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[PODCAST] EU Open Rundown 1st August 2019

  • Fed cut rates by 25bps as expected, but disappointed expectations for more dovish signals
  • Fed Chair Powell suggested the decision was different from the beginning of a lengthy cutting cycle but later added he did not say that the cut is going to be the start of a cycle of "just one" rate cut
  • Asian stocks traded lacklustre, DXY broke above YTD highs and commodities were broadly lower
  • Looking ahead, highlights include EZ & UK Manufacturing PMI (Final), US Initial Jobless Claims & ISM Manufacturing PMI, BoE Rate Decision, QIR & Press Conference, supply from Spain & France
  • Earnings: Verizon, S&P, General Motors, Marathon Petroleum, Siemens, BMW, Generali, Infineon, Shell, Rio Tinto, British American Tobacco, Barclays

FOMC

- Federal Reserve cut the Fed Funds Target by 25bps to 2.00%-2.25% as expected, in which Fed’s George and Rosengren dissented.

- The Fed said it will continue to monitor incoming information and maintained guidance to act as appropriate to sustain the expansion, while it lowered IOER to 2.1% and said it will conclude the balance sheet normalisation process in August which is 2 months earlier than expected. The Fed also cited implications of global developments for the US outlook as well as muted inflation pressures and stated that spending growth has picked up but business fixed investment growth has been soft and inflation compensation measures remain low.

- Fed's Chair Powell commented at the press conference that the outlook to the economy remains favourable and the rate cut is to foster faster return to 2% inflation target, while he added that weak global growth, trade policy uncertainty and muted inflation has concerned the Fed. Powell also stated that the rate cut is a mid-cycle policy adjustment and that the current rate decision is different from the beginning of a lengthy cutting cycle, while he answered increasing policy support this year has kept the economy on track when asked if a 25bps cut is sufficient to return inflation to target, but later added he did not say that today's cut is going to be the start of a cycle of "just one" rate cut.

- Market reaction to the decision and statement was choppy as the 25bps cut was expected, while it maintained its language to ‘act as appropriate’ to sustain the expansion and pledged to continue monitoring incoming information in their decision making. This was framed by analysts as a neutral cut since language has been maintained that the Fed can cut further if it needs to but there was not any explicit pledge to do so, while news that the balance sheet normalisation plan would end early was seen as dovish for the Treasury complex. However, Powell stated at the press conference that the move was a “mid-cycle adjustment” and that there was an ‘insurance’ aspect to the cut, while he also added that today’s rate decision was different to the start of a lengthy cutting cycle and continued to sound upbeat through the presser which triggered a hawkish reaction, although he later noted that he had not said that the rate decision will be a cycle of ‘just one’ rate cut which raised the possibility of further insurance cuts. 

ASIA-PAC

Asian stocks traded lacklustre as the region reacted to the FOMC meeting. ASX 200 (-0.3%) and Nikkei 225 (-0.2%) were lower with notable weakness seen in gold miners after the precious metal slumped post-FOMC, although downside in Australia’s broader market was limited by resilience in its largest weighted financials sector, while the Japanese benchmark briefly turned positive as it found solace from a weaker currency and amid a heavy slate of earnings. Elsewhere, Hang Seng (-0.7%) and Shanghai Comp. (-0.8%) conformed to the downbeat picture after the PBoC skipped liquidity operations again and participants digested more PMI data in which Chinese Caixin Manufacturing PMI topped estimates but remained below the 50 benchmark level, while there was also increasing concerns regarding the Chinese military intervening in Hong Kong. Conversely, participants had their first opportunity to react to the more constructive tone struck between US and China in trade talks. Finally, 10yr JGBs were lower and tracked the weakness seen in USTs following the less dovish than expected Fed, with further pressure seen after the 10yr auction results which attracted weaker demand.   

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 6.8938 (Prev. 6.8841)

Chinese Caixin Manufacturing PMI (Jul) 49.9 vs. Exp. 49.6 (Prev. 49.4). (Newswires)

HKMA lowered the base rate by 25bps to 2.50% in lockstep with the Fed. (Newswires)

Hong Kong Chief Executive Lam said China’s Army is ready to protect China's sovereignty, while there were earlier comments from China PLA Commander in Hong Kong said it will not tolerate violence. (Newswires)

UK/EU

UK Treasury said total no-deal Brexit fund is now GBP 6.3bln which includes GBP 2.1bln to prepare for a no-deal Brexit. (Newswires)

The BoE risks upsetting the economy if it changes interest rates before there is more clarity about Brexit, according to City A.M.’s shadow monetary policy committee. (CityAM)

 

FX

USD was the only game in town and continued to strengthen in the wake of the disappointment from the Fed’s ‘neutral cut’ which prompted further criticism from US President Trump who suggested that the market wanted to hear this was the beginning of a lengthy and aggressive rate-cutting cycle and that Fed Chair Powell let us down as usual. As such, the greenback’s major counterparts were weaker across the board with EUR/USD firmly below the 1.1100 handle and with GBP/USDpressured before downside was stemmed by support at the 1.2100 level, although the currency remains lacklustre as the UK ramps up its no-deal contingencies and with the government believing it can strike a series of quick side deals in the event of a no-deal Brexit once EU countries feel the disruption. Elsewhere, upside in USD/JPY was exacerbated on a break above 109.00, while antipodeans were subdued in the aftermath of the Fed and due to the lacklustre risk tone as well as declines across the commodities complex.

Brazil Central Bank Selic Rate 6.00% vs. Exp. 6.25% (Prev. 6.50%), with the decision unanimous. (Newswires) 

COMMODITIES

Commodities were lower across the board in which WTI slipped back below the USD 58.00/bbl level as a firmer USD and broad risk averse tone overshadowed this week’s bullish inventories and reports of lower OPEC output, while Brent crude tested USD 64.00/bbl to the downside and yesterday also saw the expiry of its August futures. Elsewhere, gold slumped amid a surge in the greenback following the FOMC disappointment and copper languished alongside the uninspiring picture in stocks and across the commodities complex.

GEOPOLITICS

 

US imposed sanctions on Iranian Foreign Minister Zarif, while Iran Foreign Minister Zarif said the US sanctioned him because he is Iran's primary spokesperson around the world and that the sanctions have no impact for him or his family as he does not have foreign property or interests. Furthermore, Zarif thanked the US for sanctioning him and considering him a considerable threat to its agenda. (Twitter)

US

The US treasury curve bull flattened with the 2s30s narrowing by around 10bp after the fed’s decision to trim rates by 25bp. The T complex saw a specifically bullish catalyst as the balance sheet tapering was to finish 2 months early with some analysts suggesting the fed could purchase up to USD 35-40bln of additional treasuries over the next 2 months. Looking through to the end of the year markets now price 35bp of easing (before the 25bp cut decision 68bp of easing was priced) as pricing becomes a bit more hawkish prior to the meeting. US T-note futures (U9) settled 2+ ticks higher at 127-13+.

US President Trump tweeted that what the market wanted to hear was that this was the beginning of a lengthy and aggressive rate-cutting cycle, while he suggested Fed Chair Powell let us down as usual but at least he is ending quantitative tightening. Furthermore, Trump later added that experts stated Fed should not have tightened and waited too long to undo the mistake, while he added that Fed’s Bullard said they waited too long to correct the mistake made in December. 

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MOC: * SPX 850mln to sell (vs at 650mln to sell at 1549 EDT) * Dow 50mln to sell (vs 100mln to buy at 1549 EDT)