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[PODCAST] EU Open Rundown 28th March 2019

  • Asian indices were mixed, as the region somewhat diverged from Wall Street’s negative lead – China’s 2nd largest bank posted disappointing earnings, ahead of the other Big 4’s results
  • US-China trade talks progress; IP and enforcement remain sticking points
  • UK PM May lays out resignation path, no majority for any indicative option; while DUP are to oppose PM’s deal
  • Looking ahead, highlights include German State & National CPI (Prelim), US GDP (Final) & Initial Jobless Claims, Japanese Tokyo CPI & Retail Sales, Industrial Output & Unemployment Rate, Fed's Quarles, Clarida, Bostic, Williams & Bullard, ECB's de Guindos, Nowotny, Knot & Villeroy, RBNZ's Orr, Supply from the US & Italy

 

ASIA-PAC

Asian equity markets traded mostly negative as the downbeat sentiment rolled over from US where all major indices finished lower amid lingering growth concerns and as the yield curve inversion deepened. As such, ASX 200 (+0.7%) opened subdued but with losses eventually pared by resilience across nearly all sectors, while Nikkei 225 (-1.6%)underperformed and briefly slipped below the 21000 level with selling exacerbated by a firmer currency and rotation into bonds. Elsewhere, Hang Seng (-0.1%) and Shanghai Comp. (-0.5%) were also cautious with weakness in financials due to earnings in which China’s 2nd largest lender China Construction Bank missed on FY net forecasts and posted its first quarterly Y/Y profit decline since 2015 which doesn’t bode well for the other Big 4 banks to report this week, while China Life Insurance also posted a near-65% drop in FY net. Nonetheless, sentiment in China slightly improved as US and China senior trade negotiators began the latest round of trade talks in Beijing and a Trump administration official suggested progress was made in all areas of trade talks but some sticking points remained. Finally, 10yr JGBs were supported by the negative risk tone in Japan and amid the recent bond market rally as global yields declined in which the US 10yr yield fell to a fresh 15-month low and the Aussie 3yr yield printed its lowest on record, while the results of today’s 2yr auction were also bullish as all metric improved from the prior month, albeit marginally.

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 6.7263 (Prev. 6.7141)

Chinese Premier Li said world economy faces slower growth and increasing uncertainties, while he added that some fluctuation in quarterly economic growth this year cannot be ruled out. Chinese Premier Li further commented that China must achieve goal of tax and fee cuts this year, while it will also publish a revised negative list for foreign investors and will treat domestic and foreign companies equally. (Newswires)

US administration official said US and China made progress in all areas of trade talks but enforcement and intellectual property remain sticking points, while China was also said to have made proposals on trade including tech transfers that are more specific and with wider scope than ever before. However, the official added that there is no specific timeframe for a trade deal with talks to conclude anytime from April-June and whether to lift current US tariffs on China is a sticking point and will be worked out as part of a deal. (Newswires)

UK/EU

UK PM May told the 1922 committee members that she will hand over leadership once Brexit is delivered. Furthermore, other reports suggested that she will not stay for the next stage of negotiations and others noted that will step down in the summer. (Huffington Post/Daily Mirror/The Guardian/Twitter)

UK MPs voted (441 vs. 105) to approve the Statutory Instrument which amends the date of the UK’s withdrawal from the EU to May 22nd if PM May’s Brexit deal passes this week or to April 12th if deal is not approved.

UK Parliamentary indicative votes results showed no majority was reached for any of the Brexit options, although (J)(234 For vs. 272 Against) which compels the government to negotiate for a permanent and comprehensive UK-wide customs union with the EU, and (M)(268 For vs. 295 Against) which called for a second ‘confirmatory’ referendum, were the options that lost by the narrowest margins. (Newswires)

DUP said it will not support the government on the Brexit deal if it tables a 3rd meaningful vote and that the party cannot agree to anything which threatens the union, while DUP's Dodds also said we will vote against PM May's deal and will not abstain when it comes to the union. (Newswires)

UK ERG source suggested 40 lawmakers have switched to back PM May's deal and 40 are undecided, according to The Times' Sam Coates. Separately, ERG head Jacob Rees-Mogg initially said he will back PM May’s deal if the DUP abstain but later commented he would support the DUP if it continues to oppose the deal, while former Foreign Minister Boris Johnson is also reportedly to back PM May's deal. (Newswires/Twitter)

FX

In FX markets, the DXY remained near its best levels in 2 weeks and continued to eye the 97.00 level to the upside as the cautious risk tone underpinned demand for safe-haven currencies, which was more evident in USD/JPY and JPY-crosses. EUR/USD was uneventful with prices stuck at the 1.1250 level where a large option expiry resides for today’s New York cut and GBP/USD slipped below 1.3200 on Brexit uncertainty. This was as hopes PM May could garner enough support for her Brexit deal after her promise to step down, were eventually dashed by the DUP which will vote against the deal citing a threat to the integrity of the UK, while GBP was further dampened after Parliament voted against all Brexit options in the indicative votes. Antipodeans were initially subdued due to their high-beta characteristics and with NZD/USD also weighed by a further deterioration in Business Surveys but later showed recovered as risk sentiment across the Tasman began to improve. Elsewhere, some EM currencies took a hit with BRL testing 5-month lows amid domestic pension reform concerns and weakness across LATAM, while TRY was also spooked after a crackdown on speculation against the currency resulted in the overnight borrowing rate for the currency in the offshore swap market briefly rocketing past 1000%.

New Zealand ANZ Business Confidence (Mar) -38.0 (Prev. -30.9). (Newswires) New Zealand ANZ Activity Outlook (Mar) 6.3 (Prev. 10.5)

Brazilian President Bolsonaro said his health has impaired his role leading the government and suggested that Brazil will go bankrupt if pension reform is not approved, while Economy Minister Guedes said that if the pension reform bill of BRL 1tln passes, interest rates would naturally decline by 2 percentage points. (Newswires)

COMMODITIES

Commodities were uneventful in which WTI crude futures languished following yesterday’s pullback from the USD 60/bbl level in which growth concerns and a surprise build in this week’s inventory reports weighed on the energy complex. However, losses were limited overnight with support seen around USD 59.00/bbl and amid ongoing supply disruptions with the Houston ship channel likely to experience delays for a few more days and following the recent power outage at Venezuela’s main oil port. Elsewhere, gold was uneventful with the precious metal restricted by a firmer greenback and copper also traded flat amid the mixed overnight risk tone.

Venezuela maintained its four heavy crude upgraders halted from Monday's blackout and workers were reportedly to attempt a restart later on Wednesday, according to sources. (Newswires)

Houston Shipping Channel delays may last 3-5 more days according to an update. (Newswires)

US

Most of the early action overnight/Europe trade was focussed on the short-end, underpinned by comments from Fed governor nominee Moore, who called on the Fed to immediately cut rates by 50bps. This saw the curve bull steepen. There was focus on a German 10yr auction, which sold at negative yields for the first time since 2016.The long-end of the yield curve continued to test new lows (lowest in over a year), with participants continuing to note that the 30-year bucket is the only part of the curve with its head above the effective fed funds rate. On that note, the 3m/10y inversion deepened to over 10bps on Wednesday trade; the market has been rationalising these moves with more circumspection, though concerns about the growth outlook are clearly evident. Next week’s survey data and jobs data may provide the next major catalyst for the narrative to be tweaked. Meanwhile, the belly of the curve saw decent action; in early trade a block sale of the FVM9 in 5k was followed by a large sale (15k); later in the session, some desks had reported real money was profit taking in the belly. US T-note futures (M9) settled 9 ticks higher at 124-22.

Fed's George (Voter, Hawk) said Fed can take a wait-and-see approach on monetary policy given notable downside risks to the economy and that medium-term risks to the economy is from slower growth in China, EU and UK. Fed’s George also commented the Fed is not using balance sheet as a policy tool and does not discuss balance sheet run-off as ‘tightening policy’, while she expects a rebound in payrolls for March and added that US economic growth is likely to slow to 2.0% this year as fiscal and monetary stimulus fades and amid slower global growth. (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