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[PODCAST] EU Open Rundown 13th January 2020

  • Asian equity markets began the week somewhat mixed with the region indecisive ahead of the US-China Phase 1 deal signing
  • US Treasury Secretary Mnuchin stated that China’s commitments in Phase 1 deal were not changed during the lengthy translation process
  • BoE’s Vlieghe becomes the latest MPC member to come out in support of a potential rate cut if data does not improve
  • Iran admitted that it accidentally shot down the Ukraine passenger jet in which it alleged that the airliner took the flying posture and altitude of an enemy target
  • Looking ahead, highlights include UK Monthly GDP, Industrial, Construction & Manufacturing output, Fed’s Bostic & Rosengren

ASIA-PAC

Asian equity markets began the week somewhat mixed with the region indecisive and Japanese participants away for a national holiday, with this week’s US-China Phase 1 deal signing adding to the tentativeness. ASX 200 (-0.4%) suffered from broad losses across its sectors led by underperformance in energy and defensives, while Westpac recently estimated losses from the ongoing bushfires at AUD 5bln and a total impact to domestic GDP of between 0.2%-0.5%. The TAIEX (+0.7%) was lifted following a landslide victory by Taiwanese President Tsai and with several encouraging monthly revenue updates including Acer, Pegatron and TSMC. Shanghai Comp. (+0.2%) and Hang Seng (+0.9%) were varied with early underperformance in the mainland after the PBoC once again refrained from open market operations and as the looming Phase 1 signing kept participants on the fence. Furthermore, the sides were said to have agreed to launch a new semi-annual dialogue mechanism, although not also was rosy with the US to drop its civilian drone programme amid security concerns regarding Chinese tech and with officials to visit the UK in which they are expected to pressure the UK against the use of Huawei equipment.

PBoC skipped open market operations for a daily net neutral position. (Newswires) PBoC set USD/CNY mid-point at 6.9263 vs. Exp. 6.9249 (Prev. 6.9351)

US Treasury Secretary Mnuchin stated that China’s commitments in Phase 1 deal were not changed during the lengthy translation process and reiterated that it will be released following the signing this week, while other reports noted that US and China agreed to launch a new semi-annual dialogue mechanism that is set to be announced on Wednesday. (Newswires/WSJ)

US business executives suggested the Phase 1 deal is ‘modest but helpful’ and the broad outline of the agreement includes some advances in intellectual property protection, significant agriculture purchases and reduced export barriers. (SCMP)

US officials are to visit the UK where they are expected to pressure the country not to use Huawei equipment. In addition, there were separate comments from a former MI5 chief that Huawei technology doesn’t pose a threat to UK and it was also reported the US is to scrap its civilian drone programme amid security concerns regarding Chinese tech. (Newswires)

UK/EU

BoE’s Vlieghe said he is prepared to lower rates if the data doesn’t get better. Furthermore, Vlieghe thinks it has been a close call and wouldn’t take much to swing it one way or the other, while he suggested the upcoming few meetings are live. (FT) Note, this comment follows recent dovishly perceived rhetoric from MPC members Carney and Tenreyro last week; neither of which were two of the dissenters at the December meeting. The next meeting and MPR is on January 30th.

CBI/PwC survey showed sentiment among UK financial firms improved in Q4 for the first time in 4 years. (Newswires) 

FX

In FX markets, the DXY was relatively stable below the 97.50 level following the slight pullback in the aftermath of the weaker than expected NFP jobs data and wage growth, while its major counterparts were mixed in which EUR/USD prodded Friday’s highs although advances were limited with the pair sandwiched by nearly EUR 1.6bln of option expiries set to roll off later today at 1.1120-30 and GBP/USD broke below near-term support at 1.3050 after BoE’s Vlieghe suggested he is prepared to lower rates if the data doesn’t get better and that approaching meetings are live. Elsewhere, USD/JPY and JPY-crosses were higher despite the absence of Japanese participants and antipodeans benefitted from a stronger CNH heading into the Phase 1 signing coupled with the strongest PBoC reference rate since early August which saw USD/CNH breach 6.9000. This spurred flows into several EM currencies and TWD was also a notable gainer in which it rose to its best level since June 2018 after the election victory by President Tsai who received record-breaking support. 

COMMODITIES

Commodities were mixed with WTI crude futures heading into the European morning relatively unchanged after early selling pressure on an early break below the USDD 59.00/bbl level was eventually met with dip-buying amid supply side factors including a reduction in the latest Baker Hughes rig count as well as lingering geopolitical uncertainty regarding both Iran and Libya. Elsewhere, gold began the week quiet amid an uneventful greenback in which the precious metal trickled back towards the USD 1550/oz level, while copper edged mild gains but was confined to within Friday’s post-NFP range.

Baker Hughes Rig Count (Jan 10th) Oil -11 at 659, Natgas -4 at 119, total at 781. (Newswires)

Kinder Morgan natural gas pipeline declared a force majeure after it found a leak on the Louisiana #1 pipeline in segment 25, Jefferson County, Texas. (Newswires) 

GEOPOLITICS

Iran admitted that it accidentally shot down the Ukraine passenger jet in which it alleged that the airliner took the flying posture and altitude of an enemy target, while protesters held a rally in Tehran demanding the Supreme Leader quits due to the mistake. (Newswires)

US President Trump tweeted that the National Security Adviser suggested sanctions and protests have Iran “choked off” and will force them to negotiate, although President Trump added that he couldn’t care less if they negotiate and it will be totally up to them but suggested no nuclear weapons and “don’t kill your protesters”. In addition, National Security Adviser O'Brien said President Trump is still poised to reduce troops in Afghanistan even if they cannot reach a deal with the Taliban this year. (Twitter/Axios)

White House National Security Adviser O'Brien said the Trump administration has reached out to North Korea to ask them to resume diplomacy, while there were separate reports over the weekend from North Korea state media that the country will not trade its nuclear weapons for lifting sanctions. (Axios/KCNA)

Libya's GNA PM Al-Sarraj said they will sign a ceasefire with Haftar's LNA out of a position of strength and that Libya will continue on path to democracy with the leaders set to meet in Moscow today for a possible signing, while other reports over the weekend noted the sides had agreed to a ceasefire but then blamed each other on breaking the ceasefire hours after. (Newswires)

4 Iraqi soldiers were reportedly wounded following a rocket attack on a base in Iraq. (Newswires) 

US 

The curve bull-flattened on Friday, with yields in the front of the curve on slightly lower, while 30s had fallen by almost 5bps. The employment situation report was mildly disappointing, with the headline missing expectations, and the pace of wage growth easing to under 3.0% Y/Y, bringing buying interest. A Raymond James strategist said that for the bond market, this was a positive number, especially when it comes to wage inflation; "the subtle drop in the number of hours worked," he said, "and the lower-than-expected average hourly earnings number is good for fixed income. While today's data may not result in a big move down in rates, it certainly doesn’t support a big move higher either”. US T-note futures (H20) settled 6 ticks higher at 129-02+.

Fed’s Kashkari (voter, dove) said the December jobs report suggests that the economy is slowing and that he would support a rate cut if jobs growth continues to weaken, inflation stays low and inflation expectations slip. Furthermore, Kashkari added that he sees rates on hold for the foreseeable future and sees the next move as a cut rather than a hike. (Newswires)

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BoC left rates unchanged as expected. Cut 2020 GDP forecasts. Output gap is wider than expected in October. Key: th… https://t.co/Y0N1GV8w0l