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[PODCAST] EU Open Rundown 14th May 2019

  • Asian indices were subdued after China’s tariff retaliation and the USTR posting details on tariffs for an additional USD 300bln; although, sentiment was aided by optimism from US President Trump
  • Cross party Brexit talks reportedly made no progress, while PM May is under pressure to abandon compromise attempts and is considering definitive votes to break the Brexit deadlock
  • Looking ahead, highlights include German CPI (F), ZEW, UK Employment Change, US Import & Export Prices, OPEC Monthly Oil Market Report, Fed's Williams & George, supply from Italy
  • Earnings: Allianz, Merck, ThyssenKrupp, Innogy, Vodafone

 

ASIA-PAC

Asian equity markets were mostly lower as global risk sentiment remained pressured by the escalating US-China trade tensions, which resulted to substantial losses on Wall St. and the worst performance of the S&P 500 in more than 4 months. This followed the tit-for-tat between the world’s 2 largest economies in which China announced its retaliatory tariffs affecting over 5000 US products at a rate of between 5%-25% despite US President Trump's warnings, while the USTR office later posted details of potential duties on the approximate remaining USD 300bln of Chinese goods. ASX 200 (-0.9%) andNikkei 225 (-0.6%) were both negative with the declines in Australia led by continued underperformance in its largest weighted financials sector and amid losses in energy names after a retreat in oil prices, while Japanese exporters felt the brunt of the recent flows into JPY. Hang Seng (-1.5%) and Shanghai Comp. (-0.4%) were weaker with Hong Kong playing catch up on return from the extended weekend, although the mainland bourse briefly recovered as participants found some encouragement from a CNY 200bln MLF announcement, as well as comments by US President Trump who suggested we will know the result of trade talks in 3-4 weeks and that he feels talks will be very successful. Finally, 10yr JGBs were uneventful amid a similar lacklustre tone in T-note futures and as the improved results in in the 30yr JGB auction also failed to spur prices.

PBoC skipped Reverse Repo operations but announced CNY 200bln in 1yr medium-term lending facility. (Newswires) PBoC set CNY mid-point at 6.8365 (Prev. 6.7954)

US President Trump said we will know in 3-4 weeks if talks with China are successful and that he feels talks will be very successful. There were earlier comments from Trump that he has not made the decision to go ahead with tariffs on the further USD 325bln in Chinese imports and that he will be meeting with Chinese President Xi at the G20 summit which he expects to be fruitful. Furthermore, Trump had also stated that the US cannot let China take advantage of it any longer and that he expects China to retaliate against US farmers. (Newswires)

USTR office posted details of tariffs on the approximate remaining USD 300bln of Chinese goods and will hold a public hearing on June 17th in which it stated that cellular phones and laptops computers are included on list that could be subject to potential tariffs, while the tariff list covers 3805 product categories of Chinese imports which would be subject to 25% tariffs. (Newswires)

US Treasury Secretary Mnuchin said the US is still negotiating with China and is working on when to travel to Beijing. (Newswires)

China may release additional retaliatory trade measures, according to China Global Times. (Global Times)

MSCI announced to increase weighting of China A shares in Emerging Markets, while it also included Saudi Arabia indexes and will reclassify Argentina indexes to EM. (Newswires)

 

UK/EU

UK PM May is said to be considering definitive votes on different Brexit options in an attempt to break the Brexit deadlock, while reports added she is expected to ask MPs to rank different outcomes in order of preference. (Telegraph) The report suggested that the government appears to be willing to go ahead with their plan for definitive votes regardless of support from the Labour Party.

Conservatives are reportedly preparing a new offer on a post-Brexit customs union; however, a source states that this offer has not been agreed with the Labour party. (CityAM)

Reports suggested no progress was made in cross party talks and that UK PM May is expected to face pressure in tomorrow's cabinet meeting to drop efforts for a compromise deal. (Independent) 13 of UK PM May’s former cabinet colleagues have reportedly written to PM May asking her to reject Labour leader Corbyn’s demand for a cross-party agreement to secure the Brexit deal. (Times)

UK PM May’s Europe adviser and negotiator is travelling to Brussels today to talk about how and how long it might take to change the political declaration if there were to be an agreement, according to BBC's Laura Kuenssberg. (Twitter)

 

FX

The DXY was steady overnight as it took a breather from the prior day’s volatility in which it initially fell on China’s tariff reprisal, but then bounced back after it found support within a whisker of the 97.00 level. EUR/USD partially nursed losses and GBP/USD languished firmly below 1.3000 as the latest headlines suggested no progress was made in cross party talks and that PM May is expected to face cabinet pressure to abandon attempts for a compromise agreement. Elsewhere, the escalation of trade tensions initially spurred flows into safe-haven JPY and weighed on the high-beta antipodeans, although some of the moves were pared as USD/JPY rebounded from support at 109.00 and as optimism from US President Trump provided some relief.

Australian NAB Business Confidence (Apr) 0 vs. Exp. 1 (Prev. 0, Rev. -1). (Newswires)

Australian NAB Business Conditions (Apr) 3 (Prev. 7)

 

COMMODITIES

Commodities mostly consolidated after the prior day’s rampant price action which had been due to the trade-related jitters. Nonetheless, oil prices nursed some losses overnight in which Brent and WTI crude futures reclaimed the USD 70.00/bbl and USD 61.00/bbl levels respectively amid tough US rhetoric surrounding Iran, while participants look ahead to the latest inventory updates beginning with the APIs later tonight. Elsewhere, gold prices took a well-earned breather after having notched is largest increase in 2 months and briefly reclaimed the USD 1300/oz as the China tariff retaliation spurred safe haven buying, while copper partially rebounded and as Trump’s good cop, bad cop tactics provided some solace overnight. 

GEOPOLITICS 

US President Trump said if Iran does anything it will be a big mistake. In related news, a US defence official presented an updated military plan to the Trump administration which involves deploying 120k troops to the Middle East if Iran attacks US forces. (Newswires)

North Korea said US seizure of its ship is in direct violation of June 12 summit agreement, while it added US should return the ship immediately and that it will keep a close eye on US actions going forward. (KCNA) 

 

US

An escalation of trade tensions has kept a bid in US Treasuries on Monday, which began on the front foot in APAC trade, and the trajectory continued after China announced its retaliatory measures after the US boosted tariffs on Friday. The short end of the curve saw yields lower by over 6bps, while the longer end saw yields down by around 3bps; the notorious 3m/10yr spread inverted again, however, at settlement, major curve spreads were a touch steeper. The buying of Treasuries once again saw the implied probability of Fed rate cuts in 2019 rise (to around 70%, according to the CME’s Fedwatch tool, from around 60% at the end of last week). The complex came off highs in late US trade following some constructive commentary from Treasury Secretary Mnuchin, as well as US President Trump suggesting that he will meet china President Xi at the G20 summit in June (while he also stated that he was yet to make a decision on whether to impose further tariffs on the remaining USD 325bln of Chinese imports. With a lack of A-list data this week, the focus will fall on the heavy slate of Fedspeak; however, initial indications suggest that FOMC policymakers will likely reiterate the message of neutral and patience as they assess the potential fallout from trade conflicts. US T-notes (M9) futures settled 14 ticks higher at 124-13+.

Fed's Kaplan (Non-Voter, Dove) said Fed's rate setting is where it should be for now and does not think the Fed should be cutting or hiking right now, while he added the best thing the Fed can do is be patient. Furthermore, Kaplan commented that the financial system is more highly leveraged than it was 10 years and that trade tensions are a threat to growth. (Newswires)

 

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