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[PODCAST] EU Open Rundown 25th February 2019

  • US President Trump announced an extension to the March 1st trade deadline whilst citing substantial progress on key issues
  • UK PM May is reportedly considering delaying Brexit by two months, whilst EU are said to be mulling a proposal for a Brexit delay until 2021
  • UK PM May confirmed a meaningful vote will not take place this week, MPs will get to vote by March 12th
  • Asian stocks started the week with modest gains following a strong lead from Wall Street, Mainland China outperformed on trade optimism
  • Looking ahead, highlights include BoE’s Carney, US National Activity Index and US 2yr, 5yr note auctions

TRADE

US President Trump said he will be delaying the deadline for the China tariff hike, and assuming US and China make additional progress, he will be planning a Summit with Chinese President Xi. President Trump also noted substantial progress with China on structural issues such as intellectual property protection, technology transfer, agriculture, services, currency, and many other issues, whilst adding that “big news” on China will be coming in the next week or two. (Twitter) China President Xi said, in a letter to Trump, that negotiators have made significant progress, and added that each side will redouble efforts to meet each other half way. (Newswires) Chinese Vice Premier Liu said from China's perspective, a deal is very likely to happen. (Newswires)

On Friday, at the US-China press conference in Washington, US President Trump said it is more likely than not that a trade deal will happen and added that Huawei and ZTE may or may not be not be included in the deal, this has not been discussed. Trump said a meeting with Chinese President Xi would probably be in Florida in March. He also said he does not like memorandums of understanding, they would be short term, wants a long-term deal. (Newswires)

USTR Lighthizer said a lot of progress has been made with China on technology transfers but "major hurdles" remain. Meanwhile, US Commerce Secretary Ross noted that there is a lot more to be done to get a deal done (Newswires) US-China trade talks are said to become more difficult at the final stage; commentary from Xinhua. (Xinhua) Sources stated that the US and China have not yet agreed on the enforcement of a currency pact which would ensure China will not manipulate the Yuan. (Newswires)

China has committed to buying up to USD 1.2trln of US goods; according to CNBC citing sources. (CNBC)

ASIA-PAC

Asian stocks kick-started the week with modest gains following a strong lead from Wall Street where the DJIA notched a 9-week winning streak and reclaimed the 26,000 level to the upside amid optimism surrounding US-China trade talks. ASX 200 (+0.3%) opened marginally firmer but gains in the material sector were offset by underperformance in the utility and telecom names, whilst Nikkei 225 (+0.5%) advances were led by the IT and material sectors. Elsewhere, Shanghai Comp (+3.8%) outperformed as investors cheered US President Trump’s announcement of an extension to the China tariff deadline, citing good progress on key issues whilst also noting plans for a Summit with Chinese President Xi. Meanwhile the CSI 300 (+3.9%), formed of major companies listed in Shanghai and Shenzhen, surged into bull market territory, marking a 23% gain from cycle lows. Finally, Hang Seng (+0.1%) failed to grasp onto the same momentum as its mainland peers, as the index was weighed on by the utilities sector after China Resources Power fell over 5% amid reports of delisting.

Japanese PM Abe's economic adviser Hamada said the BoJ can abandon the 2% inflation target as it "isn't absolutely crucial". (Newswires)

PBoC sets CNY mid-point at 6.7131 (Prev. 6.7151) (Newswire)
PBoC injected CNY 40bln via 7-day reverse repos


UK/EU

EU are reportedly mulling a proposal for a Brexit delay until 2021 as leaders are said to be determined to avoid uncertainty of three-month extension requests; according to The Guardian citing EU sources. (The Guardian) Brexit is to be delayed for up to two months under plans being considered by UK PM May in a bid to avoid resignations by ministers; according to The Telegraph. (The Telegraph)

UK PM May confirmed that a meaningful vote will not take place this week whilst also saying she will not rule out extending Article 50. She said MPs will be able to have a final vote on the Brexit deal by March 12th. Furthermore, senior government sources stated that the Premier could signal this week that she is taking a no-deal Brexit off the table. (BBC/Newswires)

Labour MPs Phil Wilson and Peter Kyle are tabling an amendment that backs PM May's current Brexit deal with the condition of a second Brexit referendum. Wilson said that he is winning over support from Labour leader Corbyn's team and Tory cabinet ministers. (The Times)

UK PM May has been warned by ministers that she has until Tuesday to announce a Brexit delay or she will face a mass rebellion that risks collapsing the government. (The Telegraph)

Senior UK ministers warned that extending Article 50 could lead to further temporary extensions that would become permanent and stop Brexit altogether. (The Telegraph)

Senior UK Ministers Greg Clark, Amber Rudd and David Gauke said they will vote for a Brexit delay if there is no breakthrough in negotiations. Five cabinet ministers have called on Work and Pensions Secretary Amber Rudd to be sacked after she threatened to vote for the delay. (The Times)

Fitch affirmed Italy at “BBB”; Outlook Negative (Newswires)
Fitch upgraded Hungary to “BBB”; Outlook Stable
S&P affirmed Sweden at “AAA”; Outlook Stable
S&P affirmed Switzerland at “AAA”; Outlook Stable
S&P affirmed Lithuania at “A”; Outlook Stable
Moody’s affirmed Netherlands at “AAA”; Outlook Stable


FX

In FX markets, DXY retreated from the 96.500 level after US President Trump acknowledged progress in US-Sino trade talks with a tariff deadline extension. As such EUR/USD made mild advances before hitting resistance at 1.1350, while GBP/USD was initially pressured by reports that UK PM May is seeking to extend Article 50 by two months in a bid to avoid further cabinet resignations, alongside confirmation that a meaningful vote will not take place this week. Elsewhere trade-proxy AUD/USD gained as the US President cited substantial progress with China on key issues, thus extending the March 1st deadline. AUD/USD breached its 50 DMA to the upside at 0.7134 to edge closer to its 100 DMA at 0.7161. Meanwhile, the Kiwi also started the week on the front foot, as gains were initially spurred by the release of above-forecast retail sales before optimistic trade news sent the NZD higher with its antipodean counterpart. Finally, USD/CNY fell below 6.6900 for the first time since July 2018 to a low of 6.6727 ahead of its 100 WMA at 6.6642, as President Trump’s encouraging trade tweet spurred demand in the Chinese currency.

New Zealand Retail Sales Volumes (Q4) Q/Q 1.7% vs. Exp. 0.5% (Prev. 0.0%) (Newswires)


COMMODITIES

Commodities were mixed overnight as WTI futures gave up opening gains despite the overall trade-driven optimism, although it is worth noting that Nigerian election polls have now closed with reports of dozens killed in election violence, however, there has been no reports of disrupted oil flow from the OPEC producer. Also, in spite of the Baker Hughes rig count showing a drop of four active rigs, US production reached a record high last week at 12mln BPD according to EIA data. Elsewhere, spot gold benefitted from the easing buck and hovered near Friday’s highs, while copper traded choppy as initial trade-induced upside waned after Xinhua noted that US-China trade talks are said to become more difficult at the final stage.

Iranian Supreme National Security Council Secretary said Iran has designed and put into practice initiatives to neutralise the US sanctions against Iranian oil exports. He also noted that Iran has options to stop oil flow if threatened, other than closing Strait of Hormuz. (Tasnim)

Libya’s NOC Head said the 300K BPD El-Sharara oil field remains closed as armed men are still at the field. (Newswires)

Baker Hughes Rig Count (22 Feb): Crude rigs -4 at 853, gas rigs unchanged at 194, total rigs -4 at 1047. (Newswires)

GEOPOLITICS

US President Trump tweeted that he and North Korean leader Kim Jung Un both expect a continuation of progress made at the first US-North Korea Summit in Singapore. (Twitter) However, US President Trump said he is not removing North Korean sanctions. (Newswires) US and North Korea may agree to declare the end of the Korean war at the Hanoi summit; according to Yonhap citing Blue House. (Yonhap) US President Trump is to arrive in Vietnam for the US-North Korea Summit on the evening of February 26th; according to the Vietnamese Foreign Ministry. (Newswires)

US Vice President Pence is to announce on Monday “concrete steps” and “clear actions” in support of Venezuela; according to a senior US official. (Newswires)
 

US

Yields fell by 2.5-4bps across the curve on Friday. Gains were pressured with newswires attributing selling to optimism over US/China trade talks, which have been extended as policymakers say progress is being made, though failed to provide many specifics. Fed speak tended to focus on broader themes around policy frameworks rather than the current monetary policy/economic outlook; next week's dual testimony from Fed chair Powell is now eyed for cues about Fed policy. At settlement, major US curve spreads were little changed, with a slightly steeper bias. US T-note futures (h9) settled +7+ ticks at 122-04+.

Fed's Clarida (Voter, Neutral) said the Fed is launching a broad review of policy framework, mulling changes to inflation-targeting framework; will consider new tools to ease policy if needed, such as capping treasury yields. (Newswires)

Fed's Quarles (Voter, Neutral) said he probably underestimated the difficulty of communications on the balance sheet; thinks balance sheet should move to shorter maturities. He added that it is appropriate to keep the balance sheet large enough to buffer against shocks to reserve supply and one option of ending balance sheet run off this year is to hold a fixed level of total assets for a time. (Newswires)

Fed's Bullard (voter, dove) said he does not want policy tools at cross purposes; doesn't want to cut the balance sheet and rates at the same time.  He added that now that rates are higher, changes to balance sheet will only have minor impact. (Newswires)

Fed's Harker (Non-voter, Hawkish) says QT should end in 2019, says slow and steady approach will reduce uncertainty, and added that the Fed should be cautious with balance sheet wind down. (Newswires)

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