Original insights into market moving news

[PODCAST] EU Open Rundown 21st February 2019

  • FOMC minutes stated that almost all Fed officials wanted to halt the balance sheet run-off later this year, whilst several officials see a 2019 rate hike if the economy remains on track
  • US and China are drafting 6 MOUs on key structural issues which will cover IP, property, services, tech transfer, agriculture, currency and non-tariff barriers
  • EU reportedly wants proof that UK MPs are willing to back revised deal before EU leaders sign off on deal changes
  • Looking ahead, highlights include French, German & EZ Flash PMI, ECB Minutes, US Durable Goods & Existing Home Sales, US Philly Fed Business Index, ECB’s Praet, BoE’s Haldane, Fed’s Bostic & BoC’s Poloz, Spanish, French & UK Auctions
  • Earnings: Kraft-Heinz, AXA, Saint Gobain, Atos, Orange, Deutsche Telekom, Barclays, BAE Systems


- FOMC minutes stated the committee would slow the balance sheet runoff in a scenario of a reduction of the target range of the Fed Funds Rate and that almost all Fed officials wanted to halt runoff later this year, while the committee wanted to make clear it was flexible in its approach to normalising the balance sheet.

-The minutes also stated many Fed officials were unsure what rate moves may be needed this year and that several officials see a 2019 rate hike if the economy remains on track.

- The minutes also noted that officials signalled concern on trade, fiscal policy and the government shutdown, while officials said some downside risks had increased and business investment had moderated but also mentioned there was a strong labour market, inflation is near target and recent household data has been strong.

- At first glance, the release seemed to be a touch hawkish, if judged on market reaction (ES fluctuated to HOD and near LOD within a short frame of time before going to unchanged levels vs pre-release of the minutes; Treasuries were lower and the USD index firmed). However, as the minutes were digested, the dovish elements were highlighted and risk assets found some cautious bids.

- The minutes seemed to confirm some of the dovish remarks officials have made as of late as it noted that officials are tilting towards ending the balance sheet run-off in 2019, although there wasn’t a lot that hinted the FOMC was on the cusp of easing policy any time soon as the central bank noted that the labour market was strong, inflation was near target, and recent household data was strong, while several officials also saw a 2019 rate hike if the economy remains on track.


Asian equity markets eventually traded mostly higher with the region supported by US-China trade hopes after reports that negotiators were drafting MOUs on key structural issues and are looking at a list of measures to address the trade imbalance. This helped the region shake off the early cautious tone brought on by another marginal performance of their US counterparts and a mixed-perceived FOMC minutes. ASX 200 (+0.7%) was underpinned by strength in Financials as well as outperformance in Consumer Discretionary after Wesfarmers shares rallied post-earnings, while the trade hopes inspired a turnaround for the Nikkei 225 (+0.2%) which was initially dampened by currency effects and after Nikkei Manufacturing PMI data slipped into contraction territory for the 1st time since August 2016. Elsewhere, the KOSPI (+0.1%) lagged with index heavyweight Samsung Electronics lacklustre after it unveiled its ground-breaking foldable smartphone which comes with an eye-watering price of nearly USD 2000, while Hang Seng (+0.6%) and Shanghai Comp. (+0.7%) were also initially choppy before the trade-related optimism provided a rising tide across the region. Finally, 10yr JGBs found support from the early cautious tone and after disappointing Nikkei Manufacturing PMI data, but then reversed course as risk sentiment improved and after weaker results in the enhanced liquidity auction for longer-dated bonds.

PBoC skipped open market operations but offered CNY 71.9bln through pledged supplementary lending operations. (Newswires)
PBoC set CNY mid-point at 6.7220 (Prev. 6.7558)

US and China are drafting 6 MOUs on key structural issues which will cover IP, property, services, tech transfer, agriculture, currency and non-tariff barriers, while negotiators are also looking at a 10-item list of short-term measures to tackle the trade imbalance. In related news, there had been earlier reports that US President Trump’s demand for stable yuan to end US-China trade war is ‘acceptable’ to Beijing. (Newswires/SCMP)


UK PM May and EC President Juncker said Brexit talks were constructive and the two discussed what guarantees could be provided to give reassurance Irish backstop was temporary in nature, while UK PM May also commented that she underlined the need for legally binding changes to the backstop to EU's Juncker. (Newswires)

UK Home Secretary Javid said risk of a no-deal Brexit have increased and that PM May cannot take no-deal off the table, while there were separate reports citing a senior official that the UK is considering a legally enforceable codicil to the Brexit agreement that could provide the UK with a unilateral exit from the backstop with a 12-month notice period. (Newswires)

EU reportedly wants proof that UK MPs are willing to back revised deal before EU leaders sign off on deal changes, while there were separate comments from EU's Tusk that delay of Brexit is better than a no deal Brexit and that he hopes UK realises no deal Brexit is unacceptable. (Newswires)

Members of the newly-formed Independent Group said that more Labour and Conservative MPs could defect and added that they expect more MPs to join them. (BBC)

European Commission are to release a report on Italy next week, wherein EU will say Italian plans for long term growth will fail. Furthermore, the EU has criticized Italy’s citizens income and lower pension age; according to La Repubblica quoting a draft of the EU report on Italy. (La Repubblica)

Fitch Ratings said it may cut UK's AA credit rating amid Brexit concerns. (Newswires)


In FX markets, the DXY was ultimately firmer in the aftermath of the FOMC minutes but was then muted overnight as its major counterparts traded mixed, in which EUR/USD attempted to nurse losses and with GBP/USD despondent after its recent failed attempt on the 1.3100 handle. The initial indecisive risk tone consigned USD/JPY to within this week’s tight range, while CNH briefly strengthened below 6.7000 against the greenback following a firmer reference rate setting and amid US-China trade hopes. Elsewhere, AUD/USD was tumultuous as the initial gains spurred by stronger than expected Employment Change, was later wiped out after Westpac’s Bill Evans revised RBA forecasts in which Westpac now sees a total of 2 cuts for this year and with selling exacerbated after source reports that China’s Dalian customs banned Australian coal imports indefinitely.

Australian Employment Change (Jan) 39.1K vs. Exp. 15.0K (Prev. 21.6K). (Newswires)
Australian Full Time Employment (Jan) 65.4k (Prev. -3.0k)
Australian Unemployment Rate (Jan) 5.0% vs. Exp. 5.0% (Prev. 5.0%)
Australian Participation Rate (Jan) 65.7% vs. Exp. 65.6% (Prev. 65.6%)

Westpac forecasts RBA to cut twice this year in August and November. (Newswires)


Commodities were mixed overnight in which WTI crude futures marginally extended on gains after several bullish headlines for oil including expectations of higher OPEC+ compliance, Nigeria’s acceptance of Saudi Arabia’s oil cut plan and a narrower than expected build in headline API crude inventories. Elsewhere, gold traded sideways amid a quiet greenback and mixed-perceived FOMC minutes, while copper slightly pulled back from recent advances. 

US API Weekly Crude Stocks (Feb 15) +1.260mln vs. Exp. +3.200mln (Prev. -0.998mln). (Newswires)

China's Dalian customs bans Australian coal imports indefinitely and sets 12mln tons overall coal import quota for this year, according to sources. (Newswires)


At settlement, the Treasury curve was slightly negative, with newswires attributing the moves to comments in the Fed’s latest meeting minutes that signal 21019 rate hikes are still possible. Earlier in the session there was some focus on a 10s30s steepening trade (18k in the TYH9 vs 4k in the ultra longs). At settle, the curve was slightly steeper, with analysts noting 2s10s spread seems to be capped by its 50 day moving average. Some had also attributed higher yields to a slate of investment grade corporate supply, which pressured the long-end. US T-note futures (H9) settled 2 ticks lower at 122-05.

US President Trump said he is negotiating with the EU and will impose tariffs if there is not a deal. (Newswires)

US House Speaker Pelosi said the House will pass resolution to block President Trump's National Emergency order. (Newswires)

Fed's Vice Chair Clarida (voter) does not think that a change in Fed policy statements represents a U-Turn, while he added the December rate hike was not a mistake and that it is unclear how much of a US growth slowdown we are seeing. (Newswires)

Fed's Daly (non-voter, dove) said we are very near neutral level for rates and wants patience on rates until she sees inflation increasing faster. Furthermore, Daly also commented she sees more headwinds such as slower global growth, uncertainty and tighter financial conditions, but added there is nothing on the radar that shows US is declining into a recession. (Newswires)

Fed's Kaplan (non-voter, dove) said global growth deceleration is likely to continue and that the Fed should pause rate hikes in order to see how economic uncertainty looks. Kaplan further commented that the weaker business outlook is the reason for his caution on rates and that the yield curve is signalling sluggish expectations for growth. (Newswires)

EU Mid-Session Update: Attack sees crude prices pop as Saudi crude output drops https://t.co/IAoChFglPp