[PODCAST] US Open Rundown 6th December 2018
- Crude collapses as OPEC+ and Saudi assert that there is no rush to cut, and 1.3mln BPD is “excessive
- Huawei CFO arrested on Iranian sanction violations hints at further trade tensions as the bearish market sentiment takes hold
- Looking ahead, highlights include ADP Employment, Initial Jobless Claims, ISM Non-Manufacturing Data, Durable Goods (R), Factory Orders and DoEs, Canadian Trade Balance, BoJ's Kuroda, Fed's Powell, Quarles, Bostic, Williams, BoC's Poloz
Asian stocks were lower across the board for a 3rd consecutive day with sentiment dampened after the US market closure and reports that Canada arrested Huawei’s CFO at the request of US authorities for alleged violations of sanctions against Iran. This prompted demands by China’s Embassy for an immediate release of the executive and led to concerns of the potential ramifications to trade discussions which weighed heavily on US equity futures. As such, Emini S&P declined by over 60 points and DJIA futures were down by more than 500 points shortly after the reopen which forced the CME to intervene to prevent a harder drop, while ASX 200 (-0.2%) and Nikkei 225 (-1.9%) were also weaker with the latter pressured by detrimental currency flows. Hang Seng (-2.5%) and Shanghai Comp. (-1.6%) conformed to the negativity with the Hong Kong benchmark underperforming amid losses across all its components and as local money markets rates edged higher again, while the PBoC announcement of a 1-yr Medium-term Lending Facility failed to support China with the operation at a reduced amount of CNY 187.5bln vs. Prev. CNY 403.5bln. Finally, 10yr JGBs were higher amid a continuation of the declines across yields and with safe-haven demand also underpinned by the weakness across equities.
PBoC skipped repo operations again but announced CNY 187.5bln of lending through 1yr MLF. (Newswires)
PBoC set CNY mid-point at 6.8599 (Prev. 6.8476)
Canada arrested Huawei CFO Meng at the request of US authorities, with the CFO facing extradition to the US on allegations she violated US sanctions against Iran. Following the arrest, the China Embassy in Canada demanded the immediate release of the CFO and said it resolutely opposes the arrest. (Globe and Mail/Newswires)
S&P/Dow Jones are to include certain China A-shares to its global indices. (Newswires)
China's Commerce Ministry says consensus has been reached with the US on agriculture, energy and cars; what has been agreed will be immediately implemented. Are very confident of reaching an agreement on trade within the 90-day period. Adds that the ultimate goal in US-China negotiations is to remove all tariffs, and that trade talks are not a give and take situation. (Newswires)
China's Foreign Ministry says Canada and US are yet to clarify the reason for the arrest of Huawei’s executive. (Newswires)
UK PM May is being pushed by cabinet members to postpone next week's Parliament vote on Brexit amid worries she is facing a loss so disastrous it could collapse the government. Instead, cabinet members believe that the PM should devote more time to selling the deal. (Times) Furthermore, reports have suggested that PM May has sent her Chief Whip to try find a way forward with the ERG by offering a potential Parliamentary ‘lock’ which would require lawmakers to give their consent before some of the more controversial parts of the UK’s exit from the EU came into effect. (Newswires)
EU is ready to offer PM May a lifeline of extending Article 50 if her deal is rejected by Parliament next week, according to sources. (Newswires)
Sky News' Political Correspondent Cohen tweets "[UK] PM will press ahead with Tuesday’s vote, despite warnings from cabinet ministers to delay, I’m told" (Twitter)
UK's Unite union leader warned opposition Labour party against backing a second EU referendum. (Guardian)
Italy's PM Conte is said to be working to lower the budget deficit target to 1.9%-2.0%; Italy may also lower the 2020 and 2021 targets (Il Sole)
Italian Deputy PM Salvini says the reports of Italian PM Conte cutting 2 key reforms are "pure fantasy", adding that the government will establish the final costs for pension reform and citizen's income measures today. Adding that new budget estimates will be ready today. (Newswires)
Italian League Party sources suggest the party doesn't want a 2019 deficit below 2.2% of GDP, and 5-Star sources say they are willing to consider a 2.1% deficit/GDP target, but nothing lower. (Newswires)
European equities (Eurostoxx -2.0%) have taken the lead from US futures and Asia-Pac trade overnight with US-Chinese trade concerns reignited by news that Canada arrested Huawei’s CFO at the request of US authorities for alleged violations of sanctions against Iran. This prompted demands by China’s Embassy for an immediate release of the executive, which subsequently weighed heavily on US equity futures. Despite commentary from China ahead of the open stating that their ultimate goal in US-China negotiations is to remove all tariffs, overnight developments have weighed heavily on sentiment in Europe thus far. The follow-through of events overnight has placed weight on IT names with STMicroelectronics (a supplier to Huawei) lower by -4.8% with losses also observed in Dialog Semiconductor (-2.6%) and Infineon (-3.3%) among others . Elsewhere, energy names underperform amid initial comments from the OPEC ministers in Vienna, signalling a potential cut in the low end of the expected range. In turn, European Oil and Gas Index fell 3.4% in-fitting with price action in the oil complex (BP -4.3%, Total -2.5%).
JPY/USD/CHF - All beneficiaries of safe-haven positioning/demand, as the global stock rout continues and intensifies, but to varying degrees with Usd/Jpy retreating below 113.00 while Usd/Chf holds near parity and the DXY remains around 97.000 amidst heavy losses in certain G10 counterparts. However, some hefty and layered option expiries in Usd/Jpy could keep that pair in check, with 1.6 bn rolling off between 112.75-80 and a similar amount sitting at 112.95-113.00, ahead of more 1+ bn maturities above the figure up to 113.75.
AUD/CAD/NZD - The non-US Dollars have extended declines vs the Greenback and underperformance against other majors, as bearish independent impulses exacerbate the negative impact of broader risk aversion. Aud/Usd is now testing 0.7200 bids and psychological support following dovish commentary from RBA’s Debelle in wake of this week’s disappointing GDP data, with rate cuts back on the agenda if the economy slows further and the baseline scenario of the next policy move being a hike does not pan out. By the same token, and with the added pressure of collapsing crude prices amidst talk of no more than 1 mn output cuts from OPEC+, the Loonie has continued its post-BoC plunge to circa 1.3440, while the Kiwi has slipped below 0.6900 towards 0.6850, but is deriving underlying support from the greater demise in the Aud again, as the cross retreats through 1.0500 and to a fresh ytd low around 1.0480.
GBP/EUR - The Pound and single currency are both holding up reasonably well given the increasingly risk-off environment, not to mention ongoing Brexit and Italian budget tension, as Cable maintains 1.2700+ status and Eur/Usd stays above 1.1300. Note, mega option expiries in close proximity from 1.1295-1.1300, 113.50-60 to 1.1380 (1.65 bn, 1.7 bn and circa 1.4 bn respectively).
EM - Almost a blanket sea of red and heavy losses vs the Usd, especially for the Rub, Zar and Yuan.
The risk-off tone has been offered additional pressure by OPEC+ headlines and Saudi quoting a 1.3mln BPD cut as excessive; this has given Bunds impetus to print a marginal new Mar. contract high at 163.35, with the German benchmark now trading around the 163.30 handle and 163.52/55 trend resistance up next. BTPs saw a kneejerk dip to 123.53 off the back of League and 5-star source reports that the far-right party are holding out for a 2.2% deficit/GDP target, but pared back the majority of this move to revert to the 123.80 area. Traders are now looking to tonight’s finalised budget details as advised by Deputy PM Salvini ahead of the Lower House and Senate votes tomorrow and Monday with market participants noting a fresh downside buyer via BTP options with a max pay-out should 10-year yields hit ~3.65%.
Gilts are still regaining some composure (+23 ticks) on risk sentiment, but still lag Bunds, after a couple of days of Brexit-driven beatings, with the 10-year eking out a high print of 123.31 after the UK’s 2049 auction that saw yields fall markedly from 1.826% to 1.0909%, and b/c climb from 1.76 to 2.40.
US 10-year futures are marginally up with yet more bull flattening as traders return to their desks to a rocky market after H. W. Bush’s memorial and confirm to the risk-off tone, with investors looking for further direction from multiple tier 1 data releases and multiple Fed speakers rounded of by Chair Powell at the end of the EU day and NFP tomorrow.
Brent (-4.3%) and WTI (-4.2%) have continued to drift lower as the 175th OPEC meeting begins, with initial remarks from OPEC delegates suggesting that OPEC+ could only cut 1mln BPD if Russia agrees to cut 150k BPD, adding they would be willing to cut over 1.3mln BPD if Russia cuts 250k BPD. Sources thereafter went on to state that any cut is unlikely to be over 1.4mln BPD. Russia’s role in the agreement continues to remain a source of speculation with prices hampered by comments from the Russian Energy Minister Novak suggesting that it is difficult for Russia to cut output quickly in Winter. WTI and Brent crude futures were then dragged lower once again after the Saudi Energy Minister Al-Falih says there is no agreement yet to cut but all options are on the table, including a no deal. Al-Falih then added that a 1mln BPD cut will be enough for OPEC+, a comment which appeared to add to the downside in energy markets with the level touted not well received by the market, particularly after he then went on to state that the KSA are content with the current oil price. Furthermore, questions also remain over who might not participate in any output cut with NOC's Sanallah contradicting comments from the Oman oil minister overnight after stating that Libya is hoping for an exemption from the OPEC cuts. Additionally, Iran continues to hold a tough stance in negotiations by stating that they will not be a part of any deal to reduce output until sanctions are removed. Note, this week’s DoE report will be released today due to yesterday’s market closure.
Gold is trading flat within a tight USD 5/oz range, with spot palladium trading at a premium to gold for the first time in 16 years; as prices hit record levels of USD 1246.50 in the previous session. Separately, China has reportedly asked steel mills in the province of Tangshan to being implementing winter curbs due to a reduction in air quality.
For a full rundown of OPEC commentary please see the relevant stories on our headline feed by using the ‘Commodities’ filter.