Connect and amid anticipation of another 25bps rate cut at this week’s FOMC which would force the HKMA to move in lock-step with the Fed. However, the index later retraced some of the gains after weaker results from HSBC and with the Shanghai Comp. (+0.6%) somewhat restricted after a PBoC liquidity drain and the steepest contraction to Chinese Industrial Profits since 2015. Finally, 10yr JGBs are lower on spillover selling from recent declines in T-notes and as stocks mildly benefitted from the trade optimism, but with downside stemmed amid BoJ presence in the market for JPY 1.1tln of JGBs in 1yr-10yr maturities.

PBoC skipped open market operations for net daily drain of CNY 50bln. (Newswires)

PBoC set CNY mid-point at 7.0762 vs. Exp. 7.0769 (Prev. 7.0749)

US President Trump said China will be buying many more agricultural products and wants to make a deal, while he added that talks are going well and that they are working very closely with the Chinese to get a deal. However, there were also reports that White House Trade Adviser Navarro was said to oppose the current language of the phase one deal because he wants it to be tougher on intellectual property. (Newswires/CNBC)

China’s MOFCOM stated the technical consultations of some of the text agreement for the deal with US were basically completed and that the sides agreed to properly handle their core concerns. China’s Global Times noted that this is the first time the Chinese side signalled that a partial agreement may be within reach. (Global Times)

Chinese Industrial Profits (Sep) Y/Y -5.3% (Prev. -2.0%). (Newswires)

 

UK/EU

EU is preparing to allow a 3-month extension to January 31st 2020 with an option to leave earlier, on November 30th or December 31st, if a deal is ratified but was also said to rule out any potential to renegotiate the Withdrawal Agreement and requires the UK to meet EU obligations during the extension. EU diplomats are to meet at 09:00 GMT (10:00 local time) to discuss the proposal. France has reportedly agreed to 3-month Brexit extension, according to Politico. (Guardian/FT/Politico)

UK’s Liberal Democratic party have drawn up a bill that amends the Fixed-term Parliaments Act, fixing an election for December 9th. If the bill is adopted by the UK PM, it could be taken through Parliament this Tuesday, Wednesday and Thursday. Further, the SNP party said it will back the bill which would give it the numbers to pass, according to Observer’s Michael Savage. Further, MPs are due to vote later on the Government’s call to have an election on December 12th, which if approved, the Brexit bill would resume its passage through Parliament until it is dissolved on November 6th. (Twitter/BBC)

UK Government believes that the new House of Commons Speaker, as Bercow is to retire at month-end, will be less likely to allow MPs to seize control of the order paper; as such hopes are that the new speaker will assist in attaining a general election. (Times)

German Chancellor Merkel’s Christian Democratic party suffered a setback in an election for state assembly in the eastern state of Thuringi whilst the populist right winged AfD party more than doubled its standing and was marginally ahead of CDU. (Newswires)

Opinium Poll showed Conservative Party with a 16-point lead at 40% of support vs. 24% of support for Labour. (Sky News)

S&P affirmed UK at AA; Outlook Negative, while it upgraded Greece to BB-; Outlook Positive and cited receding budgetary risks and lifting of capital controls. (Newswires)

Fitch affirmed Netherlands at 'AAA'; Outlook Stable. (Newswires) 

 

FX

FX price action was relatively muted in the region owing to a light calendar, several holiday closures (New Zealand, Singapore & India) and ahead of this week’s slew of risk events which includes the FOMC and culminates with Friday’s NFP jobs data. As such, the DXY traded relatively stable and held on to last week’s spoils as its major counterparts remained lacklustre with EUR/USD stuck near last week’s lows beneath the 1.1100 handle. GBP/USD was also subdued and approached closer towards 1.2800 to the downside ahead of PM Johnson’s attempt to get a snap election passed through Parliament today, while the latest reports concerning Brussels continued to suggest the EU is preparing to grant the UK request for a 3-month Brexit extension with the bloc’s ambassadors to meet early this week to finalize the agreement. Elsewhere, USD/JPY and JPY-crosses traded uneventful and antipodeans were also subdued amid a quiet overnight session and holiday-thinned conditions.

Argentina President Macri conceded defeat following the election and congratulated President-elect Fernandez, while the Argentina central bank later tightened restrictions on USD purchases with limits for individuals lowered to USD 200 per month from USD 10000 per month and the central bank president will hold a press conference 0830 local time (11:30 GMT) on Monday. (Newswires)

 

COMMODITIES

Commodities conformed to the relatively quiet tone seen across asset classes ahead of this week’s key announcements and with several market closures overnight, which provided an opportunity for some mild profit taking of last week’s gains in oil and resulted to a pullback in WTI crude futures to the USD 56.50/bbl level. Elsewhere, gold flatlined and held above the USD 1500/oz amid a steady greenback and with participants side-lined by an anticipated Fed rate cut as well as US NFP jobs data later this week, while copper mirrored the uneventful trade across the complex but was kept afloat amid the mild positive risk tone from the heightened US-China trade hopes.

Baker Hughes Rig Count: Oil rigs -17 at 696, gas rigs -4 at 133, total rigs -21 at 830. (Newswires)

 

GEOPOLITICS

US President Trump said Islamic State leader Al-Baghdadi died in a US raid in Syria, while it was also reported that the French Interior Minister instructed police to be on high alert to prevent potential revenge attacks following the death of the IS leader. (Newswires)

US Vice Chief of Naval Operations Burke says North Korean submarine-launched ballistic missiles must not be underestimated and that such weapons could pose a direct threat to the US mainland. (KBS)

US At settlement, the curve had bear-flattened, shaking off an early risk-off feeling; downside today was sponsored by constructive chatter after a phone call between US/China negotiators, which even trade hawk Navarro described as ‘excellent’. The complex did find a modest bid in quiet afternoon trade, as equities faded from near-record highs, perhaps also aided later by news that trade advisor Navarro was pushing for tougher language on IP protections. Next week, the complex will take more cues from the fundamental side of the equation, with FOMC, NFP and ISMs on tap; currently, markets are pricing with near certainty a 25bps rate cut to 1.50-1.75%; key will be how the Fed guides after it has completed its ‘insurance cuts’; currently, money markets imply easing of a 29bps into year-end (just over one cut priced), and 57bps of cuts is priced through end-2020 (implying just over 2 rate cuts by the end of next year, include the potential cut on Wednesday). US T-note futures (Z9) settled 10 ticks lower at 129-17.

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