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[PODCAST] US Open Rundown 21st November 2018

  • European equities are higher across the board (Eurostoxx 50 +0.8%) as the region stemmed the stock rout seen in Asia and Wall Street
  • European commission has rejected the Italian budget, with the opening of EDP said to be warranted
  • Looking ahead, highlights include US Durable Goods, Weekly Jobs, Existing Home Sales, Uni. of Michigan, DoEs, Japanese CPI, BoE’s Carney, UK PM May to meet with EC’s Juncker

ASIA

Asian stocks mostly weakened as the global stock rout continued into the region following the losses in US, where the DJIA dropped over 500 points to turn negative YTD and in which energy names were pressured as oil slumped nearly 7%. ASX 200 (-0.5%) and Nikkei 225 (-0.3%) were led lower by spill-over selling seen across the commodity-related sectors, while Wesfarmers shares plummeted nearly 30% after the spin-off of its Coles unit which had its stock market debut today. Hang Seng (+0.5%) and Shanghai Comp. (+0.2%) opened with firm losses but then rebounded off their lows with price action choppy amid ongoing trade uncertainty and after criticism from USTR Lighthizer’s report that China has not altered its unfair practices and appears to have conducted further unreasonable actions in recent months. Finally, 10yr JGBs failed to benefit from the widespread risk averse tone with price action subdued amid a lack of BoJ presence in the bond market and after the weakness in T-notes as US investors closed positions heading in to Thanksgiving.

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.9499 (Prev. 6.9280)

US Trade Representative Lighthizer released a report regarding China intellectual property and tech transfers which stated that China has not altered its unfair practices, while it added that it appears that China has conducted further unreasonable actions in recent months and that China has made it clear it will not change its policies in response to initial Section 301 action. (Newswires)

Chinese President Xi is expected to visit Madrid next week where infrastructure investment is expected to be a topic for discussions. (Newswires)

UK/EU

BBC Political Editor Laura Kuenssberg tweets, Damian Collins says it should be 'relatively straightforward' to get a clause into the agreement that allows us to leave the backstop independently - that might be news to the negotiators but goes on to suggest that another referendum might be the answer if the vote fails. (Twitter)

Regarding PM May's Brexit deal, Work and Pensions Secretary Amber Rudd says that she does not think any of the cabinet are going to vote against it; adding that the House of Commons will stop a no-deal, there is not a majority for that to take place. (BBC)

German Chancellor Merkel says we still don't know how to solve the Spanish objections to the Brexit deal; although she believes a solution will be found by Sunday. (Newswires)

BBC's Katya Adler tweets, Behind the scenes, Germany remains irritated with EU countries like France pushing for tougher conditions on the U.K. in the Brexit deal. Although, Berlin does add that they oppose ‘Chequers through the back door’. (Twitter)

German Government sees no possibility of new negotiations on the Brexit deal. (Newswires)

Italian Deputy PM Salvini could potentially be open to budget revisions (La Stampa) Although, Italy's League denies that Deputy PM Salvini is looking to change the budget, according to sources, (Newswires)

Italian Deputy PM Salvini says the 2.4% deficit target can't be discussed; adding that he is open to a dialogue on investments but not on the budget or pension reform. Additionally, Salvini says that debt will fall if the economy grows and that the coalition is here to stay. Also, states that the government are convinced by their budget target and will talk about it in a year, believes that EU sanctions can be avoided. (Newswires)

European Commission rejects Italy's budget, as according to Ansa, who add that the European Commission say opening of EDP vs. Italy is warranted. (Newswires) EU Commissions Dombrovsksis adds that the EDP is warranted, with the EU Commission seeing risk of a negative impact on growth from the Italian budget. Also, Belgium. France and Spain are at risk of breaching the budget rules.

Italian 5SM lawmaker D'Uva states that the party will not go back on the budget. (Newswires)

Italian PM Conte states that the government remains convinced over their budget and will hold discussions with EC’s Juncker, is also concerned about the spread and the government will respond with reforms. (Newswires)

ISTAT lowers 2018 Italian GDP forecast to 1.1% from 1.4% (made in May), see 2019 at 1.3%; for reference the EU Commission forecasts 2018 growth at 1.1% and 2019 at 1.2%; Italian government forecasts 2019 GDP of 1.5%. (Newswires)

Central Banks

Riksbank's Jochnick says that there's a lot of data to come prior to the December rate decision, there's still a choice between December or February; most recent inflation figure are more or less in line with exp. (Newswires)

EQUITIES

European equities are higher across the board (Eurostoxx 50 +0.8%) as the region stemmed the stock rout seen in Asia and Wall Street. Italy’s FTSE MIB (+0.6%) was initially outperforming with Italian banks higher amid initial reports from Italian press that Deputy PM Salvini could potentially be open to budget revisions, which were later dismissed by League sources ahead of the budget ultimately being rejected. 

In terms of sectors, financial names lost the top spot to telecom names, who are outperforming after French telecoms jumped following comments from Orange (+1.7%) CEO which renewed M&A gossip. Elsewhere, Indivior (-13.6%) fell to the foot of the Stoxx600 (+0.4%) after the Co. lost a US court ruling that had prevented Dr. Reddy’s from selling a generic version of a treatment for opioid addiction.

FX

DXY - The index has maintained its recovery momentum into the midweek session, but is off best levels amidst a welcome reprieve in riskier assets and broad sentiment ahead of Thanksgiving. The DXY has drifted back from another uptick towards 97.000, though remains underpinned ahead of 96.500 and recent lows. The Greenback also retains an underlying bid as G10 and EM counterparts struggle to recoup losses beyond round number/psychological/technical resistance against the backdrop of heavy option expiries at strikes within close proximity to prevailing prices (and with major fundamental issues still prescient of course).

NZD/AUD - The Antipodean Dollars are back in the ascendency as risk aversion seen on Monday and Tuesday abates, and the Yuan rebounds off circa 6.9500 lows vs the Usd after a weaker PBoC midpoint setting overnight and temporary breach of the Cny’s 20 DMA (6.9417). The Kiwi is back above 0.6800 after tripping some stops below late yesterday and the Aud has reclaimed 0.7200+ status as the cross holds continues its recovery/consolidation from sub-1.0600.

EUR/CAD - The single currency is holding up relatively well given more toing and froing on the Italian budget, but ultimately ongoing recalcitrant stance from Rome after reports about potential revisions were renounced in advance of the EU’s official rejection and potential if not probable EDP implementation (scheduled release time 11.00GMT, but appears to have been preannounced). However, 1.1400 is proving almost as obstinate and a decent 1 bn option expiry could well be keeping the headline pair in check. Meanwhile, the Loonie is off worst levels after sliding through 1.3300 and could be gleaning some encouragement from a partial recovery in oil prices in the run up to Canadian wholesale trade data.

GBP/CHF/JPY - All bucking the overall trend, albeit barely in terms of the Pound and Franc, as Cable pivots 1.2800 and Eur/Gbp straddles 0.8900 on Parliament approval aspirations as UK PM May heads to Brussels for more discussions on the Brexit draft and the coup to oust her seems to have fizzled out. Meanwhile, Usd/Chf has only tentatively bounced from near 0.9900 lows within a 0.9935-55 range vs Usd/Jpy back on the 113.00 handle vs a base around 112.30 at one stage on Tuesday when risk-off flows were rife, but bidding interest prevented further downside. Note, a raft of option expiries could be key into the NY cut, stretching from 111.90-112.00 to 114.00 and totalling some 11 bn.

EM - Rand in focus for several reasons, as Usd/Zar hovers near 14.0000 ahead of Thursday’s SARP policy meeting and following softer than expected SA inflation data, with a decent 1.1+ bn options expiring between 13.9000-14.0000 along with speculation about more strike action.

COMMODITIES

WTI (+1.6%) and Brent (+1.4%) took a breather from yesterday’s selloff, where prices fell almost 7% with the decline attributed to supply concerns, negative risk sentiment and Trump’s protective approach to Saudi relations. Prices are underpinned by the latest API inventory data which printed a surprise drawdown in headline crude stockpiles. Traders will be keeping an eye on today’s DoE release for any hints of increased US shale production. Today will also see the release of the EIA natural gas storage data, which has been rescheduled due to the US Thanksgiving Holiday. Elsewhere, the metals complex is in positive territory with gold (+0.2%), silver (+0.7%) and copper (+0.5%) all supported by the pullback in the USD.

Goldman Sachs said slump in oil reflects over supply concerns for 2019 and that technical position factors have exacerbated the volatility, while it also cited low liquidity heading into Thanksgiving as well as broader selling in commodities and cross-assets amid rising growth concerns. (Newswires)

Twitter source noted that a monster storm had shut all of Eastern Canada's crude output but added that one field has now resumed service. (Twitter)

Saudi oil production is said to surge to record levels in early November; Saudi crude output has run at 10.8-10.9mln BPD. With supply having passed 11mln B/D on some days, which includes draw downs from stocks. (Newswires)

FIXED INCOME

Perhaps perversely, or at least against counterintuitively, Italian bonds retain a decent bid in wake of confirmation that the 2019 fiscal draft falls foul of EU rules and will therefore be subject to official measures from Brussels. The 10 year benchmark has actually bounced off a 120.52 low to record a new intraday peak of 121.79 (+148 ticks), as the top brass in Rome remain adamant, albeit intending to discuss the situation further. Hence, safe-haven Bunds, Gilts, and US Treasuries by default are not deriving any real support from spread or hedge positioning and remain below parity, albeit off worst levels (160.48 for Bunds, -41 ticks) despite a well received Bobl auction. However, price action and direction is prone to change or more pronounced volatility with a front-loaded US agenda before Thanksgiving and no guarantee that Wall Street will pick-up the recovery baton.

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