[PODCAST] US Open Rundown 26th November 2018
- European equities started the week on the front foot (Eurostoxx 50 +1.1%) following the upbeat performance experienced over in Asia
- The Italian government are discussing reducing the 2019 deficit target to 2.0-2.1% from 2.4%; according to a government source
- The European Council released its statement that endorsed UK PM May’s Brexit deal, as expected
- Looking ahead, highlights include ECB’s Coeure, BoE Governor Carney and US 2yr Note Auction
Asian equities and US index futures began the week mostly positive as stock markets picked themselves up from the Thanksgiving holiday lull, but with upside capped amid the ongoing commodity rout. ASX 200 (-0.8%) and Nikkei 225 (+0.8%) were mixed with Australia dampened by losses in miners after the broad weakness across energy and metals in which crude slipped nearly 8% on Friday, while the Japanese benchmark was propped up by favourable currency moves. Elsewhere, Hang Seng (+1.8%) and Shanghai Comp. (-0.1%) conformed to the broad rebound in sentiment, but with the mainland less decisive as Chinese commodity prices followed suit to their global peers in which Dalian iron ore futures dropped around 6% at the open and China oil futures hit limit down. Finally, 10yr JGBs saw mild gains amid the BoJ’s presence in the market for JPY 680bln of JGBs in the belly to super-long end and which coincided with a decline in the Japanese 10yr and 20yr yields to their lowest in 3 months.
PBoC skipped liquidity operations, although weekend reports noted it may have conducted repos with some banks. (Newswires)
PBoC set CNY mid-point at 6.9453 (Prev. 6.9306)
BoJ Governor Kuroda says the BoJ's JGB buying is aimed at achieving a 2% inflation target, not at monetizing government debt, adding that Japan’s public debt is very large and therefore it is important for the government to ensure medium-long term fiscal growth. Goes on to say that it is possible to shrink the BoJ’s balance sheet at an appropriate pace when it is time to exit easy policy. (Newswires)
Shanghai International Energy Exchange says they will raise the margin requirement for crude oil futures to 10% vs. Prev. 7%; will be effective from 28th November. (Newswires)
The European Council released its statement that endorsed UK PM May’s Brexit deal as expected, while the EC restated determination to have a close as possible future partnership with the UK in line with the Political Declaration. This came after Spain struck an agreement with the UK and EU whereby Spain will have a veto over any future EU-UK agreement concerning Gibraltar. (FT). EU officials were quick to warn that there is no plan B on offer for the UK and that voters are mistaken if they think that voting ‘no’ to the deal will get them a better offer from the EU. (Telegraph)
EU officials were reportedly told that a meaningful vote could occur on 10th or 11th of December. (Newswires/Independent) Later reports suggested that the vote could also be held on the 12th December.
UK PM May was said to demand a Brexit TV debate with Labour Party leader Corbyn and a Labour spokesman later commented that Corbyn would relish a debate with PM May about her botched Brexit deal, while Scottish First Minister Sturgeon reportedly challenged the PM to a Brexit debate. (Newswires/Sky/Telegraph) UK PM May will now commence a two-week campaign to sell her deal to Parliament and the public with her central message being that if her deal is not supported, it will be “back to square one”. (Times)
UK Foreign Secretary Jeremy Hunt said it is going to be challenging for PM May to secure support for the Brexit deal as the DUP has vowed to oppose her. (Independent) Separately, there were comments on Friday from DUP Leader Foster that if UK PM May is successful in Parliament, we will have to review government leadership agreement and reiterated that the DUP cannot support the deal in its current form. (Newswires)
UK Cabinet ministers and EU diplomats are reportedly drawing up a “Plan B” proposal based on assumption PM May’s deal will fail to get through Parliament. (Telegraph)
Some UK cabinet ministers and Labour lawmakers are planning for the UK to join the European Free Trade area if parliament rejects PM May's Brexit deal. (Newswires)
Brexit Secretary Barclay states that all access to UK fishing waters would cease on day 1 of backstop. (Newswires)
Italy is to work closely with EU this week to find an agreement on the budget. In related news, there were conflicting reports over the weekend in which Italian Deputy PM Salvini was said to have threatened to bring down the government if coalition’s budget deficit target was changed, although a later report suggested Salvini hinted of some room for compromise in which he stated that nobody is fixated on 2.4% budget deficit and that if there's a budget that makes the country grow, it could be 2.2% or 2.6%. (Newswires)
The Italian Government are to meet Monday evening to discuss a potential reduction of the deficit goal; according to a government source; Il Messaggero also reported that Italian Finance Minister Tria will bring various simulations on budget changes to top-level Italian government this evening in Rome. Additionally, are discussing reducing the 2019 deficit target to 2.0-2.1% from the current 2.4% target; according to a government source (Newswires)
Italian Deputy PM Di Maio says budget deficit target reduction is not a problem as long as budget measures remain the same. Adding that the government remains committed to reform, and there can be a dialogue with the EU on the deficit target; also seeking to talk to the EU regarding more investments. Says there can be dialogue with the EU on the deficit target; also wants to talk to the EU regarding more investments (Newswires)
Italian Deputy PM Salvini has said they've had "positive feedback" form Brussels when asked about lowering their 2019 deficit target, but refuses to talk about numbers. Italy's PM Conte has declined to comment about the specific numbers on the budget. (Newswires)
German Ifo Expectations New (Nov) 98.7 vs. Exp. 99.2 (Prev. 99.8)
German Ifo Curr Conditions New (Nov) 105.4 vs. Exp. 105.3 (Prev. 105.9)
German Ifo Business Climate New (Nov) 102.0 vs. Exp. 102.3 (Prev. 102.8)
German IFO economist says that there are increasing signs that there could be a turn around, but there are signs that the German economy is cooling. Adds that uncertainty has increased in all sectors because of Brexit and trade conflicts.
Ukraine accused Russia of an act of war after the latter fired at Ukrainian ships and seized 3 vessels off Crimea, while Russia said the Ukrainian ships entered its territorial waters near Crimea. Furthermore, Ukrainian President Poroshenko has reportedly asked Parliament to meet on Monday to discuss martial law. (Newswires)
Russia has reopened the Kerch Strait near Crimea for shipping after seizing Ukrainian naval ships on Sunday; according to sources. Additionally, the 3 Ukrainian ships which were seized by Russia are reportedly moored at the Crimean port of Kerch, with no sign of damage on the ships; according to a witness. (Newswires)
North Korea is reportedly not responding to US offer for talks. (Newswires)
US Senator Graham said will push to sanction Saudi Crown Prince if CIA confirms he was behind the Khashoggi murder. (Axios)
US President Trump threatens to permanently close the Mexican border. (Newswires)
ECB's Praet (Dovish) says that recent developments indicate some loss of growth momentum, with factors related to protectionism, financial market volatility and vulnerabilities in emerging markets are creating headwinds that are becoming increasingly noticeable. And the underlying strength of the euro area economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed. Also says that they will need to clarify, possibly in the December meeting, what the ECB means by reinvesting for an extended period of time. Adds that they need big changes in scenarios to not follow rate guidance, it is clear that risks to the downside have increased noticeably (Newswires)
ECB’s Lautenschlager (Hawk) says that it is time to gradually normalize monetary policy, and confident that we will reach inflation objective of close to but below 2.0%; and outlook has not changed significantly. Risks are still broadly balanced with our monetary policy, and with the reinvestment of the maturing assets, we will provide ample support to the economy. Adding that, we should not bind ourselves for a long period of time with regard to these reinvestments, as we cannot exclude the possibility that we will reach our inflation objective earlier than expected; or that there will be an increase in negative side effects from our expansionary monetary policy. (Newswires)
European equities started the week on the front foot (Eurostoxx 50 +1.1%) following the upbeat performance experienced over in Asia, with moves exacerbated as US participants re-enter the market following the long Thanksgiving weekend. Italy’s FTSE MIB (+2.8%) largely outperforms its peers as Italian Banks benefit from the positive BTP price action amid reports via government sources that the country’s coalition government are discussing reducing the 2019 deficit target to 2.0%-2.1% from 2.4%. In turn hinting that Italy are willing to be flexible on the budget after the European Commission rejected it earlier this month. Italian PM Conte and Deputy PM Salvini have since declined to comment on specific numbers. As such, Ubi Banca (+5.9%), Unicredit (+5.9%), Bper Banca (+5.7%), Banco BPM (+5.1%) and Intesa Sanpaolo (+5.1%) all rest at the top of the Italian benchmark.
Elsewhere, UK banks have also received a lift after the European Council endorsed UK PM May’s Brexit deal, which still has to pass through parliament, with Dec 10th, 11th, or 12th touted as the possible dates for a meaningful vote, hence RBS (+2.6%) and HSBC (+2.6%) and Barclays (+2.6%) shares are higher. In terms of sectors financials are largely outperforming amid Brexit and Italian budget developments, whilst consumer staples underperform. Looking at stock specifics, Melrose (-5.0%) shares dropped after Sky News reported that the company is weighing options for GKN Powder Metallurgy division with a “low-ball” offer valuing the business at GBP 1.6bln, below analyst expectations. On the flip side Eurofins Scientific rose to the top of the Stoxx 600 after the company confirmed their guidance.
AUD/NZD/CAD - A broad risk revival and commodity comeback of sorts has lifted the Antipodean Dollars alongside their Canadian counterpart that is benefiting from the recovery in oil prices especially. Aud/Usd is firmly back above 0.7250, while the Kiwi has managed to climb over 0.6800, albeit only just after a knee-jerk downturn in wake of weaker than forecast NZ Q3 retail sales overnight and ahead of trade data later today. Meanwhile, the Loonie has pared losses from 1.3200+ to circa 1.3190-85, but may struggle to get beyond 1.3180 where heavy supply is reported. Note also, a major US bank has entered a long Usd/Cad position at 1.3192, targeting 1.3450 with a 1.3075 stop.
EUR - Also encouraged by the aforementioned upturn in risk appetite, but the single currency has appreciated independently on the latest Italian budget headlines indicating that the coalition Government may be ready to revise the 2019 deficit target, and significantly from 2.4% to 2.1% ore even 2%. This, ahead of a meeting in Rome tonight where Finance Minister Tria is expected to lay out several compromises for top officials to consider. Eur/Usd has bounced towards 1.1400 vs the low 1.1300 area, but not quite as far as its 30 DMA at 1.1394.
GBP - The Pound has derived some support from official EU approval for the Brexit withdrawal agreement, with Cable back above 1.2800 and trying to clear 1.2850, but not convincingly as UK PM May begins the arduous task of selling the deal to her party and parliament before a meaningful vote on December 12 (or perhaps 1-2 days earlier if the roadshow goes well).
JPY - The G10 loser and underperformer as safe-haven demand/flows wane and Usd/Jpy clears 113.00 with a bit more vigour to a 113.35 peak and fleetingly, but not sustainably thus far, a 50% Fib at 113.25.
DXY - The Usd and index have drifted down from highs amidst the all the above (Yen aside of course), with the DXY holding just above 96.500 vs a whisker over 97.00 at one stage and nearest tech support and resistance coming in at 96.318 and 97.055 respectively.
SEK/NOK - Irrespective of Eur gains on the Italian developments noted above, the Scandi crowns are outpacing the single currency amidst the renewed appetite for risk assets and on the divergent Norges and Riksbank vs ECB policy dynamic as the latter acknowledges weaker growth in the Eurozone and may tweak guidance to reflect that at the next meeting. Eur/Sek is back down below 10.3000 and Eur/Nok has retreated from close to 9.7500 again accordingly.
WTI (+1.1%) and Brent (+1.8%) are retracing recent losses as the USD eases from highs and market risk-sentiment improves after the complex plummeted almost 8% on Friday amid concerns of a supply glut and lower January oil demand. This comes as Saudi Arabia reported that crude production stands at an all time high at 11.1-11.3mln BPD. WTI flirts with the USD 51.00/bbl handle while Brent hovers around USD 60.00/bbl in early European trade, with traders keeping an eye on any hints to next year’s oil production from OPEC+ countries, with the Dec 6th meeting looming. However, we may get some sort of direction just before December with the Saudi Crown Prince and Russian president meeting on the side lines of the G20 summit this coming weekend. Furthermore, some traders are noting that hedge funds haven’t been this pessimistic in regard to global oil prices for almost three years. Finally, Shanghai International energy Exchange said they will raise the margin requirement for crude oil futures to 10% from 7%, effective Nov 28th.
In the metals complex, gold (+0.2%) is higher as the yellow metal moves conversely to USD actions, while silver (+1.0%) outperforms with markets gearing up for the FOMC minutes release later this week. Elsewhere, base metals hover near last-week’s lows with the global growth slowdown weighing on investors’ minds.
The euphoria and early bid in Italian bonds has petered out and aside from pure consolidation and profit taking there is likely to be an element of longs wanting confirmation that the Government is sincere about cutting the 2019 budget shortfall before getting too carried away. From a chart perspective, 10 year BTP futures did achieve an upside objective at 124.75, but did not breach the resistance level with enough momentum or conviction to test 125.00 and the next major bullish target at 125.34. Hence, a pull-back to just below the 124.00 handle and paring of losses for core Bunds, while Gilts actually carved out a fresh intraday high on Liffe at 123.00 (-10 ticks vs -29 ticks at one stage) amidst the ongoing Brexit vigil until UK Parliament votes on the draft next month. Elsewhere, US Treasuries remain lacklustre awaiting the full return from Thanksgiving and with the short end braced for supply in the form of Usd39 bn 2 year notes.