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[PODCAST] EU Open Rundown 20th December 2018

  • The FOMC raised the fed funds rate target by 25bps, narrowed the trajectory of rate hikes going forward and softened its guidance on future rate hikes
  • Asian equities firmly in the red following the declines seen on Wall St. post-FOMC. DXY fluctuated on either side of the 97.000 handle
  • Looking ahead, highlights include Riksbank Rate Decision, UK Retail Sales, BoE Rate Decision, US Initial Jobless Claims & Philly Fed Business Index

FOMC

- The FOMC raised the fed funds rate target by 25bps to 2.25% - 2.50% (vs. Prev. 2.00% - 2.25%), in line with the analyst median forecast.

-The central bank also narrowed the trajectory of rate hikes going forward, now envisaging two hikes in 2019, and one in 2020 (previously it had seen three hikes in 2019 and one in 2020). Crucially, the FOMC lowered its estimate of the neutral rate (to 2.8% from 3.0%).

- The central bank softened its guidance on future rate hikes, saying that “some further gradual increases” to rates (versus the previous “further gradual increases”). In terms of risks to the outlook, the Fed continues to see these as “roughly balanced”

- Markets initially reacted with caution, with ES (H19) and T-Notes moving lower (T-Notes recovered thereafter, sending 10-year yields to the lowest since May), upside was seen in the USD. Many saw reaction as a result of the narrowing of the trajectory of normalisation as an acknowledgement of slowing growth momentum.

- In his statement, Chair Powell said “cross-currents” have emerged, and the Fed has seen developments that signal softening ahead, though the developments have not fundamentally altered its outlook. Powell reiterated comments from October that policy is not on a pre-set course, and talked about the Fed’s data-dependency.

- Powell said the FOMC sees some moderation of growth in 2019; tightening financial conditions and slower growth led the Fed to mark down inflation projections. Powell suggested that inflation trends can allow the Fed with patience in normalising policy.

- On the neutral rate, he suggested we are now at the bottom-end of the estimate of the neutral rate, while stating that there is a high degree of uncertainty about the path of future hikes; Powell stated that policy does not need to be accommodate and it was appropriate to be neutral. He also said the Fed took tightening financial conditions into account.

- On independence, Powell said political concerns played no role in the FOMC’s deliberations, and nothing would deter the Fed from doing what it thinks it the right approach. Elsewhere, Fed Chair Powell said that balance sheet policy will remain on auto-pilot.

- Through his press conference, ES futures continued to slide, while the USD continued to appreciate and T-Notes printed highs of 121-13+. Markets attributed this to Powell striking a cautious tone; specifically, 2019 will see a slowdown of growth, and there was a high degree of uncertainty on the rate trajectory. Additionally, he does not believe policy needs to be accommodative, and said neutral policy was now appropriate, giving traders little reason to jump into risk

ASIA-PAC

Asian equities drowned in a sea of red following the decline seen on Wall St. post-FOMC where the Dow, S&P 500 and Nasdaq all dived to fresh YTD lows and tech-giant Apple sunk over 3%. ASX 200 (-1.3%) was mostly pressured by the material sector as metals fell with the Fed-induced USD strength, similarly Nikkei 225 (-3.4%) retreated further below the 21,000 handle to levels last seen in September 2017 as its heavy mining sector slumped, while a firmer JPY further distressed the benchmark. Elsewhere, Shanghai Comp. (-1.1%) was weighed on by financial names (China Banks sector -2.3%) after the PBoC refrained from raising reverse repo rates following the FOMC and HKMA 25bps hikes. Meanwhile, Hang Seng (-1.5%) was pressured by the regional risk sentiment alongside weakness in the property and financial sectors, on the flip side, shares in Rusal provided the industrial sector with modest support after spiking higher in excess of 20% after the reports that US will terminated sanctions against the company.

Hong Kong Monetary Authority raised rates by 25bps to 2.75% in lockstep with the Fed, as expected. HKMA stated that rising interest rates reflect normalisation from a low-rate environment and more data in needed to determine if the local property market is in a downturn. (Newswires)

PBoC left reverse repo rates unchanged with the 7 ,14, and 28-day rates kept at 2.55%, 2.70% and 2.85% respectively; according to a statement. (Newswires)

BoJ left monetary policy steady with short-term rate target at -0.1% and JGB yield target at around 0.0%; unchanged as expected. The Central Bank maintained pledge to buy JGBs in a flexible manner with holdings to increase at a pace of JPY 80tln per annum. Forward guidance was unchanged with BoJ stating it "will keep current extremely low rates for an extended period of time". Board members Kataoka and Harada dissented on YCC as expected. (Newswires)

PBoC set CNY mid-point at 6.8936 (Prev. 6.8869) (Newswires)
PBoC injected CNY 120bln via 7-day reverse repos and CNY 30bln via 14-day reverse repos; net CNY 150bln

Chinese official says China are to study are new round of "substantial" tax cuts. (Newswires)

UK

UK Work and Pensions Secretary Amber Rudd said that another Brexit referendum will become a "plausible" way forward if there is deadlock in Parliament. (BBC)

BBC's Political Correspondent Nick Eardley tweets that the government is strongly opposed towards a second referendum, citing Downing Street sources. (Twitter)

The Irish Government has published its Brexit contingency plans. (Newswires)

EU

Italian Economy Minister Tria said budget deal should show markets once and for all that Italy has no intention of leaving the Euro. He also added that the lower deficit won't impact pensions overhaul, budget measures and citizen's income being implemented April 1st, 2019. (Newswires)

Italy reportedly targets debt/gdp ratio of 130.7% in 2019, falling to 129.2% in 2020, ANSA reports. (ANSA)

FX

In FX markets. DXY fluctuated on either side of the 97.000 handle following the FOMC rate decision which turned out to be less dovish than markets expected. As such, EUR/USD remained sub-1.1400 and around its 50 DMA at 1.1384, while GBP/USD was choppy above 1.2600. Meanwhile, USD/JPY was initially dominated by the greenback as the pair hovered around 112.50 before safe-haven flows took the pair below its 100 DMA (112.41) and recent low (112.09) to test the big figure to the downside. Elsewhere, NZD is the marked underperformer after the currency received a double whammy from disappointing Q3 GDP alongside ANZ forecasting a 25bps cut to the RBNZ OCR in November next year, subsequently NZD/USD fell below 0.6750 ahead of its 50 DMA at 0.6733. Meanwhile AUD/USD tested 0.7100 to the downside after a muted reaction to the Australian jobs data as part-time jobs mostly contributed to the rise in the employment change, while full time jobs fell by 6.4K. Finally, USD/CNY rose above 6.9000 to levels last seen at the end of November as the PBoC introduced a targeted lending measure to support growth, as well as refraining to raise rates after the HKMA hiked by 25bps, in lock-step with the Fed.

ANZ expects the RBNZ to cut the OCR in November 2019; and added that through 2020, they see the Cash Rate declining to as low as 1.00% (currently 1.75%). (Newswires)

New Zealand GDP Prod Based QQ, SA Q3 0.3% vs. Exp. 0.6% (Prev. 1.0%) (Newswires)
New Zealand Trade Balance Nov -861M vs. Exp. -880M (Prev. -1295.0M, Rev. -1317M)

Australian Employment Nov 37.0k vs. Exp. 20.0k (Prev. 32.8k) (Newswires)
Australian Full Time Employment Nov -6.4k (Prev. 42.3k)
Australian Unemployment Rate Nov 5.1% vs. Exp. 5.0% (Prev. 5.0%)
 

COMMODITIES

WTI and Brent recommenced their decline following yesterday’s retracement, as the former retests USD 47.00/bbl to the downside and the latter in close proximity to USD 56.00/bbl amidst ongoing supply glut concerns and slowing global growth weighing on investors’ minds. Elsewhere, the metals complex gold prices mirrored the greenback, while copper underperformed as the red metal fell victim to the soured risk tone. Finally, aluminium prices slumped after the US Treasury stated it will lift sanctions on the metal’s second-largest producer, Rusal.

Libyan PM has given orders to reopen El-Sharara’s 315K BPD oilfield, but production has not restarted yet; according to a field engineer. (Newswires)

Aluminium producer Rusal confirmed that US Office of Foreign Assets Control notified Congress of the intention to terminate sanctions against the company. (Newswires)

Saudi Finance Minister said he is "comfortable" with oil prices up to now and "relatively comfortable" in a worst-case scenario. (Newswires)


GEOPOLITICAL

US has imposed fresh Russia-related sanctions according to a Treasury statement. (Newswires)

US

Heading into the FOMC Meeting T-notes traded cautiously in a 120-26 -121-02 range; on the rate decision itself there was a two-way action with treasuries initially reticent to move before rising to 121-03. However, over the course of press conference, we saw further upside as Fed Chair Powell presented a cautious tone highlighting uncertainty ahead amid easing growth momentum.

US Senate has passed the stopgap measure averting a government shutdown through to February 8th 2019. (Newswires) WSJ then reported that Senate Republicans anticipate US President Trump to sign the bill. (WSJ)

Senior White House official declined to say for sure that US President Trump will sign the government spending bill if passed. (CNBC)

US Special Council Mueller has requested Trump Adviser Stone's Testimony to House intelligence panel, suggesting special counsel is near end of probe of Russian interference of the 2016 campaign. (Washington Post)

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