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[PODCAST] EU Open Rundown 21st July 2020

  • APAC stocks traded with firm gains, fuelled by the tech rally on Wall Street; Mainland China took a breather from yesterday’s outperformance
  • EU leaders have reached an agreement on a EUR 1.82tln budget and recovery package
  • China urged UK to stop interfering in Hong Kong affairs and stated UK will bear consequences if it insists in going down the wrong road
  • RBA Governor Lowe said the Cash Rate could be lowered to 10bps but lower rates would have little benefit; he favours a weaker AUD but will not intervene
  • In FX, EUR/USD lost ground on “buy the rumour, sell the fact”, DXY was pushed to session highs and PBoC set the firmest CNY fix since March 12th
  • Looking ahead, highlights include ECB's de Guindos, supply from UK & Germany

CORONAVIRUS UPDATE

US COVID-19 cases +1.3%; marking the slowest daily increase in two weeks. US COVID-19 cases rose by at least 61,761 on Monday, whilst deaths rose by at least 500, according to a major newswires tally. California COVID-19 (D/D): Cases +1.8%/+6,846 (prev. +9,329, vs 7-day average +2.7%); deaths +9 (prev. +90). California Governor Newsom said he expects to announce that some California industries will be allowed to operate outdoors, according to ABC7 sources. Further, Newsom said hospitalizations have been rising at a slower pace, over the past 14 days ICU admissions have risen 12%. Texas coronavirus cases increased by 7,404 on Monday (vs. +7,300 on Sunday); deaths rose by 62 (Prev. +93); hospitalization down 23 (Prev. -66); according to the State Health Department Houston-Area, Texas ICU census falls 18% to a 2-week low of 811. Mississippi recorded its highest ever single-day increase in COVID-19 cases (+1,251 at 43,889). LA County coronavirus cases increased by 3,160 (Prev. +2848), deaths rose by 9 (Prev. +11); hospitalization +16 (Prev. +28), according to the County Health Department. New Jersey Governor Murphy said schools are set to reopen in the fall. (Newswires)

White House Chief of Staff Meadows and Treasury Secretary Mnuchin will be meeting with Senate Republicans and then House Speaker Pelosi and Senate Minority leader Schumer today on the next coronavirus bill. Sources state that Republicans are looking at USD 100bln of the touted USD 1tln to go to state and local governments. Any potential boost in minimum wage is not part of the negotiations, according to Fox, “these negotiations will likely crescendo between now and the first week of August”. (Fox News) GOP Leader McCarthy told reporters GOP stimulus bill includes both payroll tax cut and direct payments. Senate Finance Chairman Chuck Grassley is not a fan of adding payroll tax cut to next bill, says direct payments are more effective, according to CNN. (Twitter)

US President Trump reiterated efforts to defeat the "China Virus" and promoted wearing face masks (Twitter) Note. over the weekend, US President Trump said he will not consider a national mandate on mask wearing. (Fox News)

Australia's Victoria State reported 374 new COVID-19 cases (Prev. 275). (Newswires)

China reported 11 new COVID-19 cases in Mainland (Prev. 22); 3 new imported cases (Prev. 5) and 6 new asymptomatic cases (Prev. 13). (Newswires) South Korea reported 45 new COVID-19 cases (Prev. 26); according to KCDC cited by Yonhap. (Yonhap)

Germany’s COVID-19 cases rose by 522 (Prev. +249), deaths rose by 4 (Prev. +2), according to RKI. (Newswires)

ASIA

Asia-Pac bourses traded firmer across the board following strong handover from Wall Street, as tech shares pushed the SPX into positive territory for the year, whilst Amazon shares gained almost 8%, Tesla over 9%, and IBM rose some 6% after hours following a beat on both top and bottom lines, but notably, the Co. reported an improvement in three out of five units over the past quarter. ASX 200 (+1.9%) was bolstered by its tech and material stocks in what was an in-fitting performance with its peers State-side, albeit BHP shares failed to gain much traction in Aussie trade after reporting a quarterly copper production decline whilst noting 2021 copper output volumes will be slightly lower YY. Nikkei 225 (+0.8%) also felt the tech euphoria, but with upside somewhat hampered by currency dynamics. Elsewhere, Shanghai Comp (+0.1%) took a breather after yesterday’s rally and as the PBoC’s operation resulted in a modest net daily drain of CNY 20bln. Hang Seng (+2.1%) saw a strong performance from the cash open as a number of its large cap stocks remained in firm positive territory, whilst reports yesterday noted the Hang Seng will launch a tech index next Monday to track the 30 largest eligible stocks listed in Hong Kong. Elsewhere, Alibaba’s Hong Kong listing soared over 5% as its founder’s newest venture looks towards a record USD 200bln IPO. Note: Taiwan’s chip giant TSMC rose over 4% amid tailwinds from IBM’s earnings.

PBoC injected CNY 10bln via 7-day reverse repos for a net daily drain of CNY 20bln at a maintained rate of 2.20% PBoC set USD/CNY mid-point at 6.9862 vs. Exp. 6.9912 (Prev. 6.9928); firmest fix since March 12th.

Moody's revised down Chinese companies' earnings for 2020; largest downgrades in auto-related and oil-related stocks, expects a gradual recovery in 2021 with GDP. (Newswires)

Trump administration has blocked TikTok on work devices for Federal employees; as expected. (Newswires)

Australian Minister for Resources said Australia has been shielded from an even worse economic downturn amid record demand for resources from China despite soured relations, Canberra is expanding trading partners to provide new markets for resources; FT reported. There were fears China would target resource sectors following the imposition of trade sanctions on some Australian farms products, but Australian Minister for Resources said China will probably continue to buy Australian resources. (FT)

RBA Governor Lowe said the Board could lower the Cash Rate to 10bp (currently 25bps) but judgement is lower rates would have little benefit. Lowe also would like to see a lower AUD, but will not intervene to lower it, whilst stating the situation in Melbourne is concerning. The Board has not ruled out future changes to this package, though it recognises that, in the current environment, there are limitations to what more can be achieved through monetary policy, there is no need to intervene in FX. There has been no change to the Board's view that negative interest rates in Australia are extraordinarily unlikely. The unemployment rate is likely to increase further, even with the recovery underway. There is also a broad understanding that the RBA is prepared to use its balance sheet in whatever quantity is needed to maintain the target. (RBA)

RBA July Minutes stated economic conditions had stabilised and the downturn had been less severe than earlier expected; Members agreed that negative interest rates in Australia remain extraordinarily unlikely. The minutes noted that it was likely that fiscal and monetary support would be required for some time and that the Board remained committed to supporting jobs, incomes and businesses and to making sure that Australia is well placed for recovery. The Minutes also reiterated that the Bank is prepared to scale up asset purchases again if necessary, whilst there is no case for FX intervention. (RBA)

Japanese CPI, Core Nationwide YY (Jun) 0.0% vs. Exp. -0.1% (Prev. -0.2%); Overall Nationwide CPI (Jun) 0.1% (Prev. 0.1%). (Newswires)

South Korean July 1-20 Exports -12.8% YY (Prev. -7.5%); imports -13.7% YY (Prev. -12.0%); Semiconductor exports -1.7% YY; Exports to China -0.8% YY, according to the customs agency. (Newswires)

UK/EU

EU leaders have reached a deal on the post-pandemic recovery package. Council President Michel said EU money will be linked to observing the “rule of law” (Newswires) Note Hungary previously threatened to veto a compromise that tied the distribution of the aid to respect for the “rule of law”. Earlier, EU proposed EUR 1.074tln for its 2021-2027 budget; and the Recovery Fund size has been maintained at EUR 750bln and will comprise of EUR 390bln in grants and EUR 360bln in loans. (Newswires) The "Frugal" members received a jump in budget rebates for their consent to EUR 390bln in grants, but Germany would get no extras, according to FT’s Khan. (Twitter) EU Commission is to propose a tax on goods imported into EU from countries with lower carbon emission standards in H1 21, and is to be introduced from 2023; will work on other revenue boosting proposals over 7-years, including a financial transaction tax. Money from the new revenues will be used to pay back commission borrowing for the recovery package. (Newswires)

BoE's Haldane said it is worth thinking about tackling corporate debt overhang problems in a more systemic fashion; we could purchase other assets and do more QE; we are reviewing negative rates, especially if there is another negative shock. We have to be mindful of unintended consequences of very low rates, but the risks of low rates are worth taking to keep businesses afloat and workers in jobs. Haldane said he does not think it is the right time to change the anchor for monetary policy, when asked about nominal GDP targeting. (Newswires)

BoE's Tenreyro said UK more likely to see deflationary pressures than inflation, as demand falls below supply; says we face an interrupted, incomplete v-shaped recovery. (Newswires)

Spokesman for Chinese embassy in the UK said UK has repeatedly violated international law and basic norms of international law over Hong Kong; urges UK to stop interfering in Hong Kong affairs. UK will bear consequences if it insists in going down the wrong road. (Newswires)

UK's Russia report is said to state that Kremlin attempted to meddle with the Scottish Independence vote but not the Brexit vote, according to The Telegraph. (Telegraph)

ECB's Schnabel reiterated that the balance of risk is tilted to the downside, ECB will likely use the full PEPP envelope if baseline outlook holds. Schnabel did not rule completely rule out increasing PEPP but stated it is not on ECB agenda at the moment. ECB will not increase PEPP just because of investor expectations. (ECB) Note, ECB President Lagarde last week stated that if baseline remains, the ECB will use full PEPP envelope.

FX

DXY trickled lower and lost more ground below 96.000 in early hours as safe-haven outflow pressured the index, prompting it to briefly dip below the June 10th low of 95.714. As such EUR/USD and GBP/USD initially drifted higher in tandem, but thereafter the Single Currency saw a bout of selling amid the “buy the rumour, sell the fact” phenomenon as EU leaders reached a deal on the Recovery Fund, propping up the DXY to overnight highs. Elsewhere, USD/JPY remained marginally softer but tested support at 107.10 multiple times as the pair eyed several option expiries for today’s NY cut, including ~USD 400mln at 107.00, and some USD 1.1bln between 107.30-35. Antipodeans meanwhile were choppy, AUD/USD saw fleeting upside from the RBA minutes due to the Board’s economic assessment being less severe than originally feared, whilst members pushed back on negative interest rates and reaffirmed commitment towards supporting a recovery. Gains were short-lived ahead of RBA Governor Lowe’s speech release - which initially proved to be a damp squib as it provided little by way of fresh substance, whilst making no direct mention of coronavirus or the outbreak in Victoria. However, the Governor later noted that the Cash Rate could be lowered by 15bps and he favours a weaker currency, but the AUD held onto gains and moved at the whim of the Buck thereafter. CNY remained stable after the PBoC set the firmest CNY fixing since mid-March.                                   

COMMODITIES

WTI and Brent September contracts remained within recent ranges amid a lack of news-flow for the complex, with the former trading on either side of USD 41/bbl whilst the latter tested recent resistance at USD 43.45/bbl. Spot gold also traded within a tight range throughout a bulk of the session, but the yellow metal saw a bout of upside as spot silver prices gained a footing above USD 20/oz for the first time since September 2016. Shanghai copper and Dalian iron ore futures advanced as the yellow metal tracked the gains in stocks.

Vale Q2 iron ore output 67.6mt vs. Exp. 69.0mt; Co. says the most probable scenario is for iron ore production to be towards the lower end of guidance. (Newswires)

BHP (BHP AT/BHP LN) - Group copper production volumes expected to be slightly lower in 2021, in China, copper demand could be modestly lower than steel in FY20; Quarterly copper production 414k tons vs. Prev. 444k tons. Waio iron ore production 75.6mt vs. Prev. 71mt; attributable 66.7mt vs. Prev. 62.6mt. Remains confident in outlook for demand for BHP products over medium to long term. (Newswires)

GEOPOLITICAL

Five Iranian Revolutionary Guards were killed in the Israeli airstrikes which targeted IRGC positions, according to Sky News Arabia. (Twitter)

South Korean and US defence chiefs discussed combined exercises and defence cost sharing. (Yonhap) Reports last week noted White House is mulling troops cuts in South Korea amid disagreement between the two sides over cost sharing, according to WSJ.

US

Yields were little changed on the session in what was another extremely thin volume session. By settlement, 2s unch. at 15bps, 10s -1bps at 62bps, 30s -1bps at 132bps. The US bond market appears to very much be in holiday mode and not bringing many back to their desks to fuss over new vaccine updates, China woes or US stimulus negotiations. Furthermore, little concession is being seen ahead of Wednesday’s USD 17bln 20-year Bond auction. Wider supply cooled, however, where there has been a big drop in new corporate issuance following the record-beating slate seen in the prior few months; dollar funding for participants with access to debt capital markets is not an issue, for now, after many corporate Treasurers beefed up their balance sheets. T-note futures (U0) settled +1 tick at 139-12+

International Business Machines (IBM) reported Q2 2020 (USD): EPS 2.18 (exp. 2.07/1.73 reported); Revenue 18.1bln (exp. 17.72bln). Global Technology services: 6.3bln (exp. 6.3bln). Cloud and cognitive software: 5.75bln (exp. 5.7bln). Global business services: 3.9bln (exp. 3.9bln). Systems revenue: 1.9bln (exp. 1.75bln). Global financing: (exp. 0.322bln). (Newswires) Co. shares rose over 6% after-market

US Senate Banking Committee is set to approve Judy Shelton for a seat at the Fed; a spokesperson for Republican US Senator John Kennedy said he would be voting to advance her nomination, thus solidifying Republican support for her selection. (FT) Republican US Senator Kennedy had previously been sceptical of Shelton's nomination as a Fed governor.

US House Panel is seeking records of the FAA Survey on employee culture following the Boeing (BA) 737 Max crashes, according to a letter. (Newswires)

US Senate has confirmed Russel Bought to be director of White House Office of Management and Budget. (WSJ)

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