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[PODCAST] EU Open Rundown 8th July 2019

  • Asian equity markets began the week with firm losses as the region reacted to the weakness last Friday on Wall St
  • China is expected to use its plan to name foreign companies that are a national security risk, as a bargaining chip in trade talks with US
  • A YouGov poll over the weekend showed UK PM candidate Boris Johnson with 74% of support vs. 26% for Jeremy Hunt
  • TRY weakened more than 2% against USD after the Turkish Central Bank Governor was ousted and replaced by his deputy
  • Iran is reportedly to lift uranium enrichment to over 3.67%, while an Iranian official confirmed they will scale back commitment to the 2015 nuclear deal
  • Looking ahead, highlights include German trade and BoE’s Haldane

 

ASIA-PAC

Asian equity markets began the week with firm losses as the region reacted to the weakness last Friday on Wall St. ASX 200 (-1.0%) and Nikkei 225 (-1.1%) were lower in which the commodity-related sectors led the broad declines in Australia, especially gold miners after the precious metal slipped below the USD 1400/oz level as a function of a stronger USD and tempered rate cut calls, while Tokyo sentiment was also downbeat as participants digested data releases including a contraction in Machinery Orders. Hang Seng (-1.8%) and Shanghai Comp. (-2.5%) were the laggards after continued PBoC liquidity inaction and further clashes between police and protesters who have now targeted tourist areas in Kowloon. In addition, there were suggestions the US-China trade truce at the G20 has done little to bring the sides closer to an actual trade agreement and it is also expected that China could use its plan to name foreign companies a national security risk, as a bargaining chip in trade discussions. Finally, 10yr JGBs were lower as they tracked the decline in T-notes and rebound in yields in the aftermath of the strong US jobs data, with the absence of the BoJ in the market also contributing to the lack of demand for bonds.

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 6.8881 (Prev. 6.8697)

China is expected to use its plan to name foreign companies that are a national security risk, as a bargaining chip in trade talks with US. In related news, a SCMP columnist suggested to ignore the hype and that US President Trump and Chinese President Xi are no closer to an agreement. (SCMP) 

China FX Reserves (USD)(Jun) 3.119T vs. Exp. 3.110T (Prev. 3.101T). (Newswires)

Japanese Machinery Orders (May) M/M -7.8% vs. Exp. -4.7% (Prev. 5.2%) Japanese Machinery Orders (May) Y/Y -3.7% vs. Exp. -3.9% (Prev. 2.5%)

UK/EU

A YouGov poll over the weekend showed UK PM candidate Boris Johnson with 74% of support vs. 26% for Jeremy Hunt, while it was also reported that Home Secretary Javid backs Johnson as he sees him as better placed to deliver what we need to do at this critical time. (Newswires)

British lawmakers from both the ruling Conservatives and opposition Labour said they were examining steps to prevent the next PM from pursuing a no-deal Brexit. (Newswires) More specifically, Dominic Grieve is planning on amending a bill in Parliament on Monday, to ensure the House of Commons is sitting in October in order to prevent the next PM from suspending legislature to pursue a no-deal Brexit. (Newswires) 

Britain could reportedly be facing a EUR 200bln EU bail-out bill unless it manages a clean Brexit, according to a group which represents numerous pro-Brexit campaigning organisations. (Telegraph)

ECB's Villeroy said if and when needed, there must be no doubt about our determination and capacity to act. Villeroy also suggested that the ECB looks at markets but are data dependent, while he added that the ECB cannot make miracles and it is up to political leaders to reduce uncertainty. (Newswires)

Germany’s CDU Chairwoman Kramp-Karrenbauer warned junior coalition partners against blocking the appointment of a German as the next European Commission President as it would put their coalition under “maximum strain”. (Newswires)

Greece’s centre-right New Democracy party won a landslide victory over incumbent Syriza party, which led to outgoing PM Tsipras conceding defeat to New Democracy leader Kyriakos Mitsotakis. (Guardian)

FX

 

The greenback was relatively stable although has slightly pulled back from post-NFP highs in which the better than expected jobs data pushed the DXY back above 97.00. As such, markets have only priced in a less than 5% chance of a 50bps rate cut at this month’s FOMC vs. more than 32% over a week ago and the probability of a 25bps cut is now at over 95%. EUR/USD and GBP/USD traded rangebound and failed to make any significant recovery from Friday’s pressure in which the latter briefly gave up the 1.2500 handle to the downside, while the latest YouGov polls over the weekend also showed that UK PM candidate and hardcore Brexiteer Boris Johnson was firmly in the lead with 74% of support vs. 26% for Jeremy Hunt. Elsewhere, USD/JPY and JPY-crosses were little changed with only minimal flows seen into the safe-haven JPY despite the deterioration in risk sentiment and antipodeans also followed suit to the humdrum tone, while the biggest mover was TRY which weakened more than 2% against USD after the Turkish Central Bank Governor was ousted and replaced by his deputy which President Erdogan stated was due to the former Governor’s unwillingness to lower rates.

 

Turkey Central Bank Governor Cetinkaya was removed from position and replaced by Deputy Governor Uysal in which President Erdogan cited a refusal to cut rates as the reason behind the dismissal. (Newswires)

COMMODITIES

Commodities were uneventful overnight with WTI crude futures holding onto last Friday’s US gains where prices reclaimed the USD 57.00/bbl level which then later acted as support. In terms of fundamentals, it was reported that Saudi Arabia output was at 9.8mln BPD in June vs. 9.7mln BPD in May which although is a slight increased, remains comfortably below the OPEC+ commitment of 10.3mln BPD, and geopolitical concerns continue to linger as Iran confirmed it will scale back commitment to the 2015 nuclear deal. Elsewhere, gold was lacklustre following its recent slip below USD 1400/oz in the aftermath of the NFP data although prices within close proximity for an attempt to reclaim the level, while copper conformed to the rangebound trade across the complex and has so far shrugged off the negative risk tone in the region as well as the hefty losses in its largest buyer China. Iran Oil Minister Zanganeh said he is hopeful that Iran’s crude oil exports will improve, while he added that the price of oil is not Iran's main concern and that what matters is the amount Iran can export. (Newswires)

 

GEOPOLITICS

 

US President Trump said Iran better be careful and that it is doing a lot of bad things, while he added that Iran will never have a nuclear weapon. (Newswires)

Iran was reportedly to lift uranium enrichment to over 3.67%, while an Iranian official confirmed they will scale back commitment to the 2015 nuclear deal and will keep reducing its commitments every 60 days unless signatories move to protect it from US sanctions and signal room for diplomacy. (Newswires/FARS)

Iran Defence Minister said the downing of the US drone sends a message that Iran will defend its borders. (Newswires)

 

US

 

US yields rose sharply after the June employment situation report surprised to the upside, and the internals of the report also provided encouragement that the labour market is in decent shape. Bear-flattening was the play after the data, and there was a significant paring back in the implied probabilities of a 50bps rate cut at the Fed’s July meeting – the probability has now fallen to just 0.5% from around 27% before the data, though the market is still completely priced for a 25bps cut; money markets now price 60bps of easing through the end of the year, compared to 75bps at the close of business on Thursday. Interestingly, Treasuries only marginally recovered from lows, despite equities paring back the NFP-induced slide. US T-note futures (U9) settled 25 ticks lower at 127-15.

US President Trump said the Fed does not have a clue and that the most difficult problem for the US is the Fed and not the nation’s competitors, while he separately commented that the Fed would lower rates if it knew what it was doing. Furthermore, Trump said that China is devaluing its currency and that the UK Ambassador to the US has not served the UK well. (Newswires)

Fed Board nominee Shelton said the jobs report shows Trump’s agenda is working, while she added that she does not want the Fed to 'pull the rug' from under the market and that markets are not wrong in questioning the yield curve. Furthermore, Shelton echoed Trump comments on ECB looking to devalue the EUR and suggested that competitive devaluation is cheating not competing. (Newswires)

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