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[PODCAST] US Open Rundown 13th November 2018

  • Brexit "endgame" talk lifts Cable to a 1.29 handle as a deal hangs in the balance; Italian assets underperform ahead of budget re-submission deadline
  • Positive US-China trade rumblings lifting equities but oil extending losses as Presidential jawboning fails
  • Looking ahead, highlights include Italian Budget Resubmission Deadline, ECB’s Stournaras, de Guindos, Fed’s Brainard, Harker, Daly

ASIA

Major Asian equity markets mostly followed suit to the sell-off on Wall St where tech led the declines after Apple shares dropped 5% following an outlook cut by supplier Lumentum Holdings and with energy names hit again after oil posted an 11th consecutive decline. ASX 200 (-1.8%) and Nikkei 225 (-2.1%) weakened from the open with the tech sector the underperformer in the region as another Apple supplier Japan Display reported a loss for H1 and downgraded its outlook. Furthermore, Japanese exporters suffered from recent flows into the JPY and large automakers were pressured after the US Commerce Department submitted a draft recommendation on potential auto tariffs to the White House. Elsewhere, Shanghai Comp. (+0.9%) and Hang Seng (+0.6%) both opened lower although gradually recovered amid hopes for an improvement in US-China trade relations amid reports that US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He spoke by phone on Friday about a deal that could ease trade tensions and with some US officials reportedly expecting China to make a trade offer ahead of the Trump-Xi meeting. Finally, 10yr JGBs were initially supported as the broad risk averse tone spurred a flight to safety, but then failed to hold on to the marginal gains as prices mirrored a pullback in T-notes despite stronger 30yr auction results.

PBoC skipped open market operations for a net neutral daily position. (Newswires)

PBoC set CNY mid-point at 6.9629 (Prev. 6.9476)

US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He spoke by phone on Friday about a deal that would ease trade tensions. Reports also noted that China officials do not expect to resolve the trade dispute at G20 but are instead hoping for a broad framework deal, while some US officials expect China to make a trade offer ahead of the Trump-Xi meeting and USTR Lighthizer is said to want tariffs to continue to force China into concessions. (WSJ) In related news, China Vice Premier Liu He is to visit the US to pave the way for the Xi-Trump meeting. (Newswires)

Chinese Premier Li said China's economy faces fresh challenges and is slowing down but long-term fundamentals are good. Premier Li also commented that China aims to persist with deepening reforms through measures including tax cuts, while he added that China hopes to solve trade differences with US through discussions and that both sides will find a solution that meets common interest. (Newswires)

UK/EU/US

UK PM May said Brexit talks are now reaching their "endgame" and that both sides working hard to reach an agreement but added that significant issues still remain and that the government will not accept a deal at any cost. Furthermore, there were reports that UK PM May had rejected the latest draft Brexit deal with the EU as it didn’t provide a clear exit from the customs union if the EU began acting in bad faith in discussions regarding a future trade agreement. (Newswires/The Sun)

DUP's Robinson said it sounds like UK PM May is in the right place regarding Brexit and that the mood has improved but there is still work that remains to be done. (Newswires)

EU sees little chance of a Brexit deal this week as according to the RTE. (Newswires)

Britain's Ambassador to the WTO has said that it is becoming more apparent to WTO members that Britain may leave without a deal (Newswires)

Reports suggested that Italy will maintain their 2019 deficit/GDP target of 2.4% but could alter their 2019 growth target of 1.5%. (Il Sole)

UK Average Earnings (Ex-Bonus) Sep 3.2% vs. Exp. 3.1% (Prev. 3.1%)

UK Average Weekly Earnings 3M YY Sep 3.0% vs. Exp. 3.0% (Prev. 2.7%, Rev. 2.8%)

UK ILO Unemployment Rate Sep 4.1% vs. Exp. 4.0% (Prev. 4.0%)

German ZEW Current Conditions Nov 58.2 vs. Exp. 65.0 (Prev. 70.1)

TRADE

US Commerce Department submitted a draft recommendation on potential auto tariffs to the White House which are undergoing interagency review and are sign of US administration's increasing frustration at EU and Japan over lack of progress on auto trade issues, while the Section 232 recommendations will be discussed at White House trade meeting on Tuesday. (Newswires)

EQUITIES

All major European indices are in the green, with the DAX (+0.6%) out in front, led by the likes of Lufthansa (+2.4%) who are benefiting from lower oil prices and Bayer (+0.3%) who presented an increase in earnings and confirmed their outlook. FTSE MIB (-0.3%) is lagging its peers weighed on by Telecom Italia (-1.4%) who removed their CEO to the dismay of Vivendi (23.9% shareholder). Italian financial names are also softer ahead of today’s budget re-submission deadline. Sectors are predominantly higher with outperformance in Telecoms post-earnings from Vodafone (+9.0%). Energy names lag, in-fitting with price action in the complex. 

Regarding individual equities, BTG (+9.2%) are leading the Euro Stoxx 600 after presenting an increase in half year revenue and operating profit. Elior Group (+8.0%) are off best levels but remain supported by news that they have hired advisors to initiate the sale of their catering business. Babcock (-2.5%) are under scrutiny from the Ministry of Defence over their handling of a contract relating to the UK’s Trident Submarines.

FX

G10 - An almost clear and defining line between the ‘so called’ risk or high beta/yield currencies vs safer-havens, as US-China trade tensions ease somewhat amidst reports of constructive discussions between key officials, while the YUAN also pares some losses with the aid of intervention via local banks overnight (said to have been defending 6.9700 vs the Usd).

Hence, the DXY and broad Dollar are off Monday’s peaks, with the latter only maintaining gains/positive momentum vs the JPY above 114.00 and CHF (to a lesser degree) over 1.0100. However, the index remains underpinned around the 97.500 mark and still poised to build on yesterday’s new ytd high at 97.704 given high levels of ongoing uncertainty and global risks, with only one major chart hurdle seen ahead of 98.000 (97.871 Fib resistance).

NZD/AUD - Outperforming on the aforementioned US-China ‘understanding’, with the Kiwi staying within striking distance of 0.6750 and the latter not far from 0.7200, but perhaps capped by mega option expiry interest at the strike (1.6 bn), while still feeling the adverse effects of bearish cross-positioning as Aud/Nzd inches further below 1.0700.

GBP/EUR/CAD - All holding up relatively well, or at least consolidating off worst levels, with the Pound retesting 1.2900 vs the Greenback and 0.8700 vs the single currency on hopes if not high expectations of a Brexit breakthrough in time before tomorrow’s deadline. Note, some independent support from Sterling via firm UK wage data, but limited. The Eur is just keeping its head above 1.1200 vs the Usd awaiting Italy’s budget resubmission to the EU that is widely expected to reveal a concession or compromise, but no white flag. Option barriers at the big figure are underpinning the headline pair, though by the same token 1 bn expiry interest at 1.1250 are also keeping upside attempts in check. Looking at the Loonie, only fleeting intraday recoveries in oil prices are keeping the commodity unit pressured and it is struggling to stem losses beyond 1.3250.

COMMODITIES

Gold (+0.1%) is marginally up after reaching 16-month highs yesterday. Of note, traders are gathering in Shanghai for Asia Copper Week, as copper prices have fallen by approximately 17% this year, on track for their worst year since 2015. Intra-day, copper and other metals have moved higher following reports that Liu He, China’s top trade negotiator, may visit Washington in preparation for Trump Xi talks.

WTI (-2.2%) and Brent (-2.1%) are in the red after a failed intervention by US President Trump who tweeted that oil prices should be lower, and he hopes Saudi and OPEC do not cut oil production. Note, the monthly OPEC report to be published today at 1115GMT.

OPEC monthly report: OPEC crude production rose 127k bpd in October to average 32.9mln bpd, according to secondary sources. Crude oil output increased mostly in the UAE, Saudi Arabia, Libya and Angola, while production declined in IR Iran, Venezuela, Kuwait and Nigeria. In 2018, oil demand growth is anticipated to increase by 1.5mln bpd, a downward revision of 40k bpd from last month’s projection. For 2019, world oil demand is forecast to grow by 1.29mln bpd, a minor downward adjustment of 70k bpd from the previous month’s assessment

Non-OPEC oil supply in 2018 is expected to grow by 2.31mln bpd, an upward revision of 90k bpd. Non-OPEC oil supply in 2019 is forecast to grow by 2.23mln bpd, a minor upward revision of 120k bpd

FIXED INCOME

Inverse correlations with Italian BTPs are never too far from the surface it seems, and certainly a dynamic that persists while debt markets await the next exchanges between Italy and the EU on 2019 budget divergences. Hence, a further downturn in the 10 year benchmark to just below 121.00 amidst rather tepid auction results, for obvious reasons, has helped Bunds rebound to a new Eurex high, at 160.39, +10 ticks vs -26 ticks at one stage, while Gilts continue to lag on Brexit deal aspirations, albeit paring losses to 9 ticks vs 36 ticks at best, and US Treasuries shadow moves elsewhere ahead of the return of cash participants after Monday’s Veterans Day holiday – futures off worst levels seen overnight, but curve still fractionally steeper.

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