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[PODCAST] US Open Rundown 6th August 2018

  • Cable probing 11-month lows as UK Trade Minister Fox cites 60% chance of “no deal Brexit”; USDTRY pushes to new record high of 5.1800
  • Oil spiking higher and up on the day on reduced supply, equities initially lower but push into positive territory in a news-thin morning
  • Scarce calendar ahead with no tier 1 data or scheduled events to look forward to

ASIA

Asian equity markets began the week mostly positive as bourses followed suit from Friday’s gains on Wall St, although upside was limited as the region took its first opportunity to digest Friday’s key events including China’s tariff retaliation list announcement and the mixed US jobs data. ASX 200 (+0.6%) was led higher by commodity-related stocks and Nikkei 225 (+0.1%) was positive but with upside limited by recent JPY strength. Elsewhere, Hang Seng (+0.5%) and Shanghai Comp. (-1.2%) were mixed as the mainland failed to hold on to early gains due to trade uncertainty and further PBoC inaction. Finally, 10yr JGBs were quiet overnight but still edged mild gains as yields slightly eased from last week’s BoJ-triggered surge, while reports also noted that the BoJ bought a record amount of 5yr-10yr JGBs last week in its efforts to cap gains in yields.

China state media commented that China is prepared for a long trade battle with the US, while it also noted that US is escalating trade friction with China and is turning international trade as a zero-sum game. In addition, China state media said President Trump is starring in his own carefully orchestrated Street Fighter-style deceitful drama and wants others to play along which is wishful thinking. (Newswires/Xinhua/Twitter)

PBoC skipped open market operations and were net neutral on the day. (Newswires)

PBoC set CNY mid-point at 6.8513 (Prev. 6.8322)

EU/UK/US

UK Trade Secretary Fox said the likelihood of a no-deal Brexit is increasing in which he blamed the "intransigence" of the European Commission. Fox also placed the chances of leaving the EU without a deal at "60-40" and stated that EU Chief Negotiator Barnier dismissed the UK's Chequers proposals simply because "we have never done it before". This also comes alongside commentary in the Sunday Times over the weekend that businesses and investors are scrambling to protect themselves against a plunge in the value of the pound if Britain crashes out of the EU in March. (BBC/Sunday Times) However, there were later reports that UK PM May is said to be confident of reaching a Brexit agreement according to sources who insisted there is only a very small probability of failing to reach an agreement with the EU. (Guardian)

EU is reportedly considering softening backstop powers for Northern Ireland to avert a no-deal Brexit, according to a senior EU diplomat. (FT)

UK Chancellor Hammond has warned senior figures in the City that France could attempt to bind Britain’s financial services sector in red tape post-Brexit, leading to a potential loss of access to European markets. (FT)

ECB's Lautenschlaeger (Hawk) stated it would be wrong for the central bank to abruptly change monetary policy direction which would not help the economy nor price stability. Lautenschlaeger also stated she is very much in favour of normalizing monetary policy which means gradually raising interest rates and that the pre-condition is that the path to price stability is sustainably strengthened. (Newswires)

GEOPOLITICAL

North Korea Foreign Minister Ri described US actions as alarming in response after US Secretary of State Mike Pompeo urged other countries to keep up sanctions pressure on Pyongyang. In addition, a UN report stated that North Korea has not halted its nuclear and missile program which is in violation of sanctions. (BBC/Newswires)

US President Trump tweeted on Saturday “Iran, and its economy, is going very bad and fast! I will meet, or not meet, it doesn’t matter – it’s up to them… Iran Is messing with the wrong President”. Furthermore, US Secretary of State Pompeo said the White House will make an announcement detailing reinstatement of some Iran sanctions on Monday. Note: The first round of Iran sanctions imposed by the US to come into effect on Tuesday – the Iranian government will no longer be able to purchase US banknotes and broad sanctions will be imposed on Iranian industries. (Twitter/Newswires)

Venezuela said there was an assassination attempt on President Maduro by far-right opponents after several drones armed with explosives blew up near President Maduro, while reports also noted Maduro was unharmed and that 7 people were being treated for injuries. (Newswires)

EQUITIES

European equites opened the week modestly lower (Euro Stoxx 50 -0.2%) as trade concerns weighed on indices initially. Most major European indices were in the red, with the DAX leading the losses and breaking through its 100DMA (12,582) to the downside following Linde (-3.5%) announcing that they and Praxair may need to shed more assets to get antitrust approval, casting doubt over the viability of their merger. The losses in the DAX and Euro Stoxx were short-lived, however, seeing choppy trade and paring back early losses into positive territory on no fundamental catalyst in a news-thin day.

The materials sector (-1.2%) is underperforming on the back of softer base metals, as the US-Sino trade spat continues to weigh on the market.

HSBC (-0.4%) reported earnings, where the bank highlighted rising expenses alongside a civil penalty of USD 765mln.

William Hill (+0.3%) have reportedly entered into talks with US casino “giant” Penn National Gaming that would provide the co. with a greater share of the US sports betting market.

FIXED INCOME

Gilts returned to Liffe on the back foot, albeit modestly between 122.71-57 vs their previous 122.74 settlement, and in relatively subdued trade at the start of the new week with little on the domestic agenda bar Halifax house prices. The Short Sterling strip was also moderately softer off the open, but only a tick offside at worst after last week’s net gains beyond the very front end of the curve following the BoE rate hike and guidance signalling no further tightening this year. Moreover, Governor Carney underlined Brexit contingency and concerns about no deal that could prompt the MPC to change course on policy, and comments from Trade Secretary Fox over the weekend chime with his view that the risk of that scenario is rising. Hence, the 10 year UK has subsequently rebounded to 122.86 and 3 month contracts are flat to 1 tick ahead presently, while Bunds have reclaimed 162.00+ status and a marginal new Eurex high at 162.16 vs. 161.83 at worst and US Treasuries remain largely side-lined with the curve marginally flatter.

FX

GBP - More negative news for the Pound as UK Trade Secretary Fox claims that the risk of a no deal Brexit has risen to 60% after EU chief negotiator Barnier rejected the Chequers White Paper, with Cable back down through 1.3000 and hitting marginal new lows around 1.2950, while Eur/Gbp is back above 0.8900 even though the single currency is relatively weak in its own right. Note also, a major US bank has initiated a short Cable trade at 1.2986, looking for 1.2700 and with a 1.3150 stop, while market contacts suggest stops are likely if the aforementioned ytd base is breached from 1.2950.

TRY - The Lira remains under heavy pressure and one of if not the EM underperformer again as Usd/Try soars further above 5.0000 to almost 5.1600 and fresh all-time highs. The catalyst, ongoing US-Turkey diplomatic strains due to Pastor Brunson on top of the latter’s domestic political situation and investor angst over the economy, perceived Government interference with the CBRT and a whole lot more.

CAD/CHF - Back to the G10 and the next biggest losers after Sterling, with the Loonie back under 1.3000 vs its US rival due to Canada’s row with Saudi Arabia over an activist being held in the Kingdom. Meanwhile, the Franc is straddling 0.9950 vs the Greenback, but firmer again vs the Eur around 1.1500, which will keep the SNB fully monitoring the situation and ready to maintain a dovish stance on policy (to recap, Jordan said last Friday that the Bank has more room to cut rates if needed).

EUR/NZD/AUD/JPY - All holding up relatively well vs a bid Dollar in general (DXY over 95.300 and still poised for a test of 95.652 highs for the year so far), but the Eur only just keeping its head above 1.1550 and layered bids down to 1.1520 ahead of the 2018 low (1.1510), while the Kiwi remains under 0.6750 and is lagging its antipodean counterpart that is holding firm after PBoC Yuan intervention near 0.7400 and circa 1.0975 on the cross ahead of the RBA policy meeting tomorrow (full preview available via our headline feed). Usd/Jpy is very rangebound again between 111.15-35 with bids at 111.00 and offers at 111.50, 111.60 and 111.73, according to market observers.

COMMODITIES

Oil is higher on the day with WTI +0.7% and Brent +0.7% amid a Saudi crude output cut on Friday alongside the US rig count falling for the second time in three weeks, seeing a decline of 4 to 1044.

Russia’s energy minister Novak reported that future output is to be in line with the OPEC+ 1mln BPD boost plan.

The EU said that other signatories are committed to the continuation of Iranian exports of oil and gas

In the metals scope, gold is essentially unmoved and is still languishing around 17-month lows, currently trading at USD 1211.90/oz. London Copper has fallen for the 3rd session in 4 as trade concerns weigh on the construction material. Zinc is also faring poorly and has fallen 2.2%, with Shanghai lead also down 1.4%.

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