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[PODCAST] US Open Rundown 7th January 2019

  • European equities are in the red, with some outperformance in IT. The USD continues to underperform major counterparts
  • US-China trade talks begin; although, a US destroyers’ presence may cause tensions to flair
  • Looking ahead, highlights include US Factory Orders, US ISM Non-MFG PMI, Fed’s Bostic and ECB’s de Guindos

ASIA

Asian stocks began the week higher across the board as the region took its first opportunity to react to the trifecta of bullish developments from last Friday including the blockbuster NFP jobs data, dovish comments from Fed Chair Powell and the PBoC’s 100bps RRR cut. ASX 200 (+1.1%) and Nikkei 225 (+2.4%) gained from the open with Australia led by strength in tech and miners, while the Japanese benchmark outperformed and initially rose by over 3% as it tracked the rally in its Wall St. counterparts. Elsewhere, Shanghai Comp. (+0.7%) and Hang Seng (+0.8%) conformed to the positive tone following the RRR cut announcement and with mid-level trade discussions set to resume between US and China today, although the mainland lagged its regional peers following a CNY 170bln liquidity drain by the PBoC. Finally, 10yr JGBs were softer with safe-haven demand dampened amid the rally across stocks, but with downside also stemmed by the BoJ’s presence in the market for JPY 1tln in JGBs with maturities spread across the curve.

PBoC skipped open market operations for a net daily drain of CNY 170bln. (Newswires)
PBoC set CNY mid-point at 6.8517 (Prev. 6.8586)

US

US President Trump and Chinese President Xi Jinping are reportedly mulling a potential summit in H1 2019 if progress is made in trade talks which begin today in Beijing according to sources. Elsewhere, US President Trump renewed his threat to invoke a national emergency as a way to circumvent Congress and build a wall on the southern US border in which he warned he may declare a national emergency dependent on what happens over the next few days. (Nikkei/Newswires)

US President Trump tweeted that Vice President Mike Pence and group had a productive meeting with the Schumer/Pelosi representatives in which many details of border security were discussed, while he added we are now planning a steel barrier rather than concrete. (Twitter)

OMB Director Mulvaney is said to demand USD 5.7bln for steel barrier spanning 234 miles and requests USD 800mln of humanitarian aid at the border in letter to congressional leaders. (Newswires)

UK/EU

UK PM May warned that Britain would be in unchartered territory if her Brexit deal is rejected by parliament and said the vote would be held around 15th January as expected. May also left open the possibility of a 2nd referendum but stated that this is not a course of action she wanted to follow. (Newswires)

More than 200 UK lawmakers from the Conservative and opposition parties have signed a letter to UK PM May asking her to rule out the option of a No deal Brexit. (Newswires) This also comes in the context of reports stating that Parliament will vote on two amendments to the finance bill on Tuesday that would result in a government shutdown unless UK PM May is able to secure support for her Brexit deal. (Times)

UK MPs reportedly believe that Parliamentary rules will prevent UK PM May bulldozing her Brexit deal through by staging multiple repeat votes until the Commons surrenders. (Independent)

UK PM May will decide today whether to cancel MPs’ February break and make them work at weekends as time runs out to pass Brexit legislation before Britain leaves the EU. (Telegraph)

UK PM May is set to make another bid to EU leaders to offer a concession on the Irish backstop as she attempts to win over Brexiters who have vowed to vote down the government’s deal. (Guardian)

UK government are to hold the meaningful vote on the Brexit deal on January 15th; according to the BBC. (Newswires)

BBC's Laura Kuenssberg tweets that Labour are calling for PM to make an urgent statement to the Commons today on Brexit and the terms of debate. (Twitter)

EU Commission says that the deal on the table is the only one possible and it will not be renegotiated. (Newswires)

GEOPOLITICAL

A second summit between US President Trump and North Korea leader Kim is reportedly likely to be held in Hanoi, Vietnam. (Newswires)

US destroyer has sailed near the Parcel Island chain to challenge China's excessive maritime claims. (Newswires) Subsequently, China’s Foreign Ministry say they have sent a vessel to verify this, and warn it off. Adding that US action in the sea has violated law, and China has urged the US to stop these actions. (Newswires)

EQUITIES

Major European indices are broadly in the red [Euro Stoxx 50 -0.5%] with underperformance seen in the FTSE 100 (-0.6%) after multiple downgrades within the index such as; Centrica (-4.6%), InterContinental Hotels (-2.1%) and Hargreaves Lansdown (-0.6%). Sectors are firmly in the red with the exception of IT which is the outperforming sector. Other notable stories include Tullow Oil (+1.7%) in the green after being upgraded at RBC. Ryanair (-1.0%) share prices are down as the Co are named the UK’s worst short-haul airline for the 6th consecutive year.

In terms of pre-market news flow for the US, General Electric shares are up around 2.8% pre-market following reports that Apollo are considering a bid for the Co’s jet-leasing business. Elsewhere, Apple’s iPhone XR volume outlook for the initial 6-months of production has been approximately halved to 30-40mln units (WSJ). In recent news, Eli Lilly are to purchase Loxo Oncology for USD 8bln. (Stats News)

FX

USD has kicked the week off on the back-foot in a continuation of the sentiment seen on Friday after Fed Chair Powell opted to strike a more flexible approach to monetary policy than the one he was perceived to have had at last month’s press conference. As such, the DXY resides on a 95 handle after breaching 96.00 to the downside during Asia-Pac trade to a session low of 95.85.

Subsequently, the greenback’s major counterparts have captured on the relative weakness of the USD to eke out mild gains with USD/JPY a key source of market focus. USD/JPY has drifted lower throughout the Asia-Pac and EU session’s with a low print of 108.04 as the move ran out of steam ahead of the psychological 108.00 level where there were said to be bids, with larger bids noted at 107.50. Of note, from a risk perspective, opening gains in European bourses proved to be relatively short-lived with EU cash bourses mostly residing in modest negative territory.

Elsewhere, gains for GBP vs. the USD have been relatively modest as political risk keeps prices anchored. Lawmakers return to Westminster this week and as such, Brexit-related commentary has ramped up significantly over the weekend. In terms of the latest state-of-play, May’s meaningful vote appears to be going ahead on the 15th despite reports last week acknowledging that it is unlikely to pass. As such, the likelihood of alternative scenarios such as a second referendum, no deal Brexit and a confidence vote continue to heighten but with a distinct lack of clarity on what the most like course of action will be. In terms of price action, GBP/USD is currently trading around the mid-point of the session’s 1.2719-55 range with Jan 2nd high of 1.2773 the next source of resistance should the USD concede further ground.

EUR has extended its recovery above 1.1400 vs. the USD with the move pausing for breath just under the 1.1450 level. Macro newsflow for the EZ remains light ahead of this week’s ECB minutes release with mixed retail sales and factory orders from Germany unable to sway investor sentiment.  From a technical perspective, Lloyds suggest a clear break above 1.1500 could inspire a gradual recovery towards 1.1600 before an eventual move towards range highs of 1.1750-1.1850.

Finally, AUD/USD has extended its post-Powell move above 0.7100 to reach a session high of 0.7141 with technical resistance seen at 0.7150, and with the 55 and 100DMAs at 0.7174 and 0.7182 respectively. Should prices take a turn lower, option activity for the pair could play a role with 1bln in expiries between 0.7095-0.7105. From a fundamental perspective, AUD will likely remain sensitive to trade updates between the US and China with traders mindful of the commencement of trade talks today in Beijing. 

FIXED INCOME

Core EU debt had started the session marginally higher as 10-year Bund futures trade choppily in the green by 20 ticks and maintain the 163.89 level as support and 164.40 as resistance after a surprise increase in German YY Retail Sales and larger than expected decline in MM Industrial Orders. Gilts have started Liffe higher by over 40 ticks after rumblings that the Brexit deal’s approval could be conditional on more EU concessions, with the vote now just over a week away on January 15th as according to the BBC. On a technical standpoint, 10-year traders will be looking at the 123.91 4th Jan high as resistance. BTPs have extended on the risk-driven downside on the open, with Italian 10-years trading close to a session base of 126.05 ahead of the big figure.

US Fixed income is taking a breather today after the action-packed end to the week, with 10-year futures essentially unchanged from last weeks close of 122-09, with traders now looking ahead to potentially market-moving commentary from Fed’s Bostic later in the day after the release of the US’s Durable Goods and Non-manufacturing PMI releases. Later on in the week we will also be looking ahead to the first note/bond supply of 2018 kicking off with 3yrs tomorrow, with 10yr and 30yr thereafter.

COMMODITIES 

Brent (+2.3%) and WTI (+2.3%) prices are higher with WTI just over the USD 49/bbl level; fuelled by speculation that negotiations which are staring today between China and the US may lead to an easing in tensions between the two economies. Friday’s Baker Hughes showed a decrease in oil rigs by 8 to 877, indicating that production may begin to slowdown although EIA data, also from last Friday, presented an unexpected build in crude inventories. Elsewhere, both Goldman Sachs and Societe Generale have lowered their 2019 average price expectation for Brent from USD 70bbl to USD 62.50 and USD 73/bbl to USD 64/bbl. With their WTI forecasts also lowered from USD 64.5/bbl to USD 55.5/bbl and USD 66/bbl to USD 57/bbl respectively.

Gold (+0.5%) is in the green on dollar weakness following Fed Chair Powell’s Dovish comments regarding the future of rate hikes. Elsewhere, Chinese steel and iron ore are benefiting from the aforementioned commencement of US-China trade talks.

Goldman Sachs cut 3-month copper price target to USD 6100/ton from USD 6500/ton but maintained 12-month copper forecast at USD 7000/ton, while it reduced base metals targets amid notable China deceleration. (Newswires)

India's crude oil imports from Iran declined 26% M/M, to 204.9k BPD in December. According to tanker tracking data. (Newswires)

India are to continue with oil reforms to boost output; according to Energy Minister Pradhan. (Newswires)

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