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[PODCAST] EU Open Rundown 4th December 2018

  • Asian stocks traded mostly negative as the relief rally fizzled out in the region with investors quick to book their recent profits.
  • In FX markets, USD softened against its major counterparts with the DXY back below the 97.00 level amid a decline in US yields, which benefitted both EUR/USD and GBP/USD
  • Italy's Deputy PMs Di Maio and Salvini are said to be open to a possible 2% deficit. However, Italian press noted that a budget deficit at 2% is not low enough for the
  • Looking ahead, highlights include UK construction PMI, weekly API crude inventories, BoE’s Carney, Broadbent, Cunliffe, Vlieghe, ECB’s de Guindos, Fed’s Wiliams, Brexit deal debate begins at the House of Commons, supply from the UK


ASIA

Asian stocks traded mostly negative as the relief rally fizzled out in the region with investors quick to book their recent profits. ASX 200 (-1.0%) and Nikkei 225 (-2.4%) were lower from the open in which a pullback in consumer and energy stocks led the downside in Australia and with Japanese sentiment dampened by a firmer currency. An indecisive tone was seen in the Hang Seng (-0.5%) and Shanghai Comp. (-0.2%) amid a lack of fresh drivers and as participants await the next developments of the US-China trade saga with China reportedly considering possibilities of lowering US auto tariffs. In addition, US Treasury Secretary Mnuchin was said to be hopeful for an agreement but warned tariffs will be implemented if a deal fails to materialize, while China reportedly censored a post by the US Embassy regarding the recent trade developments and tariff ceasefire which some have suggested could be a possible effort to avoid looking weak or that it gave in to US pressure. Finally, 10yr JGBs traded higher amid the risk averse tone and as they tracked the overnight gains in T-notes. This coincided with the US 10yr Treasury yield dropping below its 200DMA for the first time in around a year, while the US 2yr/10yr spread continued to narrow to its flattest in over a decade. Today also saw a 10yr auction from Japan, although there was a muted reaction as the auction bore mixed results.

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.8939 (Prev. 6.9431); strengthened fix by the most since June 2017.


UK/EU

MPs are to vote today whether the UK government breached Parliament rules which could result to a suspension of Attorney General Cox or PM May’s de facto Deputy Liddington. This came after UK Speaker of the House Bercow decided to grant the debate amid allegations of contempt over the lack of legal advice from the government over Brexit and later stated that there is an arguable case the UK government may be in contempt of parliament by declining to release its full Brexit legal advice. (Newswires/Twitter/BBC/Times)

UK BRC Retail Sales YY Nov -0.5% (Prev. 1.3%). (Newswires)

Eurogroup said it plans to back the EU's Commission view on Italy's budget and that fiscal expansion in Italy is particularly worrying. Elsewhere, there were comments from Italian PM Conte that he is not working on a 2019 budget which has a deficit below 2%, while Italy Deputy PM Salvini said the basics of the Italian budget will not change and that they have no interest in a collision with the EU commission. (Newswires/ANSA) It was later reported that Italy's Deputy PMs Di Maio and Salvini are said to be open to a possible 2% deficit. However, Italian press noted that a budget deficit at 2% is not low enough for the EU. EU estimates that Italy needs to cut budgets by around EUR 12bln. (Corriere/Messaggero/Stampa)

ECB's Weidmann (Hawk) said policy will remain expansive even after QE ends, while he added they should not delay normalisation unnecessarily and that the next step depends on data. (Newswires)

FX

In FX markets, USD softened against its major counterparts with the DXY back below the 97.00 level amid a decline in US yields, which benefitted both EUR/USD and GBP/USD despite gains being initially capped as Europe and UK face ongoing issues regarding the Italian budget friction and Brexit-related uncertainty. USD/JPY declined due to the risk averse tone and losses in the greenback, while USD/CNH fell over 300 pips as China’s currency extended on post-G20 advances after the PBoC strengthened the fix by the most since June last year. Elsewhere, AUD/USD was initially indecisive due to mixed data but then rose following the conclusion of an unsurprising RBA policy decision to keep rates on hold, as the USD continued to suffer across the board.

RBA kept the Cash Rate at the record low 1.50% as expected and reiterated that low rates are supporting the economy. The RBA also repeated that progress on inflation and unemployment is expected to be gradual, while it expects GDP to average 3.5% over 2 years. Furthermore, the RBA stated household consumption is a continuing source of uncertainty but commented that terms of trade had been stronger than earlier anticipated. (Newswires)

Australian Current Account Balance SA Q3 -10.7B vs. Exp. -10.2B (Prev. -13.5B, Rev. -12.1B). (Newswires)
Australian Net Exports Contribution Q3 0.4% vs. Exp. 0.2% (Prev. 0.1%)


COMMODITIES

Commodities were mixed overnight with WTI crude futures marginally adding to the prior day’s gains above the USD 53.00/bbl level following recent reports which suggest the likelihood of an OPEC+ output cut extension. Elsewhere, gold gained on broad weakness in the greenback with the precious metal up around USD 14.00 per ounce for the week, while copper was lacklustre as the risk sentiment soured during Asia trade. 

OPEC key-members are reportedly returning to determine a new output deal, despite Qatar's withdrawal from the group. (Platts)

CME raised NYMEX WTI crude futures maintenance margins by 17.1% to USD 4275/contract. (Newswires)

EIA postponed DoE weekly inventory data to Thursday 6th December at 1100EST/1600GMT. (Newswires)


GEOPOLITICAL

US aircraft carrier is reportedly heading to the Persian Gulf as a show of forces following an Iranian ballistic missile test over the prior weekend. (Newswires)

China is ramping up navy patrols in Taiwan Strait as a response to US warships sailing through the region. (SCMP)

US


US Congress is planning to delay the government shutdown and border wall fight till the Friday before Christmas, while it was also reported that Congressional leaders unveiled a stop gap bill to extend funding for 2 weeks to avoid a partial government shutdown on Friday. Furthermore, Democrats signalled they would accept two-week stopgap spending bill and would line up budget fight for Christmas week. (Newswires/Politico)

White House Economic Advisor Kudlow said he is cautiously optimistic about China-US deal and that they are pretty close to deal on IP, while he also stated that China is committed to lifting tariffs and non-tariff barriers immediately including the 40% auto tariffs and retaliatory tariffs on US commodities. Furthermore, Kudlow commented that the 90-day US-China truce will begin January 1st, although the White House later corrected this and stated that the truce began on December 1st. (Newswires)

Fed Chair Powell (Neutral) said he sees long term challenges in otherwise strong economy and added that the Fed has made great progress towards mission goals. (Newswires)

Fed's Kaplan (Non-Voter, Dove) said he is focused on not being pre-determined about the future path of rates, while he added he is paying attention to slowdown in global growth and expects US growth to slow next year. Furthermore, Kaplan said it is very possible that the US economy will look very different by mid-2019 and that he wants to be patient and watch things unfold. (Newswires)

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