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[PODCAST] EU Open Rundown 2nd September 2020

  • Asian equity markets were mixed as the region partially sustained the momentum from the fresh record highs on Wall St.
  • In FX markets, the DXY has reclaimed 92.00, EUR/USD sits just above 1.19 and GBP/USD trades just below 1.34
  • ECB’s Lane says the ECB does not target the FX rate but the EUR/USD rate does matter
  • Fed's Brainard suggested the importance is for Fed policy to pivot to accommodation from stabilisation in the coming months
  • Looking ahead, highlights include US ADP Employment, Factory Orders, DoEs, BoE's Bailey, Ramsden, Vlieghe, Broadbent, Haldane, Fed's Williams, Mester, supply from UK & Germany

CORONAVIRUS UPDATE

US COVID cases +32,087 (prev. +37,532) and deaths +428 (prev. +473), while a major newswire tally stated that coronavirus cases increased by at least 43,728 to a total of 6.09mln and deaths rose by at least 1,118 to a total of 184.7k. California COVID cases +3,712 (prev. +4,176) and deaths +85 (prev. +28), Florida cases +7,569 (prev. +1,885) and deaths +190 (prev. +68), while Texas cases +4,364 (prev. +2,615) and deaths +145 (prev. +26). (Newswires)

NIH's Dr Fauci said a vaccine could be available sooner than anticipated if clinical trials provide overwhelmingly positive results, while there were separate reports that NIH advisers stated that data failed to back the plasma therapy. (Newswires)

ASIA

Asian equity markets were mixed as the region partially sustained the momentum from the fresh record highs on Wall St where risk appetite was spurred once again by strength in big tech names and following better than expected ISM Manufacturing PMI data. ASX 200 (+1.8%) was positive with the advance led by materials as it found inspiration from the similar outperformance stateside and with AMP Capital front-running the largest-weighted financials sector after it announced to conduct a portfolio review amid heightened interest and enquiries regarding its assets and businesses. Nikkei 225 (+0.3%) remained afloat although upside was limited by a mixed currency and with heavy losses seen in Nippon Kayaku on news it will be replaced by SoftBank Corp in the index, while Hang Seng (-0.6%) and Shanghai Comp. (-0.4%) were pressured following another substantial PBoC liquidity drain and with underperformance seen in Hong Kong-listed casinos names which suffered from dismal Macau gaming revenue and with notable weakness in financials. 10yr JGBs were rangebound with price action hampered amid the gains in riskier Japanese assets but with downside also limited by the BoJ’s presence in the market for a total JPY 890bln of JGBs with 1-5yr and 10-25yr JGBs.

PBoC injected CNY 20bln via 7-day reverse repos at a rate of 2.20% for a net daily drain of CNY 180bln. (Newswires) PBoC set USD/CNY mid-point at 6.8376 vs. Exp. 6.8318 (Prev. 6.8498)

US President Trump reiterated the deadline for a TikTok deal is September 15th. There were separate reports that the sale of TikTok to a US company being delayed as ByteDance works with the Chinese government for approval following new Chinese rules on US ownership, while negotiations were said to have been complicated over whether its core algorithms will be included in the deal. (Fox/WSJ)

US Secretary of State Pompeo said expect an administration announcement in the coming days or weeks on China and responded that a cold war analogy has some relevance but this is different from the cold war, when asked about the US-China relationship. (Newswires)

Chinese Embassy said the US-China relationship is in its most testing time. (Newswires)

Japan's LDP formally decided to conduct its leadership election on September 14th at 0600BST. (Newswires/Jiji)

UK/EU

ECB’s Lane says that there has been a repricing of the EUR in recent weeks, adding that the ECB does not target the FX rate but the EUR/USD rate does matter. (Newswires)

UK BRC Shop Price Index (Aug) Y/Y -1.6% (Prev. -1.3%). (Newswires)

FX

The greenback steadied overnight following the prior day’s fluctuations in which the DXY briefly slipped below the 92.00 level amid a flattening of the yield curve before rebounding on the back of stronger than expected ISM data. Nonetheless, the momentum has since petered out following the dovish rhetoric by Fed's Brainard who suggested the importance for Fed policy to pivot to accommodation from stabilisation in the coming months and that the Fed is committed to using its robust set of tools with Yield Curve Control also potentially among its toolkit. As such, the recent price action in most major pairs has been a function of the USD’s ebbs and flows which pressured EUR/USD briefly below 1.1900 where it eventually found a floor. GBP/USD gave back the 1.3400 handle which has since acted as near-term resistance with the currency also not helped by lingering pessimism regarding Brexit discussions. Elsewhere, USD/JPY and JPY-crosses traded mixed in which the former tested 106.00 to the upside after the USD resurgence, while antipodeans were varied with NZD underpinned following the lack of jawboning by RBNZ Governor Orr who reiterated they are actively preparing a package of additional tools to use if needed and with AUD/USD suffering after Q2 GDP contracted more than expected for its largest decline on record and its first recession in nearly 3 decades.

Australian GDP (Q2) Q/Q -7.0% vs. Exp. -5.9% (Prev. -0.3%)

Australian GDP (Q2) Y/Y -6.3% vs. Exp. -5.2% (Prev. 1.4%)

Australian Bureau of Statistics said GDP suffered largest quarterly decline on record, while private demand detracted 7.9ppts from GDP and services fell 17.6%. There were also comments from Australian Treasurer Frydenberg that the Victoria lockdown will weigh heavily on Q3 GDP which he expects to be slightly negative or flat and noted that any tax cut announcements will come in the October budget. (Newswires)

RBNZ Governor Orr said they have been effective in lowering interest rates across the board and are actively preparing a package of additional tools to use if needed, while the options include negative wholesale rates, more QE, direct lending to banks and ongoing forward guidance. (Newswires)

COMMODITIES

Mild upside was seen in WTI crude futures which recovered back above USD 43.00/bbl with marginal support seen following the wider than expected drawdown in the latest private inventory crude inventories, but with gains limited by the continued resumption of output in the Gulf of Mexico where shut-ins were now estimated at 28.4% vs. Prev. 53.5%. Elsewhere, gold prices were subdued after the greenback steadied following its recent rebound and copper was also lacklustre owing to the underperformance in its largest purchaser, China.

US Private Energy Inventories (w/e Aug. 28th): Crude -6.4mln (exp. -1.9mln, prev. -4.689mln)

BSEE estimated that approximately 28.4% (prev. 53.5%) of the current oil production in the Gulf of Mexico remains shut-in and estimated around 25.0% (prev. 41.3%) of natural gas production in Gulf of Mexico remains shut-in. (BSEE)

Peru Copper production declined 2.2% y/y in July although a minister noted that copper production almost completely recovered from the impact of COVID-19. (Newswires)

GEOPOLITICAL

US extended the travel ban to North Korea citing a serious risk of arrest and long-term detention. (Yonhap)

US Department of Defence report stated that China could exceed US in missile development and shipbuilding, while it noted China has already equalled or even surpassed US in some modernization areas for the military and will likely double its nuclear arsenal stockpile during the next 10 years. (SCMP)

Saudi Crown Prince and US President Trump Senior Adviser Kushner discussed prospects of a peace process in the region, as well as the need for Israel and Palestine to return to negotiations. (Newswires)

US

The Treasury curve bull-flattened on Tuesday. After month-end factors gave the curve a flatter bias on Monday, some participants had argued that September seasonals are usually bearish for the rates complex, and we were setting up for a steeper session. There was a decent attempt to steepen out the curve in wake of a solid ISM manufacturing report; however, reports suggested that real money players stepped in, with some making the case that it is hard to believe that the US economy is in the best shape since November 2018, as implied by the ISM. The curve was given a dovish jolt later on remarks by Fed Governor Brainard. That gave the curve a flattening bias – a similar reaction to what was seen in wake of Clarida’s remarks on Monday. We’ll be paying attention to NY Fed’s Williams next, who is on the slate to speak on Wednesday. T-note futures (Z0) settled 6 ticks higher at 139-14.

Fed's Brainard (Voter, Dove) said it is important Fed policy pivots to accommodation from stabilisation in coming months and that the US economy faces uncertainty with risks tilted to the downside. Brainard also noted the Fed has a robust set of monetary policy tools and is committed to using all of them, while she added that Yield Curve Control (YCC) could potentially be a tool and that it be natural to discuss forward guidance (incl. threshold guidance) at meetings, and that negative rates are not attractive in the US. (Newswires)

US Treasury Secretary Mnuchin said he is ready to negotiate with House Speaker Pelosi on a relief package and that he supports additional fiscal response, while he conducted a call with Pelosi on COVID aid talks. However, there were also comments from Pelosi’s office that there was no agreement on areas of funding Mnuchin testified about and Pelosi later stated that Democrats and White House have serious differences in understanding the gravity of the COVID-19 relief situation, following the call with Treasury Secretary Mnuchin. (Newswires)

US President Trump said he will be helping airlines hurt by the decline in traffic and stated that pharmaceutical firms will be coming to the White House to discuss drug prices. In other news, the Trump Administration unveiled a plan to tackle rise in imports of seasonal fruit and vegetables, while USTR is to request an ITC investigation of blueberry imports and will pursue talks with Mexico regarding perishable product imports. (Newswires)

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