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[PODCAST] EU Open Rundown 1st April 2019

  • Asian indices were positive as momentum carried over from Wall St; risk tone was boosted by a beat in Chinese PMIs
  • US-China talks make ‘new’ progress, although China remains cautious 
  • No clear path for UK PM May or her deal, which may be pitted against the most popular motion from indicative voting
  • Looking ahead, highlights include EZ, UK & US Mfg PMIs, EZ CPI, US Retail Sales, Business Inventories, Construction Spending, ISM Mfg, ECB’s de Guindos, BoC’s Poloz

 

ASIA-PAC

Asian equity markets began the new quarter on the front-foot with momentum sustained from last Friday’s global rally in which the S&P 500 notched its best quarterly performance in nearly a decade and as the region also cheered encouraging Chinese PMI data. ASX 200 (+0.5%) and Nikkei 225 (+1.4%) gained from the open in which Consumer Staples led the broad gains across Australia’s sectors after Woolworths completed the sale of its petrol business and announced to return funds through a AUD 1.7bln off-market buyback, while the Japanese benchmark shrugged off a weak Tankan survey and was among the best performers with risk appetite fuelled by favourable currency flows. Hang Seng (+1.8%) and Shanghai Comp. (+2.3%) were uplifted by strong Chinese data in which the Official Manufacturing, Non-Manufacturing and Caixin Manufacturing PMIs all topped estimates with the official reading in expansionary territory for the first time since October.  Furthermore, trade optimism and the inclusion of China’s onshore bonds in the Bloomberg Barclays Global Aggregate Index from today further added to the optimism with the mainland firmly extending on the over-3% gains seen on Friday and with the Hang Seng now in bull market territory. Finally, 10yr JGBs were lower amid similar weakness in T-notes and as a rally across riskier assets dampened safe-haven demand, while the BoJ recently announced its purchase intentions for the month in which it kept all amounts unchanged.

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 6.7193 (Prev. 6.7335)

Chinese Manufacturing PMI (Mar) 50.5 vs. Exp. 49.5 (Prev. 49.2); First expansion since October. (Newswires) Chinese Non-Manufacturing PMI (Mar) 54.8 vs. Exp. 54.5 (Prev. 54.3) Chinese Caixin Manufacturing PMI (Mar) 50.8 vs. Exp. 50.1 (Prev. 49.9)

Chinese President Xi is said to be wary about a summit with US President Trump given the difficulty in reaching a compromise according to reports on Friday, while China’s Global Times editor tweeted that China has been more cautious on its optimism from trade talks than the US. However, there were separate reports from other Chinese press that suggested China-US trade talks have made 'new' progress and NEC Director Kudlow also suggested headway was made in trade talks. (Newswires/Nikkei/Xinhua)

Japanese Tankan Large Manufacturing Index (Q1) 12 vs. Exp. 14.0 (Prev. 19.0); 2 year low. (Newswires) Japanese Tankan Large Manufacturing Outlook (Q1) 8 vs. Exp. 12.0 (Prev. 15.0) Japanese Tankan Large All Industry Capex (Q1) 1.2% vs. Exp. -0.4% (Prev. 14.3%)

UK/EU

Downing Street was said to be planning to bring UK PM May's deal back to the HoC again this week and threatened an election if it cannot secure a majority according to Buzzfeed's Wickham.  However, there were also comments over the weekend from Conservative Party Deputy Chairman Cleverly that the party is not preparing for a snap general election as it wouldn’t solve anything and could cause an “unnecessary delay’’ to Brexit. (Newswires/Twitter)

Multiple UK government sources suggested on Friday that there is a "run-off" idea being circulated in which UK PM May’s deal will be pitted against the strongest proposal from indicative votes process, according to The Times' Coates. (Twitter)

UK Justice Secretary Gauke has suggested that PM May could have to “accept” UK staying in customs union and break a 2017 general election manifesto pledge. (Telegraph)

Sources confirm that those close to UK PM May will push for a new PM to be selected after the Conservative Party conference in September. (Guardian)

An EU Diplomat has stated the political declaration could be amended ‘very quickly’, and that it may ‘be expected’ that EU leaders would agree to a further Brexit delay to the May 22nd one if a House of Commons majority backed a deal revised on such lines. (FT)

European Commission President Juncker stated that patience was running out with the UK, and the EU wants UK MP’s to reach an agreement over Brexit in the coming hours and days. (BBC)

ECB’s Knot (hawk) commented that the ECB would need a clear monetary-policy reason to consider acting to mitigate the effects of negative interest rates on banks and expressed doubts regarding tiered deposit rates as a best solution for banks’ excess liquidity, while he also suggested it was clear that even policy normalization interest rates would be below pre-crisis levels. (Newswires)

FX

In FX markets, the DXY was lacklustre but held above the 97.00 level amid mixed trade across its major counterparts in which EUR/USD mildly recovered from 3-week lows and with GBP/USD despondent after PM May’s Brexit deal failed to get parliamentary approval for the 3rd time. This gives the UK less than 2 weeks until its exit date on April 12th and Parliament is to conduct another round of indicative votes today where MPs are likely to revisit the options that previously garnered the most support which called for a Customs Union with the EU and Confirmatory Referendum. Furthermore, some reports have also suggested outside risks of a snap election which Tory Party Deputy Chairman Cleverly was quick to dismiss, while not all are fazed by the ongoing uncertainty with Goldman Sachs suggesting near-term risks are skewed to the upside for GBP on condition that the indicative vote process is moving along. Elsewhere, antipodeans were underpinned by the risk sentiment and strong Chinese data, while USD/JPY was also lifted above 111.00 on safe-haven outflows and following a deterioration in the Tankan survey which showed the Large Manufacturing Index at a 2yr low.

Turkey opposition party claimed victory in Istanbul and Ankara, while the ruling AK Party also initially claimed to have won in Istanbul following local elections over the weekend which was seen as a referendum on President Erdogan. However. President Erdogan later commented that although the Mayorship may have been lost in Istanbul, they won in many of its municipalities. (Newswires) 

COMMODITIES

Commodities were mostly higher overnight in which WTIcrude futures marginally extended on gains above the USD 60/bbl level with prices supported by the heightened risk appetite and after the latest Baker Hughes rig count showed a decline of 8 rigs last week for a total reduction of 69 rigs in Q1, which was the largest quarterly decline in 3 years. Elsewhere, gold was relatively unchanged as the rally in stocks limited upside in the precious metal, while copper and iron ore prices were spurred by the strong manufacturing data from China and amid upward revisions by Goldman Sachs on the latter.

US Baker Hughes Rig Count: Oil rigs -8 at 816, natgas rigs -2 at 190, total rigs -10 at 1006. (Newswires)

US Envoy for Venezuela Abrams said the US has had a "fair amount" of success in convincing companies and governments not to buy oil and gold from Maduro. (Newswires)

The Omani oil minister says that he sees prices staying in a USD 65-75 range until year-end. (Newswires)

Rio Tinto sees Pilbara iron ore shipments to be at lower end of 338mln-350mln tons and expects impact of disruption from cyclone will result in loss of around 14mln tonnes of production this year. (Newswires)

Goldman Sachs raised iron ore price forecasts with 3-month estimate at USD 85/ton (Prev. USD 80), 6-month estimate at USD 80/ton (Prev. USD 75/ton) and 1-year estimate at USD 70/ton (Prev. USD 65). (Newswires)

US

At settlement, major curve spreads had narrowed by between 1bps (2s5s) and 4bps (2s30s). Profit taking was cited in APAC trade, while the trade optimism chestnut was also cited. An attempt at a move higher in European trade ran out of steam, but did see some upside after PCE data was released (deflator saw the first decline since March 2017). There was also demand inspired by Brexit uncertainty, as well US President Trump firing barbs at Mexico on Twitter, and then subsequently in remarks. The curve remained flatter into the close, and traders will be focussed on Monday’s liquidity impact from SOMA day. US T-note futures (M9) settled 9 ticks lower at 124-07.

US President Trump said he could close the border with Mexico for trade and for a long time, while Mexican Foreign Minister later responded that Mexico does not act on the basis of threats and that Mexico is a great neighbour. (Newswires)

US NEC Director Kudlow said the Fed should cut rates by 50bps, while he also commented that there is no inflation out there and that US President Trump would like the Fed to stop shrinking the balance sheet. (Newswires/Axios)

Fed's Quarles (voter, neutral) said further rate hikes are likely to be needed at some point given the optimistic economic outlook but reiterated the Fed's wait-and-see stance. Quarles added that he does not view the yield curve inversion as much of a harbinger of recession and attributes it to other causes like the size of the Fed's balance sheet. (Newswires)

Fed's Kashkari (non-voter, dove) said he is happy that the Fed is pausing and sees no reason to hike rates, while he added that he would support a cut if he came to the conclusion that the economy is slowing and that the balance of risks has shifted. (Newswires)

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