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[PODCAST] US Open Rundown 27.06.18

  • Equity bourses initially negative and around multi month lows as US trade concerns filter through to Europe
  • Positive commentary from US Defence Secretary Mattis softens the blow, as President Xi talks have been “very, very” good
  • Looking ahead, highlights include, US durables, US advanced goods trade, DoEs, RBNZ, Fed’s Quarles, Rosengren, US 5yr Note auction

ASIA

Asian equity markets were negative with the region cautious as trade concerns lingered, albeit with a slight moderation after US President Trump suggested he would ease off on demands for new tight restrictions regarding Chinese investments and instead go through channels already in place such as the Committee on Foreign Investment in the United States. ASX 200 (flat) was choppy as the initial gains led by the energy sector were briefly eclipsed by weakness in telecoms and financials, while Nikkei 225 (-0.3%) exporter names were dampened by currency strength. Elsewhere, Hang Seng (-1.8%) and Shanghai Comp. (-1.1%) were also subdued amid the current backdrop of trade concerns and after a net liquidity drain by the PBoC which saw the mainland index extend on its descent through bear market territory. Finally, 10yr JGBs were relatively flat with only minimal support seen from the risk-averse tone in Japan and the BoJ’s presence for JPY 810bln of JGBs across the curve.

Chinese President Xi is said to have warned leaders to be prepared in the event of a full-scale trade war with US during a 2-day meeting, according to a note from SGH Macro Advisors that also suggested the PBoC will refrain from buying US Treasuries and seek to lower them. (Twitter)

PBoC injected CNY 60bln via 7-day reverse repos for a net daily drain of CNY 150bln. (Newswires)

PBoC set CNY mid-point at 6.5569 (Prev. 6.5180); weakest fix since 25th December 2017

Chinese Industrial Profits (May) Y/Y 21.1% (Prev. 21.9%). (Newswires)

EU/UK/US

German SPD Leader Nahles doesn't know if they are preparing for fresh German elections and have to wait, adding it is unsatisfactory that there is a standstill coalition on migrant policy this week. (Newswires)

UK Chancellor Hammond said he hopes the UK can seize the unlimited opportunities from China's Belt & Road initiative, while he added that as the UK and EU build new relationships, the UK will deepen its ties with the rest of the world. (Newswires)

US Trade Representative Lighthizer said retaliatory tariffs demonstrate trading hypocrisy and that there is no credible basis for EU legal theory regarding tariffs, while he added the US will take all necessary actions to protect its interests. (Newswires)

US House voted 400 vs. 2 in favour of passing bill to tighten oversight of US foreign investment due to concern over China. In related news, US President Trump suggested he would back down from his demand for new tight restrictions on Chinese investments into technology and instead rely on other channels already in place such as CFIUS. (Newswires)

S&P affirmed US AA+ rating, Outlook Stable. (Newswires)

NAFTA

Canada Finance Minister Morneau said Canada will support tariff-affected industries and will provide details on NAFTA tariff support shortly. In other news, Canada is said to be preparing steel quotas and tariffs on China and other nations to stop producers there from dumping goods which cannot be sold to the US. (Newswires)

Mexican presidential front-runner Lopez Obrador’s NAFTA negotiator hopes for a NAFTA deal in the coming months and agrees with current approach. (Newswires)

EQUITIES

European equity bourses were initially negative across the board as trade concerns hit European markets following US congressional approval of increased US-Chinese investment scrutinization. There was a turnaround, however, into positive territory with the DAX currently the outperforming bourse, after hitting 2 month lows, on the back of US Defence Secretary Mattis striking a positive tone after talks with Chinese President Xi. Most bourses are still below their 100DMA, however, and have not been able to eliminate the losses seen throughout the week, with the DAX at 12,210 vs. its 50DMA of 12,761, the FTSE 100 at 7,534 vs its 50DMA of 7,616 and the CAC at 5,268 vs. its 50DMA of 5,473.

The financial sector (-0.4%) is currently underperforming as falling treasury yields are weighing on the sector.

FX

It was a cagey start to European trade in FX markets with most majors sticking to their recent ranges. Subsequently, the USD trades relatively unchanged thus far with the DXY sitting just above 94.50 as markets pause for breath after US President Trump took a slightly more conciliatory tone yesterday by suggesting he would ease off on demands for new tight restrictions regarding Chinese investments. That said, despite these comments from Trump, they are unlikely to signal a U-turn in US trade policy and the threat of an escalation in trade tensions remains at the forefront of investor sentiment.

From a Chinese perspective, preparations are said to be made by leaders of the communist regime to help protect the nation’s economy in the event of a trade war with the US. It’s worth noting that the PBoC set the CNY mid-point fix at its softest level since 25th December last year with USD/CNY back below 6.6000 as the recent move to the downside continues to gather momentum; scepticism remains as to whether this is actually a targeted policy measure by China and how fair they would be willing to tolerate the move given the risk of capital outflows.

Elsewhere, not too much to report for EUR as focus on the most recent ECB policy announcements and communications somewhat abates Subsequently, in the absence of any major USD traction at this stage of the session, option activity could dictate performance for the pair with 1.6bln in expiries at 1.1650, 3.3bln at 1.1625 and 2.4bln at 1.1600.

GBP is also relatively contained with GBP/USD hovering around 1.3200 after yesterday’s selling which was partially brought about by comments from prospective MPC member Haskel who failed to strike an overtly hawkish tone and thus didn’t provide markets with much evidence that he could replace the vote of his predecessor, McCafferty. Attention throughout the week will likely begin to shift away from the BoE towards Brexit as the EU leaders summit nears.

Finally, USD/JPY maintains overnight losses seen in the wake of the Tokyo fix on the cautious risk tone to break below the 110.00 handle, while AUD/JPY and NZD/JPY tripped through stops at the prior session’s lows and the 81.00 and 75.00 levels respectively. JPY has given back some ground against major peers alongside the recent move in equity markets. Pressure on antipodeans was also due to China exposure for AUD after the PBoC set its weakest reference rate since December 25th and following disappointing New Zealand Business indicators; next up the RBNZ for NZD.

FIXED INCOME

The broad risk aversion in the market initially lent a helping hand to the fixed income complex with Bunds reclaiming 162.50 after running out of steam around Monday’s highs of 162.57 with volumes relatively light. In-fitting with the recent market moves, fixed income products also fell victim to the turnaround in sentiment with paper relatively unchanged for the session. Gilts are also kept pace with the general trend of the market with this morning’s FPC release unable to provide any further direction the UK 10yr with the statement judging that, apart from those related to Brexit, domestic risks remain standard overall. Brexit-related rhetoric will likely now ramp up with an ongoing lack of cabinet unanimity ahead of the EU summit. On the data front, both M/M and Y/Y metrics for the Nationwide House Price Index exceeded expectations for the month of June. Elsewhere, BTPs reluctantly joined the party albeit after a relatively indecisive start with traders mindful of tomorrow’s BTP auction and whether recent political developments have soured investor sentiment. N.b. month-end flows are likely to come into vogue over the coming days.

COMMODITIES

Oil is up ~0.8% on the day and around the month-long high levels seen post Tuesday afternoon’s rally after reports the US was pressing its allies to halt all oil imports from the nation by November. Further, API inventory report showed the largest drawdown to crude stockpiles since September 2016, although the impact was relatively contained on slight fatigue considering WTI had already rallied over 3% prior to the release.

In the metals scope, gold is uneventful at its lowest levels since December 2017 as the overnight weakening has abated slightly. Copper has hit 12 week lows as trade concerns have hit the building material at USD 6,679/tonne, alongside ongoing supply concerns from Chile.

US API Weekly Crude stocks (22 Jun): -9.22 mln (Exp. -2.6 mln, Prev. -3.016 mln)

API Cushing stocks (22 June): -1.74 mln (Exp. -2.2 mln Prev. -1.594 mln)

API Distillates (22 June): +1.785 mln (Exp. +0.8 mln, Prev. +0.75 mln)

API Gasoline (22 June): +1.152 mln (Exp. +1.3 mln, Prev. +2.113 mln)

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