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[PODCAST] US Open Rundown 26th November 2019

  • European bourses are softer in holiday-thinned conditions despite positive overnight trade rhetoric
  • ·China and US trade negotiators held a phone call today in which they reached a consensus on solving issues and agreed to keep in contact regarding phase one deal
  • Fed Chair Powell said Fed would respond if developments spurred a material outlook reassesment and that current monetary policy is likely to remain appropriate as long as data is consistent with moderate growth
  • RBA Governor Lowe says QE is not on our agenda, adds that there is no need to provide extra liquidity via market operations; would only occur of Cash Rate hit 0.25% (Currently 0.75%)
  • Sterling underperforms on Conservative parties poll lead narrowing, while AUD was briefly boosted via Lowe
  • Looking ahead, highlights include US Consumer Confidence, New Home Sales-Units, API Weekly Inventories, Fed Discount Rate Minutes, Fed’s Brainard, ECB’s Coeure

ASIA-PAC

Asian equity markets traded mostly higher after taking impetus from the fresh record levels on Wall Street where sentiment was underpinned by the US-China trade optimism and a relatively busy day of takeover activity. ASX 200 (+0.8%) was positive in which the energy sector led the broad advances across Australia’s sectors as Caltex registered double-digit percentage gains on reports it received an offer from Couche-Tard and with Westpac finding some relief from the AUSTRAC-related losses after its CEO stepped down and Chairman announced an early retirement, while Nikkei 225 (+0.4%) was lifted by a weaker currency and with M&A also in focus as Hitachi Chemicals surged on a potential takeover by Showa Denko. Hang Seng (-0.3%) and Shanghai Comp. (U/C) opened positively on the recent trade optimism although the gains were later trimmed after another substantial liquidity drain by the PBoC and as Alibaba’s debut threatened to shun the regional darlings, while a brief spike in risk appetite attributed to algos reacting to news US and China trade negotiators held a phone call and reached a consensus on solving issues, later faded given the actual lack of fresh solid developments. Finally, 10yr JGBs were pressured in early trade by the lack of safe-haven demand and with participants sidelined heading into the 40yr auction, which eventually showed firmer demand and spurred a rebound in prices.

PBoC skipped open market operations for a net daily drain of CNY 120bln. (Newswires) PBoC set CNY mid-point at 7.0344 vs. Exp. 7.0344 (Prev. 7.0397)

China and US trade negotiators held a phone call today in which they reached a consensus on solving issues and agreed to keep in contact regarding phase one deal. MOFCOM noted the talks were held by Chinese Vice Premier Liu He, USTR Lighthizer and Treasury Secretary Mnuchin, while Chinese Commerce Minister Zhong, PBoC Governor Yi and NDRC Vice Chief Ning also participated in talks. Furthermore, USTR Lighthizer later confirmed the call with China but declined to comment on specifics. (Newswires)

China's Global Times tweeted that topics in the call may have included tariff removal, agricultural purchase and a possible face-to-face meeting citing experts close to trade talks. Furthermore, Global Times later reiterated that China and the US have basically reached broad consensus on a phase one trade deal including the removal of tariffs, although some differences remain over how much tariffs should be rolled back citing experts close to the talks. (Twitter)

US

Fed Chair Powell said Fed would respond if developments cause material reassessment of the outlook and that current monetary policy is likely to remain appropriate as long as economic data is consistent with moderate growth, while he suggested that policymakers’ favourable outlook is founded on strong household spending and that monetary policy is well positioned to support labour market as well as the 2% inflation target. However, Powell also noted yellow flags in the economy including muted inflation and that lower monthly job gains suggests an economy with somewhat less momentum than previously thought. (Newswires)

US House Speaker Pelosi said we are within range of a substantially improved US-Mexico-Canada trade agreement and that they need to see the progress in writing from USTR Lighthizer for final review. (Newswires)

UK/EU

UK Election Polls: Conservatives 43% (-2), Labour 32% (+5), Liberal Democrats 14% (-2) and Brexit Party 3% (+1). Kantar poll conducted November 21st-25th. (Newswires)

BBC's Laura Kuenssberg tweeted that Labour's handling of anti-Semitism crisis comes blasting back into the campaign as Chief Rabbi Mirvis suggested that Corbyn is not fit for office and demanded every person vote with their conscience, while ITV’s Brand tweeted that the Chief Rabbi urged people to think carefully before voting Labour and noted that the party’s claim to have dealt with antisemitism is mendacious fiction. (Newswires)

Lord Kerslake, a senior adviser to the Labour Party has suggested that Jeremy Corbyn’s position as head of the party could be up for discussion as part of the price of a pact with the Liberal Democrats and the SNP. (Telegraph)

German GfK Consumer Sentiment (Dec) 9.7 vs. Exp. 9.6 (Prev. 9.6). (Newswires)

EQUITIES

Major European bourses (Euro Stoxx 50 -0.2%) are modestly softer as recent upwards momentum seen in global equities subsides amidst a lack of fresh fundamental drivers. Another bout of seemingly positive US/China news-flow overnight, in which the two sides reportedly held a phone call where they reached a “consensus on solving issues” and “agreed to keep in contact”, largely failed to lift sentiment; Lloyds argue that negotiators will now need to “walk the talk”, i.e. show real evidence of progress, if further market risk appetite is to be stoked. It is also worth noting that a number of banks’ month end rebalancing models forecast flows out of equities and into bonds – another factor potentially behind this morning’s moves. Sectors are mostly in the red, bar Tech (+0.3.), Materials (Unch), Healthcare (+0.1%) and Consumer Staples (+0.3%). In terms of equity specific movers; Faurecia (+1.0%) had a strong start to the session on the news that it targets FY revenue above EUR 20.5bln and had confirmed its FY targets, although the stock eventually gave back the majority of its gains. Valeo (-0.3%) opened higher in sympathy, before gains were also eroded. Similarly, Peugeot (-0.4%) and Fiat Chrysler (-0.1%) also struggled to hold on to early gains, which were spurred by the news that both Cos had told employees via internal communication that they would sign a binding merger agreement in the coming weeks. Enel (-0.5%) is lower despite decent earnings in which it raised its FY20 EBITDA guidance and increased its dividend. Elsewhere, Compass Group (-5.2%) sunk after earnings underwhelmed, while EasyJet (Unch.) managed to fight off early losses sustained after the Co. was downgraded to hold from buy at Berenberg.

GEOPOLITICS

Russia and Turkey are reportedly to sign the second S-400 missile system regiment contract in 2020. (Ria)

FX

GBP, EUR - Sterling has lost its recent impetus in light of fresh polls depicting a narrowing Tory lead over labour, with the latest Kantar poll showing an 11-point gap vs. 18 last week, whilst the overnight ICM polls indicated a narrowing to 7 points from 10 in the previous week. That said, it’s worth caveating that Labour’s handling of its anti-Semitism crisis has garnered some focus with Chief Rabbi Mirvus suggesting that Labour Leader Corbyn is not fit for office. Cable dipped back below the 1.2900 mark (having flatlined around the figure throughout APAC hours) and continues to drift lower to session lows having traded within a 1.2852-2907 intraday band thus far. Meanwhile, the Single Currency remains little changed and within a tight range of 1.008-19 with no pertinent comments from ECB speakers so far and with touted support at 1.1004 ahead of the round figure.

AUD, NZD - The Aussie took top spot among the G10 gainers as RBA Governor Lowe pushed back on QE and unconventional measures until Australia sees a bleaker economic picture. The Governor stated that QE will only be needed in the case of two more 25bps rate cuts, (i.e. the Cash Rate at 0.25%) and reaffirmed that negative rates in Aussie are extremely unlikely. All-in-all a hawkish outlook on monetary policy against the backdrop of recent economic data, and especially given the Central Bank’s rhetoric earlier in the year that unconventional tools are prepared to be rolled out if warranted – which also prompted most house views to converge towards QE at some point next year. Unsurprisingly, AUD/USD derived support from the Governor but the pair stopped short of the 0.6800 level to the upside vs. a low of 0.6770, albeit the pair has given up the gains as the Dollar climbs off lows. Meanwhile, the Kiwi remains supported by overnight NZ retail sales data but now trades relatively flat and still retains its 0.64+ status having earlier dipped to proximity of the round figure.

DXY, JPY - Minimal action in the DXY thus far as the Index continues its APAC sideways trade around 98.30 having printed a tight intraday range of 98.26-35. Overnight, Fed Chair Powell failed to provide much by way of new substance, whilst the latest in the US-Sino trade saga did little to inspire the Buck. Looking at the state-side calendar, Adv. Goods trade balance and Richmond Fed may attract some attention on a quiet day ahead of Fed-voter Brainard’s speech on monetary policy and tools. Similarly, the Japanese Yen has been stuck within a relatively narrow band at 108.90-109.20. The pair knee-jerked to session high overnight, potentially on algo-related action on trade headlines regarding a call between Chinese and US trade negotiators, albeit the move was short lived as it provided little substance. USD/JPY meanders around its 200 DMA at 108.93 with around USD 500mln of options expiring around 108.90-109.0 and USD 2.3bln at 109.50.

EM - Modest downside bias in the Turkish Lira amid jitters that its S-400 radar tests could provoke US lawmakers and result in sanctions. Further, reports stated that Russia and Turkey are mulling signing the second regiment contract for the Russian-made defence system. Turkey’s President more-or-less shrugged questions about resolving the dispute with US whilst reaffirming his pledge that interest rates will fall to single digits from the current 14%, albeit a timeframe was not mentioned. USD/TRY remains on the offensive having breached 5.7500 to the upside after multiple attempts and briefly surpassed its 50 DMA at 5.7509 (vs. low of 5.7355). Elsewhere, the Rand continues to be weighed on by the recent downbeat outlook from the IMF coupled with S&P’s outlook downward outlook revision. USD/ZAR found a base at 14.7500 and topped its 100 DMA at 14.7940 to print a current high of around 14.8500.

RBA Governor Lowe says QE is not on our agenda, adds that there is no need to provide extra liquidity via market operations. Will only need QE if Cash Rate falls to 0.25% (currently 0.75%) Reiterates that negative rates are extremely unlikely and is less convinced that other unconventional measures worked, jury still out. (Newswires)

Notable FX Expiry, NY Cut:

- USD/JPY: 108.90-109.00 (550M), 109.50 (2.3BLN)

New Zealand Retail Sales (Q3) Q/Q 1.6% vs. Exp. 0.5% (Prev. 0.2%). (Newswires)

Turkish President Erdogan says inflation and interest rates will fall to single digits, via NTV. Subsequently, urges the Turkish population to convert their forex reserves to the Turkish Lira and to "leave the dollar". (Newswires)

FIXED INCOME

Another relatively quiet session thus far for the debt complex, with little on the data front aside from German GfK at the start of the session which was firmer though does not change the bottoming out narrative for Germany. A number of ECB speakers were scheduled though little in the way of pertinent monetary policy remarks emerged. As such, Bunds are firmer at present but once again remain within confined ranges, circa 40 ticks for the session at present, and only marginally above the opening level of 171.04; technically, to the upside recent highs are above the day’s band at 171.35. Gilts are the outperformer in Europe today deriving support from a number of polls showing that the Tory-Labour gap has narrowed, to as little as a 7pp gap via ICM/Reuters. Though, it is worth caveating that focus is very much on tomorrow’s YouGov MRP release which successfully predicted the 2017 hung parliament. UK debt has recently breached mid-October highs at 133.55. Elsewhere, UBS note that volumes yesterday were around 30% below the average for the last ten-days for Bunds and USTs due to the shortened holiday week. Stateside, USTs are marginally firmer roughly in-line with the Bund as Fed’s Chair Powell’s remarks last night added little to the current narrative and ahead of a number of data prints, given the limited price action the curve shape is only very marginally flatter. Note; today sees supply from the UK and US.

COMMODITIES                                      

The crude complex is broadly higher but remains choppy, as Tuesday morning trade remains bound within tight USD 57.85/bbl to USD 58.30/bbl and USD 63.50/bbl to USD 63.90/bbl parameters respectively for front month WTI and Brent contracts. There has been little by way of fresh crude specific fundamental drivers, however, looking ahead, forecasts for tonight’s API Inventory data predict a 939mln bbl draw. ING highlight that the last stock drawdowns were seen in mid-October – some desks have suggested that some of the upside seen this morning could be the market “front-running” tonight inventory report. Looking to the rest of the week; OPEC’s Economic Commission Board is set to meet on Wednesday and Thursday and will then likely make a recommendation on what OPEC should do regarding of production cuts over the course of 2020. While the board can make a recommendation, there is no certainty that OPEC ministers will follow this advice as they ultimately make the decision. Looking at the metals; gold is a touch firmer, moving north of USD 1464/bbl. In terms of physical demand for the precious metal; ING point to data from China’s National Bureau of Statistics, which shows that non-monetary gold imports declined by 43% M/M to a three year low of 34.9 tonnes in October, leaving YTD gold imports down 41% Y/Y. Stronger gold prices, a weaker currency and slowing growth have weighed on retail gold demand in the country, suggests the bank, citing similar reasons for the physical demand slowdown in India. Meanwhile, copper is more rangebound, as the red metal pulls back after making two-week highs yesterday.

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