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[PODCAST] US Open Rundown 4th January 2019

  • European equities are up as market risk sentiment improves from US-China trade developments
  • Dollar underperforms major counterparts (ex-JPY) ahead of Powell speaking after NFP
  • Looking ahead, highlights include US services PMI, US and Canadian jobs reports, DoEs, Baker Hughes, Fed’s Powell, Bostic, Mester and Barkin

ASIA

Asian equities were mixed following the slide in US stocks as disappointing ISM manufacturing data added to global growth fears after Apple’s trade-related profit warning. The Dow shed in excess of 600 points while the S&P fell further below the 2500 level and the Nasdaq tumbled 3.0% as the tech sector fell over 5.0%. ASX 200 (-0.3%) and Nikkei 225 (-2.2%) both failed to benefit from the higher base metal prices as the indices bore the brunt of the tech decline on Wall St, while the latter also played catch-up after a week-long holiday. Elsewhere, Hang Seng (+2.4%) and Shanghai Comp. (+2.0%) outperformed after erasing opening losses as almost all Chinese sectors turned green (gains led by oil names and financial firms) on the back of constructive trade developments, with China’s MOFCOM confirming that trade talks with the US are to take place next week, while the release of above-forecast Caixin services PMI exacerbated gains in the bourses.

China's MOFCOM has confirmed that US and China are to hold vice-ministerial trade talks on January 7th-8th. (Newswires)

Chinese Caixin Services PMI Dec 53.9 vs. Exp. 53.1 (Prev. 53.8) (Newswires)
Chinese Caixin Composite PMI Dec 52.2 (Prev. 51.9)

PBoC set CNY mid-point at 6.8586 (Prev. 6.8631) (Newswires)
PBoC drained a net CNY 320bln via OMO vs. net injection of CNY 240bln last week

China's Premier Li reiterated that China will take more measures including a targeted RRR cuts and further tax and fee reductions in order to support private and smaller firms; according to a statement. (Newswires)

BoJ is considering lowering its fiscal 2019 CPI growth forecast to circa 1.0% (Prev. projection 1.4%) at their next policy meeting on January 23rd. Policy makers are also said to be considering a minor downward revision to the fiscal 2020 forecast of 1.5%. (Nikkei)

BoJ Governor Kuroda reiterated that it is important to take consistent policy "patiently and persistently" towards beating deflation. (Newswires)

Japan MOF's Currency Head Asakawa said he is worried about the volatile FX moves and they will take steps on forex if needed. He added that G7 and G20 have confirmed that cooperation on FX is possible if needed and that speculative moves were seen in thin markets, regarding yesterday’s FX flash-crash. (Newswires)           

PBOC cuts bank's RRR by 100bps; 50bps as of Jan 15th and then a further 50bps on Jan 25th (Newswires)

- Banks will use released funds to repay maturing MLF in Q1

- Will help offset liquidity in volatility during the Lunar New Year Holiday

- Seen as a targeted adjustment, and not as a large stimulus

US

US House Democrats have voted to reopen government, defying US President Trump’s veto threat. (Washington Post)

US Senate Minority Leader Schumer (Democrat) is to attend Friday's meeting on the US government shutdown at the White House. (Newswires)

US Vice President Pence said that there can be no deal without border-wall funding. (Fox News)

US House Speaker Pelosi has invited US President Trump to deliver a State of the Union address on January 29th. (Newswires)

UK/EU

UK Cabinet ministers have been told that EU countries are likely to provide assurances to PM May over her Brexit deal. Assurances could include a promise that the EU does not intend to keep Britain in the backstop on a permanent basis and that it is “not the desired outcome” or that it will be “only for a short period”. (The Times)

Most UK Conservative activists back a no-deal Brexit over PM May's deal; according to a YouGov poll of over 1,200 Tory activists. (FT)

UK Markit/CIPS Services PMI (Dec) 51.2 vs. Exp. 50.7 (Prev. 50.4)

ECB's Coeure says that interest rates are to remain low for as long as is necessary. (Newswires)

GEOPOLITICAL

Thirteen Canadians have been detained in China since the Huawei CFO arrest; according to Global & Mail citing a Canadian government official. (Newswires)

Japanese PM Abe said he has intentions to push towards a peace treaty with Russia. (Newswires)

EQUITIES

Major European equities are in the green [Euro Stoxx 50 +1.2%] with the SMI (+0.5%) lagging its peers, weighed on by underperformance in the healthcare sector with index heavyweights Roche (-0.2%) and Novartis (-0.1%) in the red. All sectors, including the aforementioned healthcare sector, are in the green with outperformance seen in materials on the back of positive China trade developments. Mining names such as Thyssenkrupp (+3.5%) and Anglo American (+2.8%) sit towards the top of the Stoxx 600. Other notable stories include BMW (+1.6%) and Volkswagen (+1.3%) who are up after reporting increased US December vehicles sales of +0.3% and +5.0% respectively. Elsewhere, Bayer (+3.3%) are higher after the federal judge overseeing lawsuits alleging that their glyphosate-based weed killer causes cancer has granted the Co’s request to split the upcoming trial into two phases.

FX

Price action for FX markets thus far has been significantly more orderly than the JPY-inspired volatility seen on late Wednesday as traders await key macro and central bank updates. Starting with the JPY, the Japanese currency has given back some gains to its major counterparts with USD/JPY hovering around the 108.00 level. The story for USD/JPY is more one of JPY weakness rather than USD strength with the DXY in negative territory, albeit still on a 96.00 handle. From a JPY perspective, Japan MOF's Currency Head Asakawa stated overnight that he is worried about the volatile FX moves and will take steps on forex if needed. Going back to the USD, given recent disappointing macro data, today’s jobs reports from the US will be one of the more pertinent ones as of late from a Fed-perspective. Given the recent market turmoil, markets now fully price in a rate cut by April 2020 vs. the Fed’s view of two hikes in 2019 and one hike in 2020. Amid the starkly opposing views, an out of line report could have major ramifications for the USD either way. However, with Powell speaking two hours after the release, moves in the DXY may lack some conviction as participants await the latest communication from the Fed Chair.

Elsewhere, EUR/USD has been able to capitalize on the USD weakness and retain status on a 1.1400 handle within the mid-point of its 2019 range thus far. On the data front, core EZ service PMI readings fell short of analyst estimates who had forecast unchanged readings from the prior report. This was then followed by EZ-wide inflation metrics which revealed a decline in headline CPI Y/Y to 1.6% from 1.9% vs. Exp. 1.8% but did little to place any major weight on the multi-bloc currency.

GBP is exerting some strength against its major counterparts as GBP/USD continues to extend its post-flash crash ascent with the move pausing for breath after breaching Monday’s low of 1.2682. The Pound was unable to garner much in the way of support despite a beat on the all-important Services PMI (51.2 vs. Exp. 50.7) with Markit suggesting “The meagre service sector expansion recorded in December is indicative of the economy growing by just 0.1% in the closing quarter of 2018”.

AUD/USD has continued to extend its advance above 0.7000 with traders looking to see if the antipodean can see the week out above the psychological level and thus spur hopes for a near-term recovery. AUD was given a further helping hand briefly after the PBOC announced a 100bps cut to bank's RRR. However, the move higher will fleeting given it had already been touted by Premier Li and was seen as more of a targeted adjustment to cover the Lunar New Year period rather than an unveiling of major stimulus.

USD/CAD is due to come into focus later in the session amid the release of the Dec Canadian jobs report with consensus looking for 5.5k jobs to be added to the economy vs. the prior +94.1k. CAD has seen a relatively stellar start to the year alongside advances in crude markets with USD/CAD moving from a 1.36 handle to mid-1.34 levels. However, given the aforementioned importance of the US jobs report, performance today for the pair will likely be driven by events stateside with the possibility of opposing simultaneous reports a key risk factor for traders.

FIXED INCOME

Core EU debt is falling after flattering Caixin services PMI and Nikkei Manufacturing PMI prints fixed sentiment alongside further positivity found in confident conversations vis-à-vis China-US trade talks.

This has pressured 10-year Bund futures to lows of 164.37 with traders now eyeing the 164.01 Dec. 20th high next as support.  The UK benchmark is seeing similar price action and taking aim at the big figure of 123.00 to the downside after printing a session low of 123.34. Some PMI data releases from the EU have failed to stop the fixed income rot, with both Germany and France missing expectations and the UK beating expectations, whilst the EZ CPI miss also failed to have an effect. BTPs are conforming to the risk-tolerant tone but have pulled back off of highs of 127.22 in recent trade to slowly revert to a 9 tick gain for the day after Italian YY CPI figures came in 50bps below the previous reading, traders remain mindful of Banca Carige developments.

US Treasuries are in the red for the day with the largest moves in the long end of the curve after 10-years hit a pinnacle and two day high of 123-07+ in the early European morning ahead of the 1st jobs report of the year, where consensus is looking for 177k payrolls added to have been added to the labor market in Dec. 2018.

COMMODITIES 

Brent (+2.2%) and WTI (+2.2%) prices are higher, with WTI trading around the USD 48.00/bbl level and Brent just above the USD 57.00/bbl level. This support comes after a larger than expected draw in API weekly crude stocks of -4.5mln vs. Exp. -3.1mln, with markets now looking towards today’s EIA release. In addition, the Iraq oil ministry has reportedly taken measures to cut output by 3% from October’s level of 4.653mln BPD. Elsewhere, Energy Intel’s Amena Bakr has tweeted that Saudi Arabia are to announce a jump in oil reserves.

Gold (-0.2%) has turned negative as the positive trade news from China improved the risk sentiment, with the yellow metal trading just over USD 1290/oz. Additionally, copper prices have improved on the back of positive Chinese trade news with the metal recovering from a 18-month low hit in the previous session.

Iraq are to keep their average oil output at 4.513M BPD for the next 6 months. (Newswires)

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