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11 Oct 2018
Europe: All major European stock indices closed negative yesterday. Portugal (-2.19%), France (-2.11%) and Germany (-2.21%) underperformed, while Spain (-1.05%) was hit the less. STOXX 600 fell by -1.61%, with 17 out of 19 sectors closing negative. Telecoms (+1.92%) and Banks (+0.14%) outperformed, while Basic Resources (-4.01%) and Technology (-4.30%) were the main laggards.
Eurozone sovereign debt market: 10-year EGB declined across the region, with the exception of Portugal and Greece. Italy underperformed (+3.2 bps to 3.5%). On the opposite side, Portuguese bonds outperformed, with the 10-year PGBs yield down by 1.4 bps to 1.951%, while in Greece, the 10-year GGBs yield fell by 12.3 bps to 4.411%.
Fitch said yesterday that Italy’s new deficit targets underscore fiscal risks, mainly beyond 2019, and added that the budget process has highlighted a confrontational stance towards the EU and its fiscal rules.
The 10-year Italy-Portugal bond spread reached the highest level for more than 20 years.
Portugal sold yesterday €782mn of 2.125% 2028 bonds, at an average yield of 1.939% and a bid-to-cover ratio of 2.78 (vs 2.32 in the September auction).
ECB Board member Yves Mersch said yesterday that, while measures of underlying inflation remain generally subdued, they are increasing from previous lows. Therefore, as the labour market continues to tighten, this should lead to higher nominal wage growth, which in turn should support underlying inflation. According to Yves Mersch, the ECB remains confident that the underlying strength of the euro area economy will continue to support the gradual build-up of price pressures. He added that much of the medium-term increase in inflation that ECB predicts is based on the premise of quite some degree of monetary accommodation. Finally, he considered that looking ahead, monetary policy will be firmly guided by the outlook for price stability and that the ECB stance will evolve in a data-dependent and time-consistent manner.
Portugal: PSI20 closed negative (-2.19%). 18 out of 19 members closed in the red. BCP outperformed (on the back of the European sector), while Altri (-10.83%, following its major counterparts in Europe), Navigator (-7.14%), Mota-Engil (-5.49%) were hit the hardest.
FX & Commodities: Gold rose 0.42% (+0.23% as we type), while the first future of Brent fell by 2.25% (-0.89% as we type). Euro rose by 0.25% against the US Dollar (+0.22% as we type).
US Equity & Debt Markets: S&P500 fell by 3.29% (Nasdaq Composite -4.08%). All major 11 sector finished the day in the red. Technology (-4.77%), Communications (-3.94%) and Consumer Discretionary (-3.74%) were the main laggards. 10-year UST yields fell by 4.3bps to 3.164%, reflecting the risk-off sentiment.
President Trump said the problem is the Federal Reserve and not China tariffs, when questioned about the strong declines recorded yesterday by the main stock indexes.
The US Economic Surprise Index is improving once again.
NY Federal Reserve Bank President John Williams (a voter on the rate-setting FOMC) sees the Fed making further gradual rate increases. He sees the inflation right on target, with a strong labour market. Even if inflation goes a bit above 2%, he does not expect a strong pressure.
On the monetary policy, John Williams considers that the FOMC is nearing a normal policy and stressed that the Federal Reserve monitors how its actions impact the global economy.
John Williams expects the pace of real GDP growth to remain strong, on the back of fiscal stimulus and favourable financial conditions.
Federal Reserve Bank of Chicago President Charles Evans (a non-voter this year on the rate-setting FOMC) said that the US labour market is “extremely vibrant” and that the central bank should not over-react if inflation rises a little above the 2% target. He stressed that wages are up, but not as much as expected. Charles Evans said that he was pleased where inflation is right now and added that it would not be surprising if the FOMC had to reduce inflation, against the pro-cyclical fiscal stimulus backdrop.
He said that he was comfortable with the path the FOMC has laid out so far. He will continue to pay close attention to the labour market and if the economy is able to keep an above trend growth. According to Charles Evans, gradual rate hikes give flexibility to FOMC. He considers that inflation expectations are a little lower than ideal.
Charles Evans considers that the FOMC could shift policy to slightly restrictive and then pause, with rates above 3%. He sees inflation expectations and stability concerns still being moderate.
Latin America: In Brazil, Datafolha released the first presidential poll on the run-off round between Jair Bolsonaro and Fernando Haddad. Jair Bolsonaro leads with 58% vs. 42% of valid votes. Considering total votes, Jair Bolsonaro has 49% of voting intentions (vs. 36% for Fernando Haddad). In all presidential elections, the candidate winning the first round ended up winning the second round and being elected president.
Asia: The strong decline in US equity markets led to significant selling pressure on Asian stocks: TOPIX -3.52%, HANG SENG -3.22% (as we type), SHANGHAI COMPOSITE -5.22%, HSCEI -3.28% (as we type), TAIEX -6.31%, KOSPI -4.44%, S&P/ASX200 -2.74%. The MSCI Asia index is down by 3.38%, as we type.
According to press reports, the upcoming foreign exchange report to be disclosed by the US Treasury will include concerns over the depreciation of China’s currency against the US Dollar since April.
OUR TAKE ON THE LATEST MACRO DATA:
UK: GDP Monthly Estimate:
The 3M/3M rate of change for the monthly estimate of GDP stood at 0.7% in August (vs. consensus +0.6%), unchanged if compared to the revised figure for July, suggesting a solid pace of expansion for the UK economy in 3Q18. This is the highest value since February 2017. 3M/3M rates of change slowed in the services and construction sectors when compared to July, while the industrial sector recovered.
US: September NFIB Small Business Optimism
The National Federation of Independent Business index of small business optimism fell by 0.9 points to 107.9 (vs. consensus 108.3) in September. This is still one of the highest readings in the history of the survey. Details of the survey showed solid developments for the labour market. Plans to hire fell by 3 points to 23%. However, positions not able to fill remained stable at 38%, while more firms reported raising compensation (from 32% to 37%) and the intention to further increase compensation over coming months (from 21% to 24%). Elsewhere, price pressures eased (from 17% to 15%). A decline was also recorded in the number of firms increasing capital spending (from 33% to 30%), expecting a better economy (from 34% to 33%), saying that the current backdrop is a good time to expand (from 34% to 33%) and expecting a positive earnings trend (from +1% to -1%). Nevertheless, the key components of the survey remain at a healthy level.
Italy: August Industrial Production
IP output (excluding construction) increased by 1.7%m/m in August, well above market expectations (+0.8%m/m), following the 1.6%m/m decline recorded in July. By sector, durable consumer goods (+5.8%m/m), capital goods (+3.6%m/m) and energy (+2.8%m/m) recorded all strong rises in output during the month.
Despite the strong rise posted by the index The July/August average stands 0.3% below the 2Q18 average (reflecting the weakness of past months), suggesting a weak quarter for industrial production in Italy and consistent with stagnation in industrial activity. Domestic uncertainty and the slowdown in the global economy are expected to continue to weigh on industrial activity.
France: August Industrial Production
Industrial production (ex. construction) rose by 0.3%m/m in August (vs. consensus +0.1%m/m), following a +0.8%m/m gain in July. August was the third consecutive month showing a gain. Manufacturing production increased by 0.6%m/m (vs. consensus +0.1%m/m). Construction output increased by 0.2%m/m in August. The July/August average stands 1.3% above the 2Q18 average (or 1.1% for manufacturing).
Data released for Germany (flat in August), Italy (+1.7%m/m), Spain (+0.7%m/m), the Netherlands (+1.7%m/m) and France (+0.3%m/m) point towards a solid rise in industrial production in the region over the month (to be disclosed on Friday).
Navigator: The Company said it was notified by the US Department of Commerce that it amended downwards the final anti-dumping duty to be applied retroactively to paper sales to the US for the August 2015 - February 2017 period to 1.75% (vs. 37.34% before). The revised duty will have an estimated negative impact of around €3mn on EBITDA for current year vs. €66mn with the previous duty and €2mn in net profits for 2018 vs. €45mn previously. Refund proceedings will be initiated to recover about €22mn relative to the difference between the sums deposited through February 2017 and the amount now revised (Bloomberg)
Novo Banco: Novo Banco signed a promissory sale and purchase agreement with entities indirectly owned by funds managed by Anchorage Capital Group for the sale of a portfolio of real estate known as Project Viriato. Novo Banco expects to get €388.9mn from the sale. The total amount is still dependent on the final terms of the deal (Bloomberg)
Sonae Sierra: Sonae Sierra will reopen Pantheon Plaza, a shopping mall located in the city of Larissa, that has been shut down for almost 10 years, and will reopen on 15 November under the new name Fashion City Outlet, after a reported investment of €9mn (Negócios)
Repsol: The Company sees 3Q downstream refining margin in Spain of $6.7/bbl (vs. $7/bbl a year earlier). 3Q upstream production is seen at 691kboe/d (vs. 693kboe/d a year earlier). Sees production in Europe, Africa & Brazil division to grow 13.1%y/y to 157kboe/d. Sees 3Q Latin America & Caribbean division production down 5.5%y/y to 284kboe/d (Bloomberg)
Spain: Government has reached budget agreement with Podemos. The agreement includes minimum wage of €900 (Bloomberg)
Aena: Aena is interested in the Sofia airport concession, Jose Fernandez Bosch, director of non-regulated business said at an event on Wednesday. State-owned Aena is not considering changes in its shareholder structure, Chairman Maurici Lucena said at the same event (Bloomberg)
Aena: Aena sees net profit rising to €1.31bn in 2019 from an estimated €1.27bn in 2018 and €1.23bn in 2017. Aena sees passenger volume rising 2% (+/- 0.5%) in 2019 in Spain. The company sees dividends rising to €1bn in 2019 from €975mn in 2018. EBITDA is seen rising to €2.59bn in 2019 from €2.58bn in 2018. The company sees commercial revenues growing slightly in non-regulated business (Bloomberg)
Spain: The Government is negotiating with Unidos Podemos to secure votes to approve the 2019 budget in Congress, Spanish Prime Minister Pedro Sanchez said in a press conference. Pedro Sanchez reiterates the intention to send the budget to Brussels by 15 October (Bloomberg)
Italy: According to newspaper il Messaggero, President Mattarella told government coalition leaders to use “less heated tones” when dealing with the European Union on the budget plan (Bloomberg)
Italy: The head of the lower house budget committee said Italy is “equipped” to deal with a possible European Commission rejection of the budget plan, in interview with newspaper Corriere della Sera (Bloomberg)
Italy: The Italian Government will fund 2019 budget measures with €6.9bn in spending cuts and €8.1bn in additional tax revenue, Finance Minister Tria said during a speech before the parliament’s joint budget committee. Government also seeks total €7.8bn in spending cuts and extra tax revenue in 2020 (€9.9bn in 2021) (Bloomberg)
Italy: Italian Finance Minister Giovanni Tria said in parliament that the rise in government bond yields is a reason for concern (Bloomberg)
Global: Fitch sees developed markets GDP growing 2.3% in 2018, 2% in 2019 and 1.7% in 2020 (Bloomberg)
WHAT TO WATCH TODAY:
On the data front, all eyes will be on the release of the September CPI inflation report. Brazil discloses retail sales data for August. In Portugal, INE releases the final reading for September CPI inflation.
Italy will sell today BTPs 2.3% 2021 Bonds (€3.5bn), 2.45% 2033 and 2.5% 2025 and 4% 2037 (€1.5bn). The US Treasury reopens the 30-year bond ($15bn).
Delta Airlines and Walgreens Boots Alliance will announce today its quarterly earnings, before market opens.
The ECB releases the accounts of the latest MPC meeting. In the UK, we will get the BoE Credit Conditions survey.
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