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[PODCAST] US Open Rundown 20th December 2018

  • Dollar has reverted from post-FOMC levels and European equities continue their overnight decline
  • Brent and WTI continue to decline as supply and growth concerns weigh on prices
  • Looking ahead, highlights include US Initial Jobless Claims & Philly Fed Business Index

ASIA

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 (-2.8%) 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. (-0.5%) 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 (-1.0%) 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.

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)

TRADE

EU has launched a second challenge against China at WTO over forced technology transfers. (Newswires)

UK/EU

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)

UK Retail Sales YY Nov 3.6% vs. Exp. 1.9% (Prev. 2.2%, Rev. 2.4%)

UK Retail Sales MM Nov 1.4% vs. Exp. 0.3% (Prev. -0.5%, Rev. -0.4%)

CENTRAL BANKS

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)

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 Governor Kuroda says will consider further monetary easing as appropriate if momentum towards price target is undermined. Adding that inflation expectations are in no position to accelerate ahead. (Newswires)

Japan's currency diplomat Asakawa has discussed steps to respond to volatile markets at the BoJ meeting. (Newswires)

Swedish Riksbank Rate -0.25% vs. Exp. -0.5% (Prev. -0.5%)

- Forecast for the Repo rate indicates the next hike will likely occur in the second half of 2019

- Deputy Governor Jansson dissented the rate hike, and did not support the repo-rate path in the monetary policy report.

- Riksbank sees the repo rate averaging 0.48% in Q4 2020, vs. Prev. 0.66% forecast and,  0.98% in Q4 2021, vs. Prev. 1.23% forecast.

- Add that even though inflation has been lower than expected, conditions remain good for inflation to stay close to the inflation  target going forward

- Also say as inflation and inflation expectations have become established at around 2%, the need for a highly expansionary monetary policy has decreased slightly.

- Economic activity is strong and conditions are good for inflation to remain close to the inflation target in the period ahead.

- Riksbank’s Governor Ingves says should the crown strengthen much faster than is forecast, then this would dent inflation. Adding that our assessment is that recent data has been sufficiently close to forecast for a hike. It was reasonable timing to hike and they did not feel forced to do so, whilst past difficulties of getting inflation towards the target resulted in it taking longer to begin raising hikes.

US

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)

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)

EQUITIES

Major European Indices are in the red [Euro Stoxx 50 -1.5%] continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors with index heavyweights Anglo American (-3.1%), Rangold Resources (-2.6%) and Rio Tinto (-2.6%) in the red. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging.

Other notable movers include Wirecard (-3.7%) who are at the bottom of the DAX (-0.9%) following a article stating the Co only has a 5-10% share in German online transactions.

FX

DXY - The Dollar has recoiled sharply from initial recovery highs seen after the Fed delivered its latest 25 bp hike, but not quite the dovish future guidance that most seemed to be anticipating. However, 2019 dot plots were trimmed to 2 from 3, the neutral rate was shaved to 2.8% from 3% and the accompanying statement was tweaked to a degree in terms of the amount of further policy normalisation in the current cycle. Hence, on reflection the FOMC has shifted towards a more cautious stance, and this was highlighted by Chair Powell in the post-meeting press conference, particularly with regard to subdued if not expressly declining inflation pressure. The upshot, an unwind and part-reversal in the Usd and index through pre-FOMC lows around 96.200.

SEK - In stark contrast to the Greenback’s relatively abrupt U turn, the Swedish Crown received a semi-surprise boost from the Riksbank that raised the repo rate by ¼ point against majority, albeit not unanimous by any means market expectations. Indeed, Eur/Sek has tested 10.2500 vs almost 10.3700 at one stage ahead of the contentious final policy meeting of the year, even though the decision to hike was contested by one Board member and came with a shallower projected tightening path out to 2021.

EUR - The single currency is heading gains vs the back-pedalling Usd and finally cleared recent highs just ahead of 1.1450 on its way to circa 1.1485 and mega option expiries/barriers at 1.1500 (5.6 bn) that also coincide with early November peaks.

CHF/GBP/JPY - All benefiting from the aforementioned Dollar demise, with the Franc breaching 0.9900 resistance and perhaps also aided by a widening Swiss trade surplus. Similarly, Cable has overcome a sticky level around 1.2650 to briefly peer above 1.2700 despite ongoing Brexit uncertainty and helped in part by a strong pre-Xmas UK retail sales update, but highly unlikely to derive any further purchase from the BoE that is unanimously seen standing pat. Meanwhile, broad risk-off sentiment/positioning and even flatter yield curves have sparked strong demand for the Jpy that has now rallied through 112.00 to just over 111.70, even though Japanese monetary authorities are monitoring the situation and BoJ Governor Kuroda maintains the option of further easing if needed following an unchanged final policy meeting of the year.

AUD/NZD/CAD - The Aud is markedly outperforming vs its fellow non-US Dollars, albeit within a significantly lower range vs its US counterpart around 0.7100, as the Kiwi is undermined by much weaker than forecast Q3 GDP overnight and ANZ’s dovish call for a 25 bp RBNZ rate cut. Nzd/Usd is languishing below 0.6800 and the Aud/Nzd cross is back over 1.0500 accordingly. Elsewhere, sliding crude prices and the Canadian-Chinese diplomatic situation continues to weigh heavily on the Loonie, but the Cad has rebounded from 1.3500+ lows to circa 1.3450.

EM - Regional currencies now all in the ascendency vs the Usd and regaining lost ground after the initial Fed fall-out and rout in risk assets.

FIXED INCOME

The pull-back has not been as dramatic or pronounced as the Dollar’s fall from grace, but Bunds and Gilts have retraced some distance from Eurex and Liffe peaks of 164.01 and 123.85 respectively to 163.53 and 123.24 lows in more recent trade. Conversely, BTPs have regrouped and recharged after their early session wobbles to extend post-Italian budget approval highs at 127.94, and this may be weighing on the 10 year German debt future along with the realisation that the FOMC was still less dovish than it was in September even though it did not remove further hikes from the agenda or signal a pause as such. Meanwhile, Gilts have considerably better than forecast UK data to contend with and pre-BoE positioning, even though the CBI survey was bleak, and US Treasuries retain a clear flattening bias, albeit with outright futures off overnight session highs.

COMMODITIES 

Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers are awaiting orders from state oil Co NOC.

Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.

IEA Head Birol states that he does not expect a sharp increase in oil prices in the short term, unless there is a geopolitical problem; and that US oil production is seen to be accelerating with serious growth expected until 2025. Additionally, expects the fall in Venezuelan oil production to continue.

Saudi Arabia are to cut oil production by 332,000 BPD from January to 10.311mln BPD; according to an OPEC document seen by Journalists. (Newswires)

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