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[PODCAST] US Open Rundown 5th November 2019

  • European bourses are firmer in risk-on trade this morning following the positive US-China rhetoric
  • US reportedly considers dropping some tariffs on China with the White House said to mull whether to roll back levies on USD 112bln of Chinese imports which were introduced at 15% on September 1st
  • US National Security Adviser O’Brien stated that US President Trump invited Chinese President Xi to the US if the two sides are ready to sign the phase one agreement; is cautiously optimistic
  • Iranian President Rouhani will further reduce commitments to Nuclear deal by injecting gas into centrifuges at Fordow plant
  • In FX, safe havens underperform on risk sentiment whits the AUD and GBP firmer post RBA and Services PMI respectively, vs. USD
  • Looking ahead, highlights include, US International Trade, Markit Services and Composite PMI, ISM Non-manufacturing PMI, JOLTS, Fed’s Barkin, Kaplan, Kashkari, Riksbank’s Ingves, supply from the US
  • Earnings: Allergan, Microchip Technology, Newmont Goldcorp, Regeneron

ASIA-PAC

Asian equity markets were higher as the region sustained the momentum from Wall St where all major US indices posted record highs on the continued US-China trade optimism, which was further exacerbated by reports the US is mulling rolling back the 15% tariffs on USD 112bln of Chinese imports that took effect from September 1st. ASX 200 (+0.2%) and Nikkei 225 (+1.9%) were positive but with gains in Australia limited by weakness in gold miners and a lack of fireworks from the RBA rate decision where the central bank kept rates unchanged as expected and largely reiterated its past statement, while the Japanese benchmark outperformed as it played catch up on return from the extended weekend and was boosted by a weaker currency. Elsewhere, Hang Seng (+0.6%) and Shanghai Comp. (+0.7%) were initially choppy despite the improved trade optimism as some were said to be doubtful on whether US President will sign off on the additional concessions and as participants digested mixed Caixin Services and Composite PMI data. Nonetheless, the risk sentiment eventually gained traction after encouraging comments from Chinese President Xi on opening up China’s markets which would likely further appease the US, and the PBoC also announced a larger Medium-term Lending Facility operation at a reduced rate of 3.25% from 3.30%. Finally, 10yr JGBs were lower following the bear steepening seen in USTs and with prices pressured by the outperformance of Tokyo stocks, while the BoJ’s Rinban announcement also failed to provide support as the central bank reduced its purchase amounts in 10yr-25yr maturities. 

PBoC skipped reverse repo operation but conducted CNY 400bln 1yr Medium-term Lending Facility vs. Prev. CNY 200bln with rates lowered to 3.25% from 3.30%. (Newswires)

PBoC set CNY mid-point at 7.0385 vs. Exp. 7.0392 (Prev. 7.0382)

US reportedly considers dropping some tariffs on China with the White House said to mull whether to roll back levies on USD 112bln of Chinese imports which were introduced at 15% on September 1st. However, reports added that a source cautioned that even though there was a growing consensus within the Trump admin that they have to make a concession on existing levies, it was unclear whether President Trump would sign off on this. (FT) In response to the article, Chinese Global Times Editor states that some media reports are illogical, understanding is that to achieve a Phase 1 deal the sides must proportionally and simultaneously remove additional tariffs since trade war began. Further, he added "Beijing will insist that the US proportionally remove existing additional tariffs simultaneously with China. The US keeping all tariffs, only suspending new tariff threat, in exchange for major concessions. China will not accept such a phase 1 deal" (Twitter)

US National Security Adviser O’Brien stated that US President Trump invited Chinese President Xi to the US if the two sides are ready to sign the phase one agreement, while O’Brien added that he was cautiously optimistic about it. (Newswires)

Chinese President Xi said China will continue to lower tariffs and institutional transaction costs. President Xi added that China will speed up negotiations with EU on investment agreement and talks regarding a China-Japan-South Korea FTA, while China is to also adopt 5 measures to promote higher-level of opening up. (Newswires)

More than three-quarters of Chinese consumers said they'll shun US products during the Singles' Day shopping spree on 11 November, according to a report by AlixPartners LLC., China's Global Times. (Twitter)

Chinese Caixin Services PMI (Oct) 51.1 (Prev. 51.3); 8-month low. (Newswires)

Chinese Caixin Composite PMI (Oct) 52.0 (Prev. 51.9)

China's Communist Party said it will not tolerate any seperatist behaviour in Hong Kong, Macau affairs, according to Xinhua. (Newswires)

US

Fed's Daly (non-voter, dove) said the economy is in a good place and the Fed would adjust monetary policy if there is a substantial change in outlook. Daly also stated that tools for addressing next recession include Fed Funds Rate, forward guidance and balance sheet policy, while her view is that the Fed as very far from going to negative rates and noted a strong labour market. (Newswires)

Trump lawyer Giuliani’s associate Lev Pernas, who was indicted on finance campaign charges, is now willing to cooperate in the House impeachment inquiry. (Axios)

GEOPOLITICS

Iranian President Rouhani said the country will further reduce commitments to Nuclear deal by injecting gas into centrifuges at Fordow plant starting tomorrow. (Newswires)

South Korea intends to propose working level talks with North Korea regarding the suspended Mount Kumgang tour programme, according to Yonhap citing a Government source. (Yonhap)

Turkish President Erdogan said the US is still conducting joint patrols with Kurdish YPG inside Syria, this was not part of the agreement, adds the Kurdish YPG have not left Syria's Tel Rifaat and Manbij regions despite its agreement with US and Russia. Earlier, the Turkish President noted that Turkey will abide by its agreements with Russia and US as long as they keep their promises. Further, Erdogan says he will decide whether to visit Washington this month after a phone call with US President Trump. (Newswires)

EQUITIES

Major European bourses (Euro Stoxx 50 +0.2%) are mostly in positive territory, following on from a strong APAC session in which global sentiment was buoyed by positive rhetoric from Chinese President Xi and an FT article that hinted that the US is mulling rolling back tariffs on Chinese imports, albeit it was unclear if US President Trump will sign this off. Sectors are mixed; with energy (+1.1%) in the lead, and materials (+0.5%) and financials (+0.2%) also as curve steepening supports the latter. In terms of individual movers; strong earnings from Lundbeck (+5.4%), Hugo Boss (-2.2%), AB Foods (+4.7%) and Evonik (+4.5%) has seen their respective share prices advance. Meanwhile, soft earnings from Pandora (-15.1%) and Adecco (-1.1%) has seen their shares come under pressure, with the former cutting guidance amid unrest in Hong Kong. Finally, Air France (-5.7%) is lower after announcing that it targets a medium-term operating margin of 7-8% and a medium-term positive adjusted FCF.

UK/EU

UK YouGov poll (Change on Nov 1st): CON 38%(-1), LAB 25%(-2), LDEM 16%(nc), BREX 11%(+4). (Newswires) This is releatively in-line with the weekend YouGov and Opinium polls, albeit the ICM poll seen yesterday showed a narrower 7 points Tory lead over Labour.

UK Markit/CIPS Services PMI (Oct) 50.0 vs. Exp. 49.7 (Prev. 49.5) (Newswires) UK Composite PMI (Oct) 50.0 (Prev. 49.3) - "The October reading is historically consistent with GDP declining at a quarterly rate of 0.1%" (IHS)

FX

AUD/NZD/CAD - The non-US Dollars are all benefiting from the general upturn in risk sentiment fuelled mainly by further signs that the US-China are moving closer towards Phase 1 of their trade pact, and with the Aussie also taking on board the latest RBA assertion that the domestic economy may be over the worst on the basis that there may be less pressure or reason for further easing in the near term. Aud/Usd has reclaimed 0.6900+ status in response and is pulling away from hefty option expiry interest at the big figure (1.5 bn), while Aud/Nzd is firmly back above 1.0750 even though the Kiwi is shadowing its Antipodean counterpart and the Yuan after a 5 bp MLF rate reduction from the PBoC. Nzd/Usd has rebounded through 0.6400 ahead of NZ jobs and labour cost data that follow the GDT auction, while Usd/Cnh trades sub-7.0000 vs a 7.0385 Usd/Cny mid-point fix overnight. Elsewhere, Usd/Cad is eyeing 1.3100 before the Loonie focuses of Canadian trade for some independent impetus.

CHF/JPY - In stark contrast to the above, more safe-haven unwinding has undermined the Franc and Yen, as Usd/Chf inches over 0.9900 and Usd/Jpy creeps further towards 109.00 and 200 DMA resistance just above (109.03).

GBP/EUR - Narrowly mixed vs the Greenback as the DXY straddles 97.500, with Cable keeping tabs on the 1.2900 handle where 1.5 bn expiries reside and Sterling deriving some support from another better than forecast UK PMI as the election preamble continues. However, the Pound is still biding time on Brexit uncertainty and meandering against the Euro between 0.8645-25 parameters, as Eur/Usd hovers above 1.1100 in a similarly tight band (1.1113-40) amidst little in the way of specific drivers for the single currency.

SEK/NOK - The aforementioned bullish/upbeat mood has also underpinned the Scandi Crowns and enabled the Swedish Krona to overlook disappointing data (ip and new manufacturing orders) plus pretty dovish or less hawkish Riksbank minutes on balance given a couple of reservations about telegraphing a repo hike in December. Indeed, Eur/Sek remains below 10.7000 and Eur/Nok is following suit amidst the backdrop of firm oil prices that helped the cross test 10.1350 ahead of decent technical support spanning 10.1300-10.1250.

EM - More post-CPI weakness for the Lira, as Turkish President Erdogan reiterates that the US is not complying with its side of the deal struck on Syria and piles pressure on the CBRT to slash rates again, with Usd/Try flirting with the 5.7500 level at one stage. Conversely, the Rand continues to bask in SA ratings relief rather than balk at ongoing Eskom power problems, as Usd/Zar probes 14.7000 to the downside.

RBA kept the Cash Rate unchanged at 0.75% as expected. RBA repeated its statement that rates are to remain low for an extended period and that it will ease policy if needed to support sustainable growth, while it also reiterated that a gentle turning point appears to have been reached. RBA added that its central scenario is for underlying inflation to be close to 2.00% in 2020 and 2021, while it sees economic growth at around 2.25% this year and to pick up gradually to around 3.00% in 2021.

OPEC Secretary General Barkindo says countries are ramping up compliance with global oil pact, numbers we are seeing suggests 2020 may have upside potential. (Newswires)

Global oil demand to rise to 103.9mln BPD by 2023, which is lower than the prev. of 104.5mln BPD. Oil output to decline to 32.8mln BPD in 2024 from 35mln BPD in 2019; attributed to non-OPEC growth, according to the OPEC World Oil Outlook. (Newswires)

FIXED INCOME

A decent if not downright strong DMO Gilt sale by all traditional measures bar the more expensive funding cost, has given the 10 year UK benchmark another fillip, but not quite enough to erase all of its arrears at 131.71 vs Monday’s 131.83 close. Nevertheless, EU bonds are well off worst levels and displaying more resilience than their US counterparts in similar vein to this time yesterday and ahead of a busier pm agenda including the non-manufacturing PMI and ISM, Fed speak and the 1st of this week’s Treasury auctions.

COMMODITIES

Crude markets are on the front foot this morning as yesterday’s pre-settlement losses are steadily unwound amid the broader market risk appetite. WTI Dec’ 19 and Brent Jan’ 20 futures are well off of USD 56.30/bbl and USD 61.88/bbl lows, with the latter briefly eclipsing yesterday’s USD 62.79/bbl high (which is also the 200 DMA). In terms of oil price forecasts; UBS expects oil prices to weaken in H1 2020, with Brent prices testing USD 55/bbl by mid-2020 on account of strong supply growth in non-OPEC states. They do, however, expect a price recovery in H2 2020 with prices reaching USD 60/bbl by end-2020. In terms of newsflow; comments from Iranian President Rouhani suggesting a further reduction in nuclear commitments failed to spoke the market - yesterday the head of Iran's Energy Authority said that the operation of 30 new centrifuges is underway. Elsewhere, OPEC released its world oil outlook; OPEC increased its mid-term outlook for non-OPEC supply growth and forecasted that oil demand in OECD countries is expected to move away from growth to a declining trend after 2020. Looking ahead, barring unexpected US/China trade updates, US ISM Non-manufacturing is likely the main demand side driver of sentiment, while traders will also be eyeing this evening’s API Inventory Data. In terms of the metals; gold is slightly lower on improved risk appetite with prices still holding above 1500/oz for now. Copper prices have advanced amid the constructive trade reports via the FT with the red metal eyeing 2.7/lb to the upside.

Global oil demand to rise to 103.9mln BPD by 2023, which is lower than the prev. of 104.5mln BPD. Oil output to decline to 32.8mln BPD in 2024 from 35mln BPD in 2019; attributed to non-OPEC growth, according to the OPEC World Oil Outlook. (Newswires)

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