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[PODCAST] EU Open Rundown 4th March 2019

  • Asian equities were higher across the board amid trade-optimism, Mainland China outperformed with Shanghai Comp. above 3000
  • WSJ reported that US-China trade deal is at its final stages, whilst China said foreign investment laws will strengthen IP protection
  • 1922 Committee Chairman Brady shifted his stance on PM May’s Brexit deal, EU’s Chief Negotiator Barnier said a Brexit delay is needed
  • In FX markets, DXY opened weaker after President Trump said the USD is “too strong”, AUD balanced trade talks and data, Yuan firmer on IP protection progress
  • Looking ahead, highlights include UK Construction PMI, EZ Sentix Index. US Construction Spending

TRADE

US and China are reportedly at the final stages of completing a trade deal as Beijing offered to lower tariffs and other restrictions (on US agricultural, chemical, autos, and other products) whilst US is considering removing most, if not all, sanctions levied against Chinese products. A formal agreement could be reached at a Trump-Xi summit around March 27th; according to sources familiar with the plans. (WSJ)

China spokesperson Zhang said substantial progress has been made in trade talks with the US. He added that the new China foreign investment laws will strengthen IP protection. (Newswires)

US President Trump has asked China to immediately remove all tariffs on US agricultural products as US-China are “moving along nicely” in trade talks. (Twitter)

ASIA-PAC

Asian equities were higher across the board amid trade-optimism after WSJ noted that a US-Sino trade deal is reportedly being finalised and may be signed during a Trump-Xi Summit at the end of March. On Friday, US equities rose amid the overall risk appetite wherein the S&P closed above the 2800 level for the first time since November last year. The Dow closed above 26000 as Nike and Chevron led the gains, whilst Nasdaq advanced due to outperformance in heavyweight Amazon. ASX 200 (+0.4%) was led by the outperformance in the IT sector alongside a strong performance in material names, whilst Nikkei 225 (+1.0%) was lifted by its heavy China-exposed machinery sector and a marginally weaker domestic currency. Elsewhere, Shanghai Comp. (+2.4%) was the marked outperformer and breached the key 3000 level to the upside with all sectors firmly in the green ahead of the China National People’s Congress coupled with reports of optimistic trade developments. Meanwhile, Hang Seng (+1.0%) posted modest gains but initially failed to piggy-back on the same momentum as its mainland peers as the heavy-weight financial and energy names weighed on the index.

China is "utterly dissatisfied and firmly opposes" Canada’s decision to allow Huawei CFO extradition case to go ahead, Chinese embassy in Canada said. Furthermore, Huawei CFO Meng Wanzhou has sued the Canadian government, police and border officials, claiming her legal rights were violated. Elsewhere, the UK could cap the use of Huawei equipment following the UK government’s review of the company; according to FT citing sources (Newswires/WSJ/FT)

PBoC set CNY mid-point at 6.7049 (Prev. 6.6957) (Newswires)
PBoC injected a net CNY 40bln via 7-day reverse repo

BoJ Governor Kuroda noted that achieving the 2% price target in FY 2020 is difficult, but the economy is sustaining momentum to reach this goal. Furthermore, the governor reiterates that the BoJ will patiently maintain powerful monetary easing to achieve the BoJ's price goal and repeated that Central Bank will discuss an exit strategy from easy policy at the appropriate time. (Newswires)

UK/EU

1922 Committee Chairman Sir Graham Brady shifted his stance and said he is now ready to drop his opposition for PM May’s deal if she can secure assurances for the Northern Irish backstop. (The Independent/ The Guardian) The ERG group have drawn up “three tests” the government must meet to secure their support for PM May’s deal. This includes demands for a “clear and unconditional” route out of the backstop, language that “must go beyond simply re-emphasising/re-interpreting the temporary nature” of the arrangement and a legally binding guarantee that the backstop is temporary. (The Times)

EU’s Chief Negotiator Barnier told Die Welt that the EU is ready to give the UK further guarantees that the Northern Irish backstop is temporary. However, Barnier reportedly told EU ambassadors that he is having to repeatedly rebut UK demands for a temporary backstop, but he is working on a legal add-on to help PM May. Furthermore, he stated that there is not enough time for the EU to ratify the Brexit Withdrawal Agreement, even if the deal passes through the UK House of Commons, hence PM May will have to delay Brexit. Barnier also suggested that Parliamentary arithmetic may be moving towards PM May’s favour. (Die Welt/ The Guardian/The Independent)

UK Attorney General Cox has reportedly ditched attempts to secure a hard time limit or a unilateral exit mechanism from the Irish backstop. He is said to be focusing on securing an enhanced "arbitration mechanism" that allows the UK or the EU to provide formal notice that the backstop should come to an end. (The Telegraph)

Eight pro-Brexit lawyers want to examine any agreement Attorney General Cox has reached with the EU over the Northern Irish backstop, to make sure it is temporary before they support PM May’s Brexit deal. (BBC)

The Independent Group is taking steps to become a fully-fledged political party that can rival the Conservative and Labour parties at the next general elections amid rumours that more defectors could soon going the newly formed party. (The Guardian) Labour Deputy Leader Tom Watson is reportedly set to pull together 50 or more disaffected colleagues to form the third largest group in the Commons in a move to dwarf The Independent Group.  (The Times)

UK PM May will set out details of a GBP 1.6bln fund this week to support less well-off towns post-Brexit in a bid to win Labour support for her deal. (FT)

Details of UK import duties for foreign goods has reportedly been delayed again and may now come after PM May's vote on her Brexit deal expected on March 12th; according to sources cited by The Sun. Insiders said the details of the tariff plan had been agreed by Cabinet Ministers with duties likely on beef, lamb, car parts and ceramics. Downing Street is said to be worried about upsetting Brussels by revealing its plans with negotiations over the Irish backstop at such a delicate stage. (The Sun)

Many senior MPs believe that PM May’s premiership could end in November as the one-year grace period for a Tory no-confidence vote expires. (The Times)

The Spanish government has approved unilateral contingency measures to protect the rights of Britons in Spain in a no-deal Brexit scenario. (The Guardian)

Moody’s upgraded Greece’s rating two notches to “B1”; outlook Stable (Prev. “B3”; outlook Positive) (Newswires)

FX

In FX markets, DXY started the week lower following the verbal intervention from US President Trump who repeated that the USD is “too strong” and referred to Fed Chair Powell as an individual “who likes to raise interest rates”. As such, EUR/USD opened above 1.1375 whilst GBP/USD gapped higher amid a weaker greenback coupled with weekend press, including reports that the 1922 Committee Chairman has shifted his stance to help PM May get her deal through Commons, and EU’s Chief Negotiator Barnier stating that he is ready to give further guarantees on the Northern Irish backstop, although Brexit will have to be delayed as there is not enough time for the EU to ratify the Withdrawal Agreement. However, both currency pairs came off highs as the greenback recouped losses throughout the session. Deutsche Bank has turned bullish on Sterling, citing risks of a no-deal Brexit mostly likely off the table by end-March alongside “the increased effectiveness of coordination among pro-deal MPs”. Elsewhere, antipodeans were initially bolstered amid trade optimism following the aforementioned WSJ trade article. The release of dismal Australian gross company profits knocked AUD/USD lower to sub-0.7100 levels, in turn erasing trade-related gains and denting NZD in sympathy, however, the Aussie and Kiwi then spiked higher after China noted that substantial progress has been made with the US on trade. Finally, USD/CNH opened just below its 50 WMA at 6.7074 on trade progress before falling to sub-6.7000 levels amid news that China’s new foreign investment law will strengthen IP protection, which has been a key sticking point in US-China trade talks.

Australian Gross Company Profits Q4 0.8% vs. Exp. 3.0% (Prev. 1.9%, Rev. 1.2%) (Newswires)

S&P affirmed Mexico at “BBB+”; outlook revised lower to Negative from Stable, citing concerns about lower economic growth and the new government’s energy policy. (Newswires/FT)

COMMODITIES

WTI and Brent futures benefitted from the overall trade-driven sentiment as the former just about reclaimed the USD 56.00/bbl to the upside whilst the latter extended gains above USD 65.00/bbl. Barclays maintained its Brent price forecasts as prices moved in-line with the bank’s view, Barclays expects Brent to be around USD 73/bbl in Q2 2019, although the bank noted that downside risks remain. In the metals complex, gold recovered from recent lows, although price action was largely dominated by the greenback following US President Trump’s verbal intervention, whilst copper benefitted from the overall optimism surrounding trade talks. Elsewhere, Dalian iron ore surged almost 5% to hit a three-week high as markets expect steel mills to replenish its stocks in the raw material, although Chinese steel mills have been delaying purchases due to the high prices.

OPEC condemns the NOPEC plan by the US Congressional Judiciary Committee and will reportedly take collective action to counter the plan legally if implemented; according to Energy Journalist Reza Zandi citing sources. (Twitter)

Baker Hughes Rig Count (March 1): oil rigs -10 at 843, gas rigs +1 at 195, total rigs -9 at 1038. (Newswires)

23 people have been confirmed dead on Sunday in Alabama due to tornadoes. (Newswires)

GEOPOLITICS

US to scrap large, annual military exercises with South Korea, NBC reported. However, Yonhap reported that US and South Korea are to launch a new combined exercise this week to replace their Spring-time "Key Resolve" drills. (Newswires/Yonhap)

North Korean Leader Kim Jong Un continued home without stopping in China. (Yonhap) This comes amid speculation that the North Korean leader may make a stop in Beijing on his train home.

Russian Foreign Minister Lavrov said Russia is ready to take part in bilateral talks with the US over the situation in Venezuela. (CNBC)

NORTH AMERICA

T-Note were sold, and benchmark 10-year Treasury yields rose around 5bps on the day, taking it to the key 2.75%. Much of the afternoon was categorised by rangebound price action, but in later trade the complex caught another wave of selling; many would have expected the T-Note to be bought after a bout of weak data out of the US, however, there may be a few factors explaining both the USD’s upside as well as the T-Note’s downside: firstly, the Fed is going nowhere anytime soon, with policy data-dependent and the central bank in wait and see mode, rates or the buck are not likely to garner much influence from monpol in absence of a new directional cue; second, as we have pointed out previously, a low FX vol environment (combined with rising stocks) can be a good backdrop for carry strategies (favouring the USD); and third, traders note that next week’s macro docket may see dovish updates from the ECB, possibly RBA and possibly even the BOC, which may end up favouring USD. * US T-Note futures (H9) settled 10 ticks lower at 121-14.

US President Trump reiterated that the US Dollar is too strong, stating that it is prohibitive for business and referred to Fed Chair Powell as “a gentleman who likes raising interest rates”. (Newswires)

Fed's Bostic (Non-voter, Dove) said Fed is in the range of neutral, though still might be slightly below; reiterates 'wait and see' approach. (Newswires)

US House Judiciary Committee plans to request documents from more than 60 associates of President Trump this week as part of a House investigation into obstruction of justice, corruption and abuse of power. (WSJ)

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Asia begins subdued amid headwinds from US where the majors pulled back from record levels as they digested the fir… https://t.co/2FoQ94zNdl