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[PODCAST] US Open Rundown 10th October 2018

Latest reports suggesting progress towards a Brexit deal support a GDP-flippant GBP

European indices largely in the red as focus remains on Italy amidst more budget parliamentary testimonies

Looking ahead, highlights include, US PPI, Wholesale Inventories, APIs, Fed’s Evans and Bostic

ASIA

Asia-Pacific equities traded mixed as the region mimicked the lead from Wall St. where the S&P notched its fourth day of losses while the Nasdaq snapped its three-day losing streak. The Dow closed in the red as the major indices swung between positive and negative territory throughout the day. ASX 200 (+0.1%) was supported by strength in the healthcare and consumer discretionary sectors, while Nikkei 225 (+0.1%) was initially pressured by machinery names along with Softbank after reports emerged that the company discussed investing between USD 15bln-20bln for a majority stake in WeWork, while a firmer currency only subdued the index further; index staged a recovery heading into the close. Elsewhere, mixed trade in China with Hang Seng (+0.2%) supported by oil names, while Shanghai Comp. (+0.2%) gave up initial gains to trade with no firm direction for most of the session before stabilising in the red.

PBoC set CNY mid-point at 6.9072 (Prev. 6.9019) (Newswires)

PBoC skipped open market operations and makes no fund injection or withdrawals

US Treasury Secretary Mnuchin has warned China on competitive currency devaluation and added that he wants to discuss the currency with Beijing as part of trade talks. (FT)

IMF noted near-term risks to global financial stability have increased somewhat, medium term risks remain elevated. (Newswires)

EU/UK/US

Italian Deputy PM Salvini says he is sure that the spread will not reach 400bps. Salvini went on to state the government wants to help Italian's invest in sovereign debt through tax breaks. (Newswires)

Italian Finance Minister Tria states that government bond yield gain is a cause for concern. Tria added that Economic Forecasts were approved by the Budget Watchdog, but that they had a different view on growth target. Furthermore, Tria expects a compromise on the budget with the EU. (Newswires)

Italy's League Lawmaker Bagnai says a sovereign debt downgrade is possible due to the climate that has been created. (Newswires)

Italian Economy Minister Tria says the government is to keep fiscal targets despite watchdog rejection (Newswires)

UK GDP Estimate YY (Aug) 1.5% vs. Exp. 1.6% (Prev. 1.6%, Rev. 1.7%)

UK GDP Estimate MM (Aug) 0.0% vs. Exp. 0.1% (Prev. 0.3%, Rev. 0.4%)

UK GDP Est 3M/3M (Aug) 0.7% vs. Exp. 0.6% (Prev. 0.6%, Rev. 0.7%)

ITV reported that UK PM May's negotiator Robbins has made meaningful progress in talks with EU's Chief Negotiator Barnier on the Irish border backstop. The article stated, "The most important development would be that the EU seems close to agreeing that the backstop would apply to the whole UK and not just to Northern Ireland, as it originally demanded - or at least it would apply to the whole UK for customs." (ITV)

UK PM May is reportedly to "force" cabinet into a new Brexit compromise, while a government source said that ministers feared they could be bounced into swallowing several potential changes to the customs arrangement, and the areas of EU law that the UK must follow after Brexit. A separate article by The Times reported that around 30 Labour MPs are said to be prepared to support UK PM May's Chequers deal. (The Times) This was later denied by Labour

EU Diplomatic Sources says that the EU is no longer expecting a separate new proposal from Britain on the Irish Border, with negotiators on both sides looking for an agreement in direct talks. (Newswires)

EU Migration Commissioner says that they are "not there yet" on Brexit. (Newswires)

CENTRAL BANKS

Fed's Williams (Voter, Neutral) reiterated expectations for further gradual US rate hikes and sees very strong labour market with no signs of greater inflationary pressure. Furthermore, Williams said that US normalisation of monetary policy has added the benefit of reducing risks of imbalances in the financial markets. (Newswires)

BoE's Haldane states that market forecasts of 25bps a year in the base rate is not 'dissimilar' to the MPC's forecasts for pay growth. (Newswires)

EQUITIES

Major European indices (ex-SMI) trade lower (Eurostoxx 50 -0.4%) as Italian budgetary concerns remain a key focus; SMI. The CAC 40 (-0.7%) lags its peers after being weighed on by the Luxury names after the sector was downgraded to underweight by Morgan Stanley with the US bank citing concerns about a slowdown in Chinese activity. The move by MS took the shine of LVMH's latest sales update with other Luxury names such as Kering and Burberry trading lower in sympathy.

Sectors are mixed with telecom stocks leading their peers amid broad support for the sector today.  Energy names are firmer by 0.7% following oil supply concerns from Hurricane Michael. Consumer discretionary is down by over 1.5% due to the aforementioned poor performance of luxury brands.

Dixons is up by 3.5% after being upgraded to buy at HSBC; whilst Sage are up by 2.4% following being upgraded to Hold at Deutsche Bank.

FX

USD - The Greenback has regained some composure overall after Tuesday’s rather sharp and abrupt sell-off on a degree of US Treasury yield retracement, and to a lesser extent another expression of dissent about the rate of Fed tightening from President Trump. To recap, the broad Dollar and DXY recoiled from best levels in relatively quick order, with the index down to 95.500 vs 96.000+ and circa 95.750 now, as rival currencies also derived bullish momentum on independent factors.

GBP - The Pound has run into some resistance and profit taking headwinds ahead of 1.3200 in Cable and around 0.8725 vs the Eur, but retains a firm underlying bid on another boost in Brexit deal prospects after reports that the UK and EU are getting even closer to resolving the remaining issues (regarding Ireland), and could get over the line by Monday, ‘comfortably’ ahead of the October summit.

JPY - Back below 113.00 vs the Usd and still unable to really test a key Fib level at 112.73, but perhaps drawn towards decent option interest from the big figure to 113.05 (1.2 bn) if the headline pair fails to break above 113.25.

NZD/AUD - Also giving way to a general Usd recovery having outperformed overnight on strong data and upbeat surveys along with a rise in iron ore shipments to China. The Kiwi has pulled back from just shy of 0.6500 to 0.6455 and the Aud from 0.7130 to 0.7090, while the cross remains capped ahead of 1.1000.

EUR/CHF/CAD - All holding up better against the Greenback (comparatively) , with the single currency pivoting 1.1500 and displaying resilience in the face of more Italian Government intransigence over its budget plans and fiscal policies. Note, option expiry interest may factor into the NY cut with 1.5 bn running off between 1.1500-10. Meanwhile, the Franc is meandering between 0.9905-35 and Loonie within a 1.2965-25 range having derived support from offers at and around 1.3000, but not breaching all the downside interest said to be residing from 1.2930-20. Canadian building permits ahead after weaker than forecast housing starts yesterday.

NOK - A major outperformer, and largely on significantly stronger than expected Norwegian CPI that will keep the Norges Bank on track to continue policy normalisation. Eur/Nok down from almost 9.5100 to sub-9.4500 at best.

EM - Some retracement from peaks for the Zar after a broadly positive reaction to the new SA Finance Minister appointment, while in contrast the Try has pared losses following initial disappointment over the Turkish Government’s inflation-fighting measures.

COMMODITIES

Both WTI and Brent are down just under 0.5%, trading just under USD 75/bbl and USD 85/bbl following further supply shortages from Hurricane Michael with 40% of Gulf of Mexico production now suspended in preparation. Note, APIs will be released otnight at 2130BST due to the Columbus Day holiday on Monday.

Iron ore futures are up by over 0.6% following comments from Australia’s Port Hedland that Iron ore shipments to China to rise to 37.4mln tonnes. Gold is uneventful once again trading within a thin USD 5/oz range. Zinc hit a 4-month high in Shanghai overnight amid tightening supplies.

FIXED INCOME

Another incremental decline in Bunds and Gilts, with the former slipping to 157.72 (-37 ticks), and latter down to 119.51 (-44 ticks) in wake of a rather lukewarm reception to 10 year German issuance and the largely positive Brexit factor. However, the latest upturn in Italian debt cannot be discounted as a bearish impulse for core bonds, with BTPs just eclipsing their opening high at 120.52 before the latest comments from Rome, and further persistence to push ahead with the MTP regardless of outside opposition and interference.

Elsewhere, the latest rebound in US Treasury yields and bear-steepening with 3 and 10 year notes looming before long bonds on Thursday. Moreover, potentially key US inflation data kicks off today with PPI followed by CPI tomorrow.

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