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[PODCAST] EU Open Rundown 29th November 2018

  • Asian stocks traded mostly positive after risk appetite was ignited by Fed Chair Powell’s dovish comments which spurred hopes the Fed may begin to slow down on its hiking cycle
  • In FX markets, the USD was pressured post-Powell with the DXY back below 97.00 which led EUR/USD and GBP/USD to reclaim the 1.1300 and 1.2800 handles respectively
  • EU could give Italy more time before triggering the Excessive Deficit Procedure (EDP); according to La Repubblica
  • Looking ahead, highlights include, German CPI, US PCE Price Index and Jobless data, FOMC Minutes, Japanese CPI and Unemployment rate, ECB's Lautenschlaeger, Draghi, de Guindos and Costa, Fed's Powell, Evans, Mester and Kaplan

FOMC

Fed Chair Powell said policy rate is "just below" estimates of neutral and that gradual rate hikes balance risks to forecast, while he also noted no pre-set policy path and that they are paying "very close attention" to data. (Newswires)

ASIA

Asian stocks traded mostly positive after risk appetite was ignited by Fed Chair Powell’s dovish comments which spurred hopes the Fed may begin to slow down on its hiking cycle and helped US stocks notch their biggest daily gain since March. ASX 200 (+0.6%) and Nikkei 225 (+0.3%) were underpinned from the open but with gains capped amid lingering trade uncertainty and inconclusive capex data for Australia, as well as mixed Japanese retail sales and a decline in USD/JPY. Hang Seng (-0.7%) and Shanghai Comp. (-0.5%) both initially conformed to the positive tone but then stalled amid tariff threats with Chinese President Xi’s offer of an olive branch to the US somewhat falling on deaf ears, as USTR Lighthizer said China has yet to offer meaningful proposals and suggested that the US are seeking to match China’s tariffs on autos. Finally, 10yr JGBs were marginally higher as they nursed the prior day’s losses after having found support around the 151.00 level and although today’s mixed 2yr auction results failed to spur a reaction, prices continued to gain as the strength in the regional stock markets moderated.

PBoC skipped open market operations for a 25th consecutive occasion. (Newswires)
PBoC sets CNY mid-point at 6.9353 (Prev. 6.9500)

Chinese President Xi is expected to offer greater market access and fewer subsidies to state firms when he meets with US President Trump at the G20. (SCMP)

USTR Lighthizer said China has yet to offer meaningful proposals and that Chinese policies on auto tariffs are egregious, while he added they will examine all tools to match US auto tariffs on Chinese vehicles to the levels imposed by China. (Newswires)

US Senators Marco Rubio and Chris Van Hollen to tell Trump administration ZTE (763 HK) circumvented sanctions as it used Dell hardware for Venezuela government surveillance system. (Newswires)


UK/EU

BoE as part of its Withdrawal Agreement Analysis (5yr timeframe) warned that the UK economy could contract by 8% and house prices fall by nearly a third in the immediate aftermath of a disorderly Brexit if there was no transition period. (not its base case). In other scenarios, under a disruptive Brexit, GDP would decline 3% over the five years to 2022, house prices slide 14%, if a close trading agreement is struck, GDP would be 1% smaller than if it remained in the EU over the five years to 2022 and if it is less close than this scenario the UK economy would by 3.75% smaller than if it remained in the EU. (BBC)

BoE Governor Mark Carney said interest rates will rely on supply and demand as well as currency exchange rates, while he added that a disorderly Brexit is an unlikely event. (Newswires)

BoE said all seven banks and building society have passed their 2018 stress tests. (Newswires)

UK PM May is said to delay announcement related to NHS funding citing Brexit rebellion forces, while there were separate reports that the UK and US agreed to a new open skies arrangement. (Newswires)

UK Trade Secretary Fox has warned that Britain will not replicate all the European Union’s trade deals in time for a no-deal Brexit next March. (Times)

UK Leader of the House of Commons and key cabinet Brexiteer Andrea Leadsom said she is supporting PM May's Brexit plan. (Daily Mail)

Italian PM Conte sees a cut to deficit target to 2.2%; according to La Stampa. (La Stampa)

EU could give Italy more time before triggering the Excessive Deficit Procedure (EDP); according to La Repubblica. (La Repubblica)

Greece is seen postponing bond sale following Italian market volatility. (FT)

FX


In FX markets, the USD was pressured with the DXY back below 97.00 following comments by Fed Chair Powell that the policy rate is "just below" estimates of neutral which participants interpreted as a possible sign the Fed could begin to slow down on its hiking cycle and which was in contrast to Powell’s prior view of rates being “a long way” from neutral. This benefitted the USD’s major counterparts across the board in which EUR/USD and GBP/USD reclaimed the 1.1300 and 1.2800 handles respectively, while EM currencies were lifted in tandem and the PBoC strengthened their fix accordingly. Elsewhere, antipodeans also gained at the expense of the greenback and due to their high-beta status, although AUD/USD and NZD/USD have since pulled back from their highs with AUD indecisive following mixed Capex data and after further discouraging Business Confidence from New Zealand.

Australian Private Capital Expenditure (Q3) Q/Q -0.5% vs. Exp. 1.1% (Prev. -2.5%). (Newswires)
Australian Private Capital Expenditure Est. 4 (AUD)(2018-2019) 114.1B (Prev. 102.0B)

New Zealand ANZ Business Confidence (Nov) -37.1% (Prev. -37.1%). (Newswires)
New Zealand ANZ Activity Outlook (Nov) 7.6% (Prev. 7.4%)
 

COMMODITIES

Commodities traded higher with oil nursing the prior day’s losses in which WTI crude futures were weighed in the aftermath of a larger than expected build in DoE crude stockpiles and once again tested support at a yearly low. Elsewhere, gold is firmer with prices underpinned by a softer greenback following Fed Chair Powell’s dovish-perceived rhetoric, which also lifted copper although the red metal has pared back gains overnight as the risk tone in China deteriorated on tariff concerns.


GEOPOLITICAL

US Secretary of State Pompeo said he is very hopeful for a new meeting with North Korean officials to discuss denuclearization, while there were separate reports that US requested that North Korea change its chief negotiator. (Newswires/Nikkei)

US Secretary of State Pompeo said there is no evidence connecting the Saudi Crown Prince to the Khashoggi murder. (Newswires)

US Senate voted 63-37 to advance a bill that would end US participation in Saudi Arabia-backed war in Yemen which paves way for additional vote next week, although White House has previously noted it would veto the bill if passed. (Twitter)

US


Yields were lower across the curve, with the exception of the 30-year, where yields rose slightly; today’s action was sponsored by apparently dovish remarks from Fed chair Powell. With that said, analysts are increasingly pointing out that the range in Treasury futures is extremely narrow. Even after Powell’s comments, the probability of a December rate hike was still around 80%, while the pricing through 2019 was only modestly narrowed (fed funds for Jan 2020 are implying an end-2019 FFR rate of 2.71% vs 2.75% pre-Powell). After the Powell speech, the US Treasury sold USD 32bln of 7-year notes at a high yield of 2.974%, stopping through the screens by 0.6bps. Demand for the auction was decent with the bid-to-cover 2.55x, slightly above the 6-auction average. Direct bidders took a significant portion compared to recent trend (as has been seen in the 2s and 5s auctions this week), pushing indirects and dealer participation below recent averages. US T-note futures (Z8) settled 4+ ticks higher at 119-12+.

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