19th October 2018

Major European indices are mostly lower with Italian banks adversely affected by the EU Commission’s response to the Italian budget

Dollar remains relatively well bid overall, albeit off best levels as the index straddles 96.000

Looking ahead, highlights include, Canadian CPI and Retail sales, US Existing Home Sales, Baker Hughes Rig Count, BoE’s Carney, Fed’s Bostic and Kaplan

ASIA

Asian equity markets were mostly lower following a resumption of the tech-led losses on Wall St where the dampened risk-tone was attributed to various ongoing concerns including higher US interest rates, Italy’s budget deficit, Saudi foul play and the US-China trade dispute. ASX 200 (Unch) and Nikkei 225 (-0.6%) both declined although losses in Australia were stemmed by resilience in gold miners and in the largest weighted financials sector, while Japanese exporters took the brunt of the recent safe-haven flows into JPY. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (+2.6%) were both initially negative as the mainland index extended on the prior day’s near-3% drop and as participants digested a slew of tier-1 data in which GDP Y/Y and Industrial Production missed estimates, although losses in the mainland were gradually pared as there were also various announcements from Chinese officials on supporting domestic companies. Finally, 10yr JGBs were uneventful with only minimal support seen from the risk averse tone and paltry BoJ Rinban announcement for JPY 255bln in JGBs.

Chinese GDP (Q3) Y/Y 6.5% vs. Exp. 6.6% (Prev. 6.7%) (Newswires)

Chinese GDP (Q3) Q/Q 1.6% vs. Exp. 1.6% (Prev. 1.8%)
Chinese Industrial Production (Sep) Y/Y 5.8% vs. Exp. 6.0% (Prev. 6.1%)
Chinese Retail Sales (Sep) Y/Y 9.2% vs. Exp. 9.0% (Prev. 9.0%)

PBoC injected CNY 30bln via 7-day reverse repos for a weekly injection of CNY 30bln vs. Prev. CNY 160bln net drain. (Newswires)
PBoC set CNY mid-point at 6.9387 (Prev. 6.9275)

PBoC Governor Yi Gang said will maintain prudent and neutral monetary policy, while he added PBoC will use monetary policy tools including Medium-term Lending Facility to bolster lending to private firms. (Newswires)

CSRC said it will support SME's issuance of high-yield bonds and other debt products, while it will also support share repurchases by qualified listed firms and will encourage M&A by listed firms. Furthermore, the CSRC also stated it will encourage various types of funds to aid companies facing margin call pressures. (Newswires)

Japanese National CPI (Sep) Y/Y 1.2% vs. Exp. 1.3% (Prev. 1.3%). (Newswires)
Japanese National CPI Ex. Fresh Food (Sep) Y/Y 1.0% vs. Exp. 1.0% (Prev. 0.9%)

BoJ Governor Kuroda says Japan's economy is expanding moderately and exports on rising trend; inflation is likely to gradually accelerate towards 2% and reiterates the BoJ must maintain powerful monetary easing. (Newswires)

EU/UK

UK PM May is reportedly isolated with the party said to be turning against the chaotic Brexit plan and with EU leaders giving her the cold shoulder. (Telegraph)

EU Chief Negotiator Barnier says the Brexit accord is possible but difficult; however, problems regarding Ireland could result in a failure of Brexit talks. Barnier reiterated that they are 90% there in reaching an agreement with UK and added that he is still not certain a deal will be reached. (Newswires)

UK PM May Spokeswoman said we shouldn't get ahead of ourselves on the idea of extending the transition period. (Newswires)

EU leaders are making preparations to support UK PM May in building a “coalition of the reasonable” in UK Parliament in an attempt to avert a no-deal Brexit. (Guardian)

Austrian Chancellor said expects the EU commission to give Italy a clear answer; that we need discipline and consequence. Austria's Kurz says if Italy deviates from the Maastricht budget rules it would be putting its self in danger. (Newswires)

UK Foreign Minister Hunt said the free trade agreement will take months not years to negotiate; adding that the backstop plan involving UK-wide customs union is possible, but not one which involves an indefinite customs union membership. (Newswires)

Italy's Deputy PM Salvini said he will return to Rome on Saturday to solve the coalition dispute regarding tax amnesty, adding that the coalition must stop arguing. (Newswires)

Italian Banking Association Head says one cannot remain indifferent to growing spread between IT/GE spread. (Newswires)

Italy's 5 Star chamber speaker says that he believes the 5SM cannot vote for tax amnesty as sought by League. (Newswires)

Norway's Government is considering setting up a committee for monetary policy and financial stability in the Norges Bank, that will take decisions on the key policy rate and advise on instruments such as counter cyclical buffer. (Newswires)

US

US submitted requests for dispute panel over retaliatory tariffs from China, EU, Canada and Mexico according to a source, while reports noted that Canada, Mexico and China are planning to seek dispute resolution from WTO related to US metal tariffs. (Newswires)

EQUITIES

Major European indices are mostly lower, with the exception of the SMI (0.25%) bolstered by Nestle (+1.8%), following an upgrade to buy at DZ bank, and the FTSE MIB (-1%) lagging, with Italian banks adversely affected by the EU Commission’s response to the Italian budget; UBI Banca are halted after falling 5.5%. In terms of sectors, consumer discretionary is the worst performer, down by over 1.5%, due to poor performance by Michelin (-7%), with Continental (-5.5%) and Pirelli (-4.9%) down in sympathy. The utilities sector is leading, supported by names such as National Grid +1%.

In terms of individual equities Intu Properties (+11%), following a revised offer from the Peel Group. Bouygues (-9%) are lagging after the company lowered their profit guidance; closely followed by Intercontinental Hotels (-5.1%) as USD 500mln is to be returned to shareholders by means of a special dividend.

FX

USD - The Dollar remains relatively well bid overall, albeit off best levels as the index straddles 96.000 and mtd highs ahead of a key Fib, at (96.155 and 96.236 respectively. However, some G10 counterparts have clawed back losses vs the Greenback on a mixture of pre-weekend short covering, consolidation and hedging against event risk.

NZD - The major outperformer, and firmly back above 0.6550 vs the Usd, but mainly on cross flows vs the AUD and the potential for political fall-out from Sydney by-elections. Aud/Nzd has retreated sharply from recent highs towards 1.0800 and Aud/Usd is also recoiling to straddle 0.7100 from 0.7150+ levels earlier in the week (partly on encouraging labour market metrics). Note also, the Aud remains more prone to Chinese impulses and GDP data overnight disappointed.

CAD/GBP - Also forging gains vs the Usd, or rather paring losses, as the Loonie pivots 1.3050 ahead of top-tier Canadian data in the form of CPI and retail sales, while Cable has found some respite from Brexit woes via EU’s Barnier pledging no desire to force a hard withdrawal deal on the UK, and ahead of 1.3000 via chart support.

CHF/EUR - Both narrowly mixed vs the Dollar with the Franc meandering between 0.9950-75 and single currency circling 1.1450 amidst the ongoing Italy vs EU budget rift, but with the Eur also eyeing a downside technical level (Fib circa 1.1422) and conscious of hefty option expiry interest (2.1 bn at the 1.1400 strike vs 1.3 bn at 1.1500).

JPY - Mainly weaker within a 112.15-55 range vs the Usd in wake of soft Japanese inflation data overnight and more dovish BoJ policy guidance from Governor Kuroda.

EM - The Rand is bucking a broad weaker trend in regional currencies vs the Buck with the aid of hawkish rhetoric from the SARB that indicated rate hikes if CPI rises in line with forecasts. Usd/Zar down to around 14.3375 at one stage.

COMMODITIES

Gold is marginally up, approaching USD 1230/oz once again staying in a USD 5/oz range; as the market environment is affected by market concerns such as Brexit, Italian Budget and lower than expected Chinese GDP data. London copper is flat at USD 6162/tonne, following it dropping by 1% yesterday; putting copper on track for its biggest weekly drop since mid-August.

Both WTI and Brent are up over 0.5% on the day, at around USD 69/bbl and USD 80/bbl respectively. This slight increase is likely due to ongoing tension surrounding the disappearance of journalist Khashoggi, and what the US response will be when the investigation finishes. Although, OPEC have stated that prices are likely to decline in the coming weeks as they expect US output to increase.

FIXED INCOME

After a relatively tame opening mark-up to 121.28 from yesterday’s 121.15 Liffe close and early wobble to 121.24, the 10 year UK benchmark bond built a bit more momentum alongside Bunds (crossed 160.00 to 160.08, +55 ticks vs +10 ticks at the low) and just reached 121.50 for a 35 tick gain on the day. This, as the heat turns up on Italy again with BTPs slipping to fresh intraday, recent and a new contract low (117.77, just off the 117.71 continuation base) and the overall risk tone sours. Note, PSNB balances were better than forecast but had limited market impact, though a scheduled speech from BoE Governor Carney may be more pivotal, as the 3 month STIR strip extends post-retail sales gains and flattens (1-3 ticks above parity). Elsewhere, US Treasuries have been dragged into mild positive territory and seemingly encouraged by their core EU counterparts, with the curve pretty flat after undulations this week. Also, ahead US existing home sales and more Fed speak.