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[PODCAST] US Open Rundown 28th November 2018

  • European equities (Eurostoxx 50 +0.3%) have held on to opening gains seen in the wake of the upbeat US and Asia-Pac sessions, despite lingering trade concerns.
  • EU Commission will begin disciplinary action on Italy regarding its debt before Christmas; but Italy remain optimistic that a deal can be struck with the EC
  • Saudi Energy Minister Al Falih said that Saudi cannot and will not reduce output on their own.
  • Looking ahead, highlights include US GDP, PCE Prices and Advanced Goods Trade Balance, Fed Financial Stability Report, ECB's Coeure, Praet and de Guindos, Fed Chair Powell Speaking, BoE's Annual Bank Stress Tests, Brexit Assessment and Withdrawal Scenarios

ASIA

Asian equity markets traded mostly positive following a similar lead from Wall St. but with the session initially mired by lingering uncertainty regarding US-China trade relations. Nikkei 225 (+1.0%) outperformed as the index coat-tailed on the recent advances in USD/JPY, while ASX 200 (-0.1%) was subdued by weakness in miners after the metals complex felt the brunt of the recent USD strength and with financials subdued by AMP Capital amid risk of further mischarging cases and provisions. Elsewhere, Hang Seng (+1.3%) and Shanghai Comp. (+1.0%) were higher but with price action choppy in early trade amid tentativeness heading into the Trump-Xi showdown at this week’s G20 and as participants mulled over various comments from officials including White House Economic Adviser Kudlow who affirmed that Trump could hike tariffs if no constructive talks occur at G20 and that the White House is disappointed in China's response to the trade issue. However, Kudlow also noted that Trump is open to a deal with China and there were recent comments from China’s Vice Premier Liu that China wants a negotiated solution on trade based on mutual respect. Finally, 10yr JGBs weakened amid a lacklustre tone in T-note futures and with the BoJ’s presence in the bond market overshadowed by the outperformance of Japanese stocks.

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.9500 (Prev. 6.9463)

China's US envoy said selling or reducing purchases of US Treasuries would be very dangerous like playing with fire, while the envoy doesn't think anybody in Beijing is seriously thinking about pulling back from US Treasury debt market should tensions worsen. Furthermore, there were reports that China’s Ambassador to the US warned of dire consequences if the trade war leads to economic separation and that China prefers a negotiated solution, while the Ambassador warned that China will retaliate in proportion to any US sanctions regarding Muslim Uighurs in Xinjiang. (Newswires)

Australian Construction Work Done Q3 -2.8% vs. Exp. 1.0% (Prev. 1.6%, Rev. 1.8%). (Newswires)

Chinese President Xi says he will step up protection of Intellectual Property rights. Adds China will sharply widen market access for foreign investors, and are set to import USD 10tln of goods in the next 5 years (Newswires)

UK/EU

UK PM May is said to have backed down regarding attempts to stop lawmakers from making changes to her Brexit plan which would mean that MPs will be able to vote on potential changes to her plans, while there were separate reports that UK PM May is to block publication of full Brexit legal advice. (Straits Times/ Telegraph)

The Sun reports that UK PM May could suffer a 200 vote defeat in Parliament, while a cabinet minister is said to see zero chance of the deal passing. (Sun)

Huffington Post article states "Five former Cabinet ministers and Jacob Rees-Mogg have written to Theresa May to warn her she is heading for a ‘no deal’ Brexit unless she changes course.". (Huffington Post)

UK Environment Minister Gove says UK PM May's Brexit deal is the best on the table. (Newswires)

UK Finance Minister Hammond says the UK government will publish a summary of the legal advice on Brexit, adding that the full legal advice is private. (Newswires)

ITV's Paul Brand tweets, David Davis says there is a risk that the parliamentary rebellion will melt away as the government lobbies MPs. (Newswires)

Kevin Schofield, politics home editor tweets, Ian Blackford hints that Nicola Sturgeon may set out independence referendum-2 plan after the meaningful vote, adding: "Scotland will become an independent country, it's just a question of when.". (Newswires)

UK GDP is expected to be 7.6% lower in the event of a no-deal Brexit, while it is expected to be 1%-2% lower under PM May's Chequers draft EU divorce agreement over 15 years, according to cross-government analysis. (Telegraph)

German Finance Minister Scholz says the EUR will become more important and attractive post-Brexit. (Newswires)

UK BRC Shop Price Index (Nov) Y/Y 0.1% (Prev. -0.2%). (Newswires)

EU Commission will begin disciplinary action on Italy regarding its debt before Christmas. Furthermore, EU's Dombrovskis says Italy needs to significantly correct 2019 fiscal budget, adding that a cut of 0.2% is not enough. (Newswires)

Italian economy minister Tria states that the government needs to consider uncertainty in financial markets and fears of the EU. Government are in discussions with the European Commission to provide shared improvements in the budget. Adds that the economic slowdown in course gives reason for anti-cyclical policy. (Newswires)

US

US President Trump said Fed rate policies are hurting the economy and that he is not even a little happy with Fed Chair Powell, while Trump also commented that the Fed is a much greater problem than China. (Washington Post)

The White House said US President Trump and Canadian PM Trudeau spoke regarding General Motors (GM) and G20, while a senior Canadian government official said that Canadian PM Trudeau reinforced to US President Trump the importance of both nations lifting their tariffs on steel and aluminium. (Newswires)

US President Trump is willing to shut down the Government over the border wall, as according to Politico. (Politico)

GEOPOLITICAL

US and North Korea special envoys failed to conduct their scheduled meeting. (Newswires)

US President Trump may cancel meeting with Russian President Putin at G20 due to Ukraine. A Russian Kremlin Spokesperson however then said the Putin-Trump meeting is still set to go ahead (NY Post/Newswires)

Ukraine President Poroshenko said his nation is under the threat of a full-scale confrontation with Russia and that the government was considering restricting access to Ukraine during martial law. (CNN)

Germany and France are against stricter Russian sanctions for now; according to WELT. (Newswires)

Russian President Putin plans to meet the Saudi Crown Prince at the G-20 summit; according to the Kremlin. (Newswires)

EQUITIES

In what’s been a slightly choppy session thus far, European equities (Eurostoxx 50 +0.3%) have held on to opening gains seen in the wake of the upbeat US and Asia-Pac sessions, despite lingering trade concerns. The most recent interjection came from White House Economic Adviser Kudlow who commented that Trump is open to a deal with China and that the raising of tariffs to 25% is not a "certainty" but  will be implemented if no constructive talks occur at the G20. In terms of sector specifics, IT names are the clear outperformers at this stage of the session with Wirecard (+1.3%) and Dialog Semiconductor (+3.1%) notable gainers in the tech-space after trying to recoup recent losses with not much else in the way of key newsflow. Noteworthy individual movers include EDF (+3.1%) with shares buoyed by reports that that a potential increase in the French government’s stake in the Co. would take place next year. To the downside, Tenaris (-8.2%), sit at the foot of the Stoxx 600 after the Co.’s chairman was indicted in a graft case, whilst Continental shares (-5.4%) have been weighed on by negative comments from Redburn who have warned over the group’s EBIT prospects in 2019. 

FX

DXY – Off best levels but retaining an underlying bid with supportive month end flows alongside HIA and SOMA redemption (24.9bln comes due on Friday) all impacting, while market participants keep a close eye on Fed Chair Powell’s speech scheduled for later today where he may stop the USD in its tracks or exacerbate the rally. The index has gained more ground above 97.000 to just over 97.500 before losing some momentum but still on the course to challenge the YTD high at 97.693, technically if not fundamentally.

GBP, AUD, NZD – All consolidating after recent losses vs. the buck with cable trying to revisit 1.2800 after UK Environment Minister Gove noted that UK PM May’s deal is the best on the table and offset some of the earlier Brexit negativity that was prompted by the latest piece via The Sun which stated that meaningful vote could results in a 200 vote defeat in parliament and with some cabinet ministers seeing zero chance of the draft passing. Separately, a cable forecast which took the average of 18 banks’ views of cable post-parliament vote show a 55% chance of a rejection and the pair reaching 1.25, while an approval could boost cable up to 1.34. Meanwhile, UK Chancellor Hammond said the government are to publish a summary of the legal advice on Brexit, which will ruffle some feathers amongst hardcore Brexiteers as MPs passed a motion two weeks ago that ordered ministers to provide legal advice in full on PM May’s deal. Elsewhere, antipodeans are faring better vs. the greenback again with AUD/NZD trading flat within a tight range and as NZD tests 0.6800 to the upside amid the RBNZ FSR release overnight in which they eased loan-to-value ratio restriction.

EUR – More choppy trade for the single currency with EUR/USD trading around the middle of a 1.1267-1.1304 range having taken out stops at 1.1275. Italian politics keep weighing on the currency with the European Commission unimpressed as it will begin disciplinary actions on Italy regarding debt before Christmas. EU Commissioner Dombrovskis also added that a cut of 0.2% of the 2019 budget target is not enough. EUR/USD is being drawn towards a large amount of option expiries between 1.1275 – 1.1300 (1.5bln). Looking ahead, markets will be keeping a close eye on the budget discussion between the Italian PM, two Deputy PM and Finance Minister for any hints of a budge towards EC’s direction.

CAD – Another victim of the USD strength and global trade jitters as Trump’s economic advisor Kudlow said the USMCA agreement is to be signed on Friday at the G20 summit, but sticking points remain in regards to dairy. Note, choppy oil prices have hardly helped the Loonie slide to fresh multi-month lows around 1.3330.

SEK – Significantly weaker than expected Swedish retail sales were overshadowed by NIER’s upgraded outlook on inflation. Furthermore, Swedbank played down the data and suspect retail sales will bounce back in November amid support by shopping due to Black Friday sales. However, EUR/SEK failed to rally above 10.3000 and trades within a range of 10.2870-10.2590, while technical warn fresh weakness if the pair were to breach 10.2584, adding that a move above 10.3470 is need to ease pressure. Looking ahead, Dec 12th’s inflation data will be a key point for the central bank in regards to hiking in either Dec or Feb.

JPY ­ - Edging closer to 114.00 vs. the buck with heavy option expiries around 113.50-55 (1.47bln) and 114.00 (1.9bln)

EM – Mostly weaker as the greenback hold firm with RUB as the standout underperformer amid the ongoing escalation between Russia and Ukraine, though Germany and France stated they are against stricter Russian sanctions for now, while there were witness reports of a Russian minesweeper ship heading towards the Sea of Azov share by Russia and Ukraine. On the flip side, the Russian Central Bank governor emerged earlier with a hawkish tilt whilst keeping options open for the next meeting. Note, USD/RUB is at 67.4000.

COMMODITIES

Brent (-0.4%) and WTI (-0.1%) are lower heading into the US open after initially trading positive. A larger than expected build in API crude stockpiles of +3.453mln compared to the expected build of +0.8mln had little impact on the price rebound at the time. Additionally, three North Sea forties crude cargoes which were scheduled to load in December have been cancelled due to the temporary closure of the 150,000 BPD capacity Buzzard oilfield. Saudi Energy minister Al Falih stated this morning that Saudi will not and cannot reduce output on their own, and is hopeful that upcoming meetings will result in agreement to stabilise the market.

Gold is slightly lower as the dollar continues to firm, although the yellow metal has rebounded from lows of USD 1211.3/oz in the previous session. Separately, copper is higher following a 3-session decline although, gains for the metal have been restricted by ongoing US-China tensions, with the most recent comments coming from White House Economic Advisor Kudlow saying that US President Trump is prepared to raise tariffs if G20 talks are not constructive.

US President Trump reportedly floated the possibility of removing troops from Middle-East and said oil prices are low now. US President Trump also said he called the Saudis when oil was at USD 82/bbl and 'let him have it' about oil. (Washington Post)

Goldman Sachs said iron ore price correction is mostly complete. (Newswires)

Saudi Energy Minister Al Falih states that oil market volatility has been amplified by geopolitics. Hopeful that upcoming meetings will reach a consensus to stabilise the market. Saudi will not and cannot reduce output on their own. Declines to comment on whether an output reduction would exceed 1.4mln bpd. (Newswires)

Nigerian Oil Minister Kachikwu says that OPEC+ will take the necessary action in order to stabilise prices; adding that Nigeria has raised output since last exemption and the country is very committed to working with OPEC. (Newswires)

US API Weekly Crude Stocks (23 Nov) +3.453mln vs. Exp. +0.8mln (Prev. -1.5mln). (Newswires)

FIXED INCOME

Core bonds have drifted down from best levels with the 10 year UK benchmark perhaps taking heed of a rare endorsement of PM May’s Brexit blueprint from Cabinet colleague, but also losing some technical momentum having inched closer to, but not quite testing major chart resistance at 123.40 (123.36 peak, +29 ticks).  However, Gilts are still marginally outpacing Bunds that appear to be conscious of the renewed bid in BTPs to just over 124.00 in wake of latest comments from Italian Finance Minister Tria acknowledging that the Government needs take into account jittery financial markets and EU concerns when it comes to its fiscal policy. Hence, the core Eurozone bond has not really benefited from what was a well received auction by all the traditional measures, and it seems as though US Treasuries are also wary about upcoming 7 year issuance along with some top tier data and Fed’s Powell of course.

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