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[PODCAST] EU Open Rundown 5th December 2018

  • Asian stock markets were pressured following the sell off on Wall St where doubts regarding a US-China trade deal saw all US majors drop over 3%
  • China’s Mofcom declared the US-China trade meeting as successful, although were said to be puzzled and irritated by the Trump administration's triumphant rhetoric
  • UK Government was defeated in the Commons after being found in contempt of Parliament, with MPs also granted more power over the next Brexit steps if May's deal is voted down
  • Looking ahead, highlights include, EZ Markit Services PMI, UK Services PMI, BoC Rate Decision, ECB's Draghi & Lautenschlager, Fed's Quarles, JMMC meeting, US Market Closures

TRADE

US President Trump tweeted that the US will either have a real deal with China or no deal at all and that the US will levy major tariffs against imports of Chinese products if a deal is not made with China. (Twitter)

There were initial reports that China was said to be puzzled and irritated by the Trump administration's triumph rhetoric after the trade ceasefire. However, Mofcom later stated that the US-China trade meeting was successful and is confident it can be implemented, while it added that both sides will proactively push ahead with negotiations within 90-day time frame and that China will implement specific items agreed at meeting ASAP. In addition, the NDRC said government agencies signed MOC for joint effort to toughen punishment for IP theft. (CNBC/Newswires)

White House Trade Adviser Navarro suggested to give talks a chance and that it is premature to lose faith in US-China discussions. (Fox)

China's UNIPEC is said to be planning to buy US crude oil in Q1 2019 following truce at G20 according to sources, while it was also reported that a Chinese official was told to prepare resuming US soy and LNG imports. (Newswires)


ASIA

Asian stock markets were pressured following the sell off on Wall St where doubts regarding a US-China trade deal saw all US majors drop over 3% in which the S&P 500 fell below its 200DMA and DJIA lost near 800 points on the day. This weighed heavily on the China-sensitive sectors in the US such as Industrials, Materials and Tech, while Financials took the biggest hit amid a slump in yields and ongoing yield-inversion. ASX 200 (-0.8%) was led lower by tech and financials with disappointing Q3 GDP adding to the downbeat tone, while Nikkei 225 (-0.6%) also finished negative albeit off worse levels as USD/JPY attempted to nurse losses. Elsewhere, Hang Seng (-1.7%) and Shanghai Comp. (-0.7%) conformed to the downbeat tone but with the declines in the region less drastic than the bloodbath observed stateside following stronger than expected Chinese Caixin Services PMI which jumped to a 5-month. Furthermore, there was a seemingly concerted effort by some officials to dispel the trade-related doubts in which White House Trade Adviser and ‘China hawk’ Navarro suggested to give talks a chance and that it is premature to lose faith in US-China discussions, while Mofcom also declared the US-China trade meeting was successful although Trump remained unrelenting and reiterated his threat of tariffs if they fail to reach a deal. Finally, 10yr JGBs initially rose to levels last seen over 2 years ago amid safe-haven demand and as they tracked the upside in T-notes. However, prices then pulled back to return flat after the BoJ’s bond buying operation in which it upped purchases in the 10yr-25yr maturities by JPY 20bln, as the bank is on course to reduce monthly purchases of superlong JGBs by JPY 150bln if it continues at the current pace given the previously announced reduction of operations for December.

PBoC skipped open market operations for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.8476 (Prev. 6.8939)

Chinese Caixin Services PMI (Nov) 53.8 vs. Exp. 50.7 (Prev. 50.8); 5-month high. (Newswires)
Chinese Caixin Composite PMI (Nov) 51.9 (Prev. 50.5)


UK/EU

UK Government was defeated in Parliament in which lawmakers voted to provide parliament more power over the next Brexit steps if PM May's deal is voted down on Dec 11th. In addition, UK Parliament voted that the government is in contempt over Brexit legal advice and ordered to publish advice immediately. (Newswires) Paul Brand of ITV highlighted that we are now firmly in minority government territory and that the DUP no longer provides confidence or supplies votes. UK Parliament leader Leadsom said the government is to publish document of full legal advice on Brexit on Wednesday, while The Times Deputy Political Editor Sam Coates suggested there could be a row looming over which legal advice the government releases if it is a short version briefly put before cabinet or something more substantial. (Newswires/Twitter)

UK PM May pledged a more formal role for Parliament on her Brexit deal and she will work with Parliament to prepare the mandate for next steps of negotiations, while she also commented that a 2nd referendum wouldn't bring the country together. (Newswires)

Sky News reported that the UK does not need to pass legislation to revoke Article 50. (Sky News)

UK Labour Party Leader Corbyn said reopening negotiations with the EU should not be ruled out. (Newswires)

Italy’s Deputy PM Salvini said they are short of agreeing with EU on budget, while Economy Minister Tria said the government is mulling more asset sales next year to help cut debt. (Newswires) It was later reported that Tria is reportedly more tempted to resign now than before; according to Corriere Della Sera. (Corriere Della Sera)

FX

In FX markets, USD remained firmer following the prior day’s gains in which the DXY reclaimed the 97.00 level amid safe-haven demand and after the recent bullish tone on the economy by Fed’s Williams. This also coincided with broad losses across its major counterparts with EUR/USD firmly below 1.1400 and GBP/USD failing to hold on to the 1.2700 handle after the government’s trifecta of defeats at Parliament yesterday. Elsewhere, high-beta and commodity-linked currencies AUD, NZD and CAD were subdued amid the risk averse tone and decline in oil prices, with AUD/USD the underperformer following the GDP miss.

Australian GDP (Q3) Q/Q 0.3% vs. Exp. 0.6% (Prev. 0.9%). (Newswires)
Australian GDP (Q3) Y/Y 2.8% vs. Exp. 3.3% (Prev. 3.4%)


COMMODITIES

Commodities were mixed in which WTI crude futures resumed its weakening trend overnight following Saudi Energy Minister Al-Falih’s comments yesterday that it is premature to suggest OPEC+ will lower output, while a surprise build in the headline API crude inventory report and widespread bearish updates to its components added to the pressure. Elsewhere, gold was dampened amid a firmer greenback but with losses also stemmed on safe-haven support and copper was flat which provided some much-needed respite from this week’s slump.

US API Weekly Crude Stocks (30 Nov) +5.36mln vs. Exp. -0.9mln (Prev. +3.453mln)
 

OPEC delegates are said to be concerned that Saudi and Russia are making output agreements without OPEC input, while an official said that Saudi-Russia relationship was a key reason for Qatar’s withdrawal. (WSJ)
 

Iran Oil Minister Zanganeh said OPEC has problems and that the reasons for Qatar exit must be examined, while he later stated it is too early to say if an oil output cut is needed. UAE Oil Minister stated that the market needs a drop in oil production. (Newswires)
 

Kuwait Oil Minister said OPEC will discuss market conditions and how to stabilize oil markets on Thursday. (Newswires)

GEOPOLITICAL

US Secretary of State Pompeo said the US is suspending its obligations under nuclear treaty over Russian violations. (Newswires)

US


The treasury complex drifted higher on Tuesday with particular attention falling on the long end of the curve which attracted investors’ demand amid prospect that the Fed might slow the pace of rate hikes in 2019. The 10yr yield hit a 3-month low at 2.8830% and the 30yr yield fell to 3.1278%, overall representing the largest drop since May. Yields on the short-end of the curve were lower by less than 1bps while the 30yr yield was lower by c.1bps at settlement. Much attention is on the inversion of the curve, Barron’s has noted that a true inversion would involve the short and long-ends of the curve, and how the five-year maturities ‘don’t really count’; 2s10s hit 9.32bps the lowest since 2007, but Barron’s noted that the last 10 times 2s10s has inverted, there were three occasions when there was no recession. Goldman Sachs noted that it doesn’t believe that investors ought to overly fear a flat yield curve, either as a signal or a cause of a recession, describing it as a “sheep in wolf’s clothing”. US T-note futures (Z8) settled 15 ticks higher at 120-03.

Fed's Discount Rate Minutes showed 12 Fed banks favoured no discount rate change and that several districts continued strength in spending and confidence. Furthermore, Fed bank directors saw ongoing tightening in the labour market and still positive on economic outlook, while trade policy remained a concern for some directors. (Newswires)

US Special Counsel office filed sentencing memo for former Trump National Security Adviser Flynn, in which Special Counsel Mueller recommended no jail time as Flynn was said to have provided substantial assistance. (Newswires)

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