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[PODCAST] US Open Rundown 18th January 2019

  • Major European equities are firmly in the green amidst positive trade updates [Euro Stoxx 50 +1.6%] with the IT and financial sector outperforming
  • Table turns for the Pound after yesterday’s climb as Cable straddles just below 1.2950
  • Looking ahead, highlights include Canadian CPI, US industrial production and University of Michigan sentiment, weekly Baker Hughes rig count, Fed’s Williams and Harker
  • EARNINGS: State Street

ASIA

Asian equity markets traded higher across the board as the region took impetus from Wall St where the major indices were lifted on hopes of easing trade tensions after the US was said to mull lifting China trade tariffs to break the stalemate, although the Treasury was quick to downplay the prospects regarding this. As such, ASX 200 (+0.5%) and Nikkei 225 (+1.3%) were positive with broad gains across the sectors and with the Japanese benchmark the outperformer as it coat-tailed on the favourable currency moves. Hang Seng (+1.3%) and Shanghai Comp. (+1.4%) were boosted by the trade hopes with US and China also said to be in discussions on reopening access for US poultry exports to China, while the PBoC’s continued efforts this week resulted to a substantial net weekly injection of CNY 1.16tln to the interbank market. Finally, 10yr JGBs were lower as they tracked the downside in T-notes and with demand for bonds subdued by the positive sentiment across stock markets in the region, but with losses limited amid improved demand in the enhanced liquidity auction for 10yr, 20yr & 30yr JGBs.

PBoC injected a total CNY 20bln today for a weekly net injection of CNY 1.16tln vs. Prev. CNY 410bln drain last week. (Newswires)
PBoC set CNY mid-point at 6.7665 (Prev. 6.7592)

Mofcom said it will continue to widen market access and strengthen protection of foreign investors' legal rights, while there were also reports that US and China are said to be in talks regarding reopening China's markets to US chicken exports. (Newswires)

Japanese National CPI (Dec) Y/Y 0.3% vs. Exp. 0.3% (Prev. 0.8%). (Newswires)
Japanese National CPI Ex. Fresh Food (Dec) Y/Y 0.7% vs. Exp. 0.8% (Prev. 0.9%)
Japanese National CPI Ex. Fresh Food & Energy (Dec) Y/Y 0.3% vs. Exp. 0.3% (Prev. 0.3%)

US

White House confirmed US President Trump cancelled the delegation trip to Davos amid government shutdown, while the White House also stated that US President Trump and Treasury Secretary Mnuchin are to hold Oval Office meeting today. (Newswires)

US Treasury Secretary Mnuchin has declined a request to testify next week regarding government shutdown according to US House Ways and Means Committee Chairman Neal, while the US Treasury instead offered to send senior officials to the Way and Means hearing. (Newswires)

US President Trump's former lawyer Cohen is said to be reconsidering plan to testify publicly in Congress next month amid fear for his family according to an adviser, while there were later reports that alleged US President Trump is said to have directed former lawyer Cohen to lie to Congress regarding Trump Tower in Moscow. (BuzzFeed)

UK/EU

Northern Ireland DUP Party is said to be leaning towards a customs union; according to the Time citing senior sources. The party indicated that they would be open to a Norway-style deal if it removed the threat of a Northern Irish backstop. (Times) This report was then downplayed by DUP’s Foster. (Newswires)

Labour MPs have accepted the Premier’s invitation to cross-party talks, defying party leader Corbyn’s demands for no talks until a no-deal scenario is off the table (Twitter/Times). Former Minister Nick Boles is set to table a bill which would make it impossible for the UK government to legally leave the EU without a deal on March 29th. MPs are to vote on this amendment on January 29th. (Guardian)

UK PM May Spokesperson says she has ruled out a snap general election and will be holding further talks with EU leaders through the weekend. (Newswires)

Telegraph's Political Correspondent Maidment tweets "Theresa May is meeting Cabinet ministers individually and in groups before heading to Chequers this evening. Plan is to meet with more than half of her Cabinet." (Newswires)

UK Retail Sales YY Dec 3.0% vs. Exp. 3.6% (Prev. 3.6%, Rev. 3.4%) (Newswires)
UK Retail Sales MM Dec -0.9% vs. Exp. -0.8% (Prev. 1.4%, Rev. 1.3%)

GEOPOLITICAL

EU Commission has proposed negotiating mandates for trade talks with the US, the EU seeks cover tariff removal for industrial goods and regulatory cooperation. Trade Commissioner Malmstrom added that EU are ready to put cars into the negotiations with the US; we are not proposing to restart broad free trade agreements with the US. (Newswires)

German government spokesman, when asked about mulling the ban of Huawei from its 5G network, said security is important for Germany. (Newswires)

EQUITIES

Major European equities are firmly in the green amidst positive trade updates [Euro Stoxx 50 +1.6%]. FTSE MIB (+1.0%) was initially weighed on by the poor performance of index heavyweight Telecom Italia (-7.0%) at the bottom of the Stoxx 600 after saying they expect 2018 organic EBITDA of domestic business unit to be in the lower mid-single digits compared to the previous year; adding that this may influence 2019. Major sectors are similarly in the green with some underperformance in telecom names on the back of aforementioned Telecom Italia. Other notable movers include Casino (+6.6%) after the Co’s CFO states that despite the French protests they expect to meet 2018 profit goals. Ryanair (-1.7%) have dropped to their lowest level in around 4 years as the Co. have cut their full year guidance. Easyjet (-2.4%) have been dealt a double blow this morning suffering from the Ryanair guidance cut and a downgrade at JP Morgan.

Foxconn have cut 50k jobs at their iPhone factory since October, the scale of the cut is not necessarily deeper than prior years but it is significantly earlier; according to Nikkei citing industry sources. (Nikkei)

Tesla (TSLA) are said to cut full-time employee headcount by 7% and are to increase production with the aim of getting a Model 3 starting price to USD 35k. (Newswires)

FX

DXY – Little changed and within a tight 96.000-140 band following yesterday’s volatile trade amid reports that the US are said to be mulling rolling back on China trade tariffs in an attempt to break the stalemate in talks, although the Treasury was quick to downplay the prospects regarding this. Furthermore, participants will be eyeing the meeting between US President Trump and Treasury Secretary Mnuchin at 17:45 GMT for any fresh details on trade or the government shutdown. DXY keeps its head above 96.000 and north of its 100 DMA at 96.055 ahead of the US industrial production data. Wells Fargo notes that a solid print in December IP would show that the industrial sector remains stable, while “a weaker print, on the other hand, may further stoke fears surrounding ongoing trade tensions and Fed policy.”

GBP – The table has turned for the Pound after yesterday’s climb to test 1.3000 to the upside amid continued hopes of an Article 50 extension with reports stating that the EU are prepared to delay Brexit until at least July. In terms of the latest, the Northern Irish DUP party is reportedly leaning towards a Norway-style deal if it removes the threat of a NI backstop. This type of deal would essentially remove customs checks and allow for trade deals to be struck outside of the EU, though one key rule which must be accepted is the free movement of goods, services, persons and capital to and from EU and EEA member states. PM May has scheduled meetings with party leaders (ex-Labour) to find some common ground before she heads to Brussels. Labour MPs have accepted the PM’s invitation to cross-party talks in a move which defies party leader Corbyn following his demand for a no-deal Brexit to be taken off the table before dialogue can commence. GBP/USD edged lower at the start of the EU session though further downside was seen just before the release of disappointing UK December retail sales (Y/Y 3.0% vs. Exp. 3.6%), with the ONS citing weak sales as shoppers brought forward spending for Black Friday discounts. Subsequently, Cable fell to an intraday low of 1.2930 (vs.; high 1.2993) and currently stands as the G10 underperformer.

EUR – Relatively uneventful and stuck in sideways Dollar-dominated trade as EUR/USD flirts with the 1.1400 handle ahead of the ECB interest rate decision next week where focus will be on EZ growth outlook. In related news, Bank of America Merrill Lynch has cut its 2019 Euro area growth forecast to 1.1% (Prev. 1.4%) and added that balance of risks remains clearly tilted to the downside. EUR/USD remains above its 50 DMA at 1.1380 ahead of heavy option expiries for today’s NY cut with 4bln at strikes 1.1375-1.1405 and a further 2bln between 1.1415-25 which may cap upside.

AUD, JPY – The main movers from the aforementioned trade-related news as the JPY unwound risk premium and trade-proxy AUD benefitted from the heightened risk appetite. Upon the news, AUD/USD spiked to highs of 0.7221, though the downplay in reports by the Treasury sent the pair back below 0.7200 to test 0.7175 before stabilising just under its 100 HMA at 0.7188. Back to the Yen, USD/JPY was unreactive to the in-line inflation figures but tested 109.60 to the upside on the back of the trade news before consolidating around just under 109.50 ahead of 3.1bln options expiring at strike 109.00-10.

FIXED INCOME

Bund futures have kicked off the day as the European underperformer, with German 10-years languishing around lows of 163.85 after failing to keep its head above the 164.00 mark as the improved trade-driven sentiment weighs on futures. This comes after WSJ’s reports overnight that the US’s Chinese tariffs could be lifted in order to make headway in trade talks, despite CNBC reporting that neither Mnuchin or Lighthizer had made any reference to tariffs. On a technical standpoint, 10-year Bund traders will be eyeing the 163.48 January 9th low as the next support level to the downside.

In the UK, Gilts outperform their German counterparts but are also definitively in the red and hang near lows of 122.15 as the Brexit debacle rages on, with the DUP now reportedly leaning towards a customs union in a Norway-esque deal should the threat of a backstop on Northern Ireland be removed. The poor UK retail sales data failed to have an effect on the UK benchmark as focus firmly remains on Brexit ahead of PM May’s Plan B presentation on Monday.

Moving to the States, UST futures are lower across the curve with most of the action in the belly following the aforementioned positive trade developments weighing on futures. This has seen 10-yr futures slide to trade in close proximity to session lows of 121-10+ with the 28th December 121-09 low eyed as the next support level to the downside. This also comes after comments from Fed’s Evans in yesterday’s session, who stated that the dot plot forecast for 2 hikes is reasonable, but it may be less, with Williams and Harker on the docket to speak today.

COMMODITIES 

Brent (+1.3%) and WTI (+1.4%) prices are benefitting from the positive market sentiment generated by potential US-China trade progress, currently just above USD 61/bbl and USD 52/bbl respectively. IEA’s report maintains their global oil demand growth estimate at 1.4mln BPD, and global oil supply fell by 950k BPD in December. However, the report does highlight that Russia raised their oil production in December to 11.5mln BPD and that it is unclear when they will cut production. For context, yesterday Russian Energy Minister Novak said that Russia will try to accelerate cuts in their oil output, but that there are technical limitations.

Gold (-0.5%) has suffered in the US-China stemmed positive risk environment, with the yellow metal residing towards the bottom of its USD 5/oz range. LME copper has breached USD 6000/tonne to the upside on reports stating the US are considering lifting tariffs on China; although this was swiftly downplayed. Elsewhere, spot palladium resides just below its all-time record of USD 1434.50/oz achieved on Thursday.

IEA Report

- Maintain estimates of global oil demand growth at 1.4mln BPD, global oil supply fell by 950k BPD in December, led by lower OPEC production ahead of cuts

- Russia raised oil production in Dec to 11.5mln BPD; it is unclear when Moscow will cut output

- By mid-2019, US production will probably be higher than the capacity of Saudi or Russia

- Non-OPEC oil production to slow to 1.6mln BPD from 2.6mln BPD

South Africa and Saudi Arabia talks include ARAMCO using Saldanha oil tanks. (Newswires)

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China's Agriculture team getting as far away from the NYSE, just like us!! Hope you all have a good weekend, we'll… https://t.co/NsIJqCDJFE