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Patris Daily - 10 October 2018

10 Oct 2018

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GLOBAL MARKETS OVERVIEW:

Europe: All major European stock indices closed positive yesterday. Italy outperformed (+1.06%) and closed with gains for only the 2nd time in the last 10 sessions. STOXX600 also closed positive (for the 1st time in 4 sessions) and rose 0.20%, with 10 out of 18 main sectors closing positive. Oil & Gas (+1.53%) and Basic Resources (+1.16%) outperformed, while Chemicals (-0.71%) were hit the hardest.

According to the IMF, global growth is projected at 3.7% in 2018 and 2019, 0,2pp below the July 2018 WEO. Growth in advanced economies will remain well above trend at 2.4% in 2018, before softening to 2.1% in 2019. In 2018, weaker-than-expected outturns in the first half of the year have led to downward revisions for the Euro Area and the UK. Germany is now projected to grow at 1.9% in 2018, 0,3pp below the July 2018 WEO, while France is now projected to grow at 1.6%, 0.2pp below the July projection. In 2019, recent trade measures are expected to weight on economic activity, especially in the US, where the 2019 growth forecast was revised down by 0.2pp. In emerging Asia, China growth was revised downwards 0.2pp in 2019, with trade measures expected to negatively impact economic activity. In Latin America, Brazil is now projected to growth at 1.4%, 0.4pp down from the July 2018 WEO projections, while Mexico is expected to growth 2.2%, 0.1pp below previous projections.

Eurozone sovereign debt market: 10-year EGB traded with a mixed tone across the region, with the 10-year BTPs yield down by 9.2 bps to 3.468% and the 30-year BTPs yield down by 2.7 bps to 3.918%. Greece followed with the 10-year GGBs yield down by 4.7 bps to 4.534%. On the opposite side, Germany and France underperformed with the 10-year Bunds yield up by 1.9 bps to 0.546% and the 10-year OATs yield up by 1.5 bps to 0.885%.

Italian Finance Minister Giovanni Tria reiterated yesterday that the economic growth gap with the EU is not acceptable. In his opinion, Italy’s low growth in the past didn’t allow for debt-to-GDP cut. He also reiterated budget deficit targets of 2.4%, 2.1% and 1.8% of GDP for 2018, 2019 and 2020 respectively, although he highlighted that deficit could be lower if the government is not able to implement plans. He added that the income support tool will be introduced next year, while existing retirement rules continue to be seen as an obstacle to hiring. He considered that both economic and public finance forecasts are cautious, and sees growth targets are possible to be exceeded. According to Giovanni Tria, IMF growth targets need to be adjusted to consider the fiscal plan. Moreover, he mentioned that current government bond yield spread is unacceptable. Tria also said that the government could act in case of unexpected rise in bond spreads and stressed that Italy is one of the few nations with budget surplus in past years.

Bank of Italy’s Deputy Director Signorini mentioned that government measures are estimated to have an elevated impact on growth. Nevertheless, he added that high bond yields may limit the lending capacity of banks, while the structural deficit target may leave the country with little room.

Italian European Affairs Minister, Paolo Savona, said yesterday that the budget outline for next year should change if the government bonds’ spread widening goes out of control. He added that the ECB could help narrow the Italy-Germany bonds spread by buying Italian bonds.

Italian Deputy Premier Matteo Salvini said in an interview with RAI television that he will not go back on pension reform and tax cuts in budget plan. He expressed confidence that the spread with German Bunds will not reach 400bps and stressed that he will not go back either because of the spread or the European Commissioners. He also ruled out early elections.

Meanwhile, a chief economist at Moody’s considered, in an interview with newspaper La Stampa, that it is logical that the market concerns about Italy will be reflected in ratings’ agencies upcoming reviews of the country. He sees the government’s fiscal plan as a mistake and compared it to gambling with the long-term fiscal and economic health of Italy.

The vulnerability of the Italian banking sector to higher government bond yields has once again been well seen over recent months, reflecting the still sizeable holdings of BTPs, in spite of being better capitalised.

Portugal: PSI20 followed all other major European stock indices and closed positive (+0.20%) for the first time in 4 sessions. 15 out of the 18 members closed positive. The main Portuguese stock index benefited from the strong performance of Sonae Capital (+11.9%), and to a lesser extent of Sonae (+2.8%) and Navigator (+1.7%). On the other hand, Pharol (-1.4%) and EDP (-1.2%) were hit the hardest.

FX & Commodities: Gold rose by 0.14% (flat as we type), while the first future of Brent increased by 1.30% (-0.08% as we type). The euro finished the day little changed (flat as we type).

US Equity & Debt Markets: S&P500 finished the day with a 0.14% decline (Nasdaq Composite +0.03%). 5 out of the 11 major industry groups posted gains by the end of the day, with Energy (+0.99%) being the major outperformer. Materials (-3.40%) and Industrials (-1.51%) were the main laggards. 10-year UST yields fell by 2.7bps to 3.207% (3.215% as we type).

Dallas Fed President Robert Steven Kaplan (a non-voter this year on the rate-setting FOMC) recognised that the Federal Reserve is reaching its dual mandate objectives. The consumer remains solid, although the fiscal boost is expected to fade in 2019/2020. Inflation pressures are building, in spite of structural pressures that are deflationary. He continues to see technology and globalisation as limiting pricing power.

Robert Steven Kaplan does not believe that inflation may accelerate (any move in inflation above target is expected to be gradual). On the yield curve, he sees the long-end reflecting the uncertain growth outlook. He acknowledged that productivity could lift the neutral interest rate.

Robert Steven Kaplan sees the Federal Reserve raising gradually and patiently interest rates, and reiterated that he is comfortable raising rates three times from now until June. He said that he does not know if the Federal Reserve should hike rates past neutral, while he continues to watch energy markets (given its potential impact on consumers). He sees unemployment in mid-3% range or lower by end-2019.

Federal Reserve Bank of Philadelphia President Patrick Harker (a non-voter this year on the rate-setting FOMC) said that the labour market has very little slack, as he continues to hear from employers that thy can’t fill the jobs they have.

Latin America: In Mexico, headline (+0.42%m/m vs. +0.41%m/m) and core (+0.32%m/m vs. +0.27%m/m) CPI inflation printed above market expectations. The annual rate of change accelerated to 5.02%y/y in September, from 4.90%y/y in August. At its latest MPC meeting, the Banxico kept unchanged its key policy rate, with a hawkish forward guidance and a dissenting vote for a hike.

Asia: With markets closed in Taiwan for a holiday, equity indexes in the region traded with a mixed tone overnight: TOPIX +0.16%, HANG SENG +0.30% (as we type), SHANGHAI COMPOSITE +0.18%, HSCEI +0.34% (as we type), KOSPI -1.12% (after being closed yesterday for a holiday) and S&P/ASX200 +0.14%.

The EEM ETF is back to its lows for the year. 

OUR TAKE ON THE LATEST MACRO DATA:

No relevant data was released yesterday.

GLOBAL HIGHLIGHTS:

BCP: S&P upgraded BCP to BB/Stable, from BB-/Positive (Bloomberg)

BCP: The CEO admitted that the bank could the target of a hostile takeover bid, given the current trend of consolidation in the European banking sector (Negócios)

CTT: Gsa Capital Partners reduced its net short position in CTT by 7.63% to 1.64mn shares, or 1.09% of the company’s stock (Bloomberg)

EDP: EDP issued first €600mn “green” bond maturing in October 2025, with a coupon of 1.875%, corresponding to a yield of 1.959% (EDP’s filing on CMVM)

Portugal: ECB financing to Portuguese lenders fell in September to the lowest since April 2010, the Bank of Portugal said. ECB financing fell to €18.957bn in September from €19.745bn in August, a reduction of nearly €800mn (Bloomberg)

Spain: Spanish banks still have lower capital ratios than European peers, Bank of Spain Deputy Governor Margarita Delgado said at a banking conference. She urged Banks to keep advancing in having more capital, of better quality than before the financial crisis. Banks need also to keep reducing non-productive assets (Bloomberg)

Telepizza: Telepizza agreed to buy Sodetur and Costa Hut, franchises of Pizza Hut in Ecuador, the company said in a regulatory filing. The purchase adds 38 stores to 23 it already operates in Ecuador, becoming leader in Ecuadorian market in terms of sales and number of stores. The purchase, financed with Telepizza’s own resources, will have immediate positive impact on consolidated EBITDA, according to the group (Bloomberg)

Italy: Italian PM Giuseppe Conte said in a statement that numbers are not up for discussions. He added that the fiscal outline will be reinforced with investment plan that will discussed with main companies (Bloomberg)

Italy: PM Giuseppe Conte will meet with managers of state co-owned companies (ENI, ENEL and Poste) today to call for their contribution to the government’s plan to boost GDP growth as part as next year’s budget, Corriere della Sera reported (Bloomberg)

Italy: Roberto Fico, speaker of the lower house of the country’s parliament urged calm in EU budget talks. He considered that there has been enough talk about austerity. Therefore, he believes that reason is needed to help growth and reduction of social inequality (Bloomberg)

Italy: The country’s parliamentary budget office does not approve the new fiscal outline, including the government target of 1.5% economic growth in 2019. It said that growth targets are ambitious and too optimistic and highlights the significant deviation from the structural deficit rule. The parliament budget joint committee can now ask the government to review the targets or provide it with a new explanation of why it confirms them (Bloomberg)

WHAT TO WATCH TODAY:

On the data front, we will have the August industrial production data in France, Italy and the UK.

Michel Barnier is expected to present a draft text on the future relationship to EU ambassadors today.

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