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[PODCAST] US Open Rundown 28th October 2019

  • European bourses are little changed this morning on a lack of newsflow
  • European Council President Tusk announces that "The EU27 has agreed that it will accept the UK's request for a Brexit "flextension" until 31 January 2020
  • 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
  • Looking ahead, highlights include ECB’s Draghi & BoE’s Tenreyro
  • Earnings: Alphabet & T-Mobile
  • Reminder, UK clocks moved back 1hr such that the London-New York time gap is 4 hours for this week

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 (+0.8%) 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. (+0.8%) 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)

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)

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)

UK/EU

European Council President Tusk announces that "The EU27 has agreed that it will accept the UK's request for a Brexit "flextension" until 31 January 2020. The decision is expected to be formalised through a written procedure" (Twitter)

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)

Following the EU27 flextension acceptance, Liberal Democrats consensus is that they will continue to back an election, though no final decision has been taken as of yet., Telegraph's Rayner. (Twitter)

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)

Opinion Polls showed the Conservative Party have a 16-point lead at 40% of support vs. 24% of support for Labour. (Sky News) 

EQUITIES

A choppy start to the week for European equities [Eurostoxx 50 Unch] as the region failed to sustain the positivity seen during APAC hours in which Mainland China and Hong Kong outperformed on trade optimism. Major bourses are tentative as is usually the case ahead of a risk-packed week which sees the latest FOMC/BoJ policy meetings, German Prelim CPI, EZ flash CPI, US ISM Manufacturing, US labour market report and a slew large-cap earnings. Sectors are mixed with pressure seen in Financials as heavyweight HSBC (-4.1%) slumped post-earnings after missing on adj. pretax and revenue expectations, whilst stating that it no longer intends to achieve its ROTE target and notes of “significant” restructuring charges amid a deterioration in the global outlook.  On the flip side, consumer discretionary outperform as jewellery makers benefit from LVMH’s (+0.3%) unsolicited bid to acquire Tiffany (+20% pre-market), which is poised to be rejected according to sources cited by the FT. Thus, the likes of Pandora (+1.3%), Richemont (+2.1%) and Swatch (+1.4%) are lifted in tandem. Turning to individual stocks, Bankia (-3.0%) shares fell after the Co. reported this morning. In terms of bank analysis, JPM favour Euro-area stocks and note that international shares are set to outperform those in the US. JPM also maintains a bullish outlook on global equities but also expect rotation into cyclicals and value shares benefitting non-US equities more. Elsewhere, the analysts are overweight on Japan, neutral regarding the US, underweight on the UK and neutral for EM.

Microsoft (MSFT) – Have secured the Pentagon’s USD 10bln cloud computing contract, as such Co. are around 3.0% higher in pre-market trade. Amazon (AMZN) had been considered the favourites to win this contract. (Newswires)

FX

USD - The Dollar is holding the bulk of last week’s late recovery gains, with the DXY firmly above 97.500 within a 97.731-896 range and eyeing a potentially pivotal week including the FOMC policy meeting, coupon settlement day, month end, NFP and the manufacturing ISM. In the interim, preliminary trade data will overshadow wholesale inventories today after reports that the US and China are close to finalising elements of the Phase 1 pact, while Tuesday’s highlights are likely to be consumer confidence and pending home sales.

AUD/EUR/NZD/GBP - Although the Greenback remains underpinned overall, as noted above, the Aussie, Euro, Kiwi and Pound are all marginally firmer, with Aud/Usd maintaining 0.6800+ status, Eur/Usd inching towards 1.1100, Nzd/Usd pivoting 0.6350 and Cable hovering above 1.2800 between 1.2860-10 broad parameters. Note, Asia-Pacific trade was hampered somewhat by the NZ market holiday (Labour Day), but early EU activity boosted by some demand for Sterling that saw the Eur/Gbp cross test 10 DMA support at 0.8629 amidst expectations that the EU will respond favourably to the latest UK Brextension request, which has subsequently been confirmed by EC President Tusk and leaves the Pound prone to another showdown in Westminster as PM Johnson continues to push for a GE. Meanwhile, a decent expiry option may cap Eur/Usd given 1.3 bn rolling off at the 1.1100 strike.

JPY/CAD/CHF - All fractionally softer vs the Buck, as the Yen straddles 108.70 ahead of the BoJ and remains wary about possible policy action or more dovish guidance, while the Loonie is looking at the BoC for more independent direction having strengthened recently to breach 1.3100 and test the next line of resistance at 1.3050 that also coincides with a 1.3051 Fib retracement. Elsewhere, no looming SNB meeting to consider for the Franc, but latest weekly Swiss sight deposits suggest the Bank has been back in action as Usd/Chf hovers around 0.9950 and Eur/Chf climbs towards 1.1050.

EM - Yet more Rand and Lira outperformance, with the former encouraged by Eskom declaring no further load-shedding for Monday or this week at this stage, while the latter continues to welcome a thawing in Turkish-US/international relations over Syria. However, the Argentinian Peso is lamenting the weekend election result revealing a win for Fernandez that has prompted the authorities to implement capital controls.

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)

Larger FX option expiries for today's NY cut:

- EUR/USD: 1.1040 (226M), 1.1065 (300M), 1.1085-90 (500M), 1.1100 (1.3BLN)

FIXED INCOME

Gilts have been front-running the more recent recovery in debt futures and bouts of consolidation/short covering, with the 10 year benchmark cutting its arrears to just 10 ticks at 132.26 vs 62 ticks at worst, as markets await the outcome of PM Johnson’s next attempt to win backing for a GE. Meanwhile, Bunds have drifted back below 171.00 and the UST equivalent is holding just above the 129-05 overnight session low ahead of advance trade data, wholesale inventories and Dallas Fed manufacturing that kick-off a blockbuster week in relatively calm fashion.

COMMODITIES                                      

WTI and Brent are softer this morning but not by any significant magnitude thus far on a lack of fundamental newsflow as markets begin another packed week in a tentative fashion. Crude specific newsflow include comments from the Russian Energy Ministry; who noted that it is too early to discuss deeper OPEC+ cuts, which dampens the source reports seen last week. Further, the Ministry noted that OPEC+ will consider the US’ oil output growth slowdown in their December decision, for reference OPEC+ are expected to revise policy when they convene on December 6th. Last Friday’s Baker Hughes print for oil rigs was the lowest reading since April 2017 and therefore the oil rig count has dropped by 189 this year. Elsewhere, UBS note that recent indicators of weakness including this year’s rig decreases and a employment slowdown in Texas indicate that prices above USD 56/bbl for WTI are necessary to justify the maintenance or expansion of current oil production levels. In terms of metals - spot gold is flat and remains within relatively narrow USD 5/oz ranges above the USD 1500/oz mark heading into key risk events this week. Elsewhere, copper prices are on the backfoot amid further deterioration in China’s industrial profits which was the steepest fall in four years.

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