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Patris Daily - 12 October 2018 - Part 1

12 Oct 2018



Europe: For the second day in a row, all major European stock indices closed negative yesterday. UK (-1.94%), France (-1.92%) and Germany (-1.48%) underperformed, while Portugal (-0.82%) was hit the least. STOXX 600 followed and also closed negative (-1.98%, reaching its lowest level since December 2016) with all 19 sectors closing negative. Insurance (-3.24%), Oil & Gas (-3.15%) underperformed, while Media (-0.73%) was hit the least.

Eurozone sovereign debt market: 10-year EGBs traded with a mixed tone across the region, with Italy (once again), Portugal, Spain and Greece underperforming. Italian yields increased across the curve, with 10-year BTPs yields up by another 5.7bps to 3.557%, and 2-year BTPs yields up by 7.4bps to 1.462%. Portuguese 10-year PGBs yields rose by 5.6bps to 2.007%, while 10-year SPGBs yields were up by 3bps to 1.638% and 10-year GGBs rose 3.9bps to 4.450%. On the opposite side, France and Germany outperformed with 10-year OATs yields down by 2bps to 0.876% and 10-year Bunds yields down by 3.4 bps to 0.516%.

Italy sold yesterday €558mn of 4% 2037 bonds (average yield of 3.79% and a bid-to-cover ratio of 1.9x), €942mn of 2.45% 2033 bonds (average yield of 3.66%, and a bid-to-cover ratio of 1.41x), €1.5bn of 2.5% 2025 bonds (average yield of 3.28% and bid-to-cover ratio of 1.9x), and €3.5bn of 2.3% 2021 bonds (average yield of 2.51%, bid-to-cover ratio of 1.26x).

In Italy, both the Senate and the lower house approved yesterday the Update to the Economic and Financial Document. In Spain, Podemos and PSOE reached an agreement on the 2019 budget, which, according to press reports, involves higher tax rates for high-income earners and a higher minimum wage.

ECB Governing Council member and Bank of Finland Governor Olli Rehn said that convergence to sustainable price stability in the euro area requires significant monetary stimulus, which calls for prudence and for a gradual approach to monetary policy normalisation. He stressed that it is critical to ensure that the monetary policy toolbox is sufficient when the next recession hits. He added that there are indications the natural rate of interest may have declined in recent years, and may be clearly below what was thought to be normal in the past. He considered protectionism as the present danger to sustained growth.

ECB Governing Council member and Estonia central bank Governor Ardo Hansson said yesterday that wage growth and a shortage of equipment both promise to drive up inflation. He added that once net asset purchases end, the ECB may debate whether re-calibration of the forward guidance is needed.

EU Economy Commissioner Pierre Moscovici said yesterday that the EU economy is quite solid, even though the region still requires long-lasting reforms. On Italy, he said that the EC has not rejected the Italian Budget, but acknowledged the risk of a significant deviation. According to Pierre Moscovici the true problem of the country is its low productivity. He recognised that the situation in Greece is getting better.

The accounts of the 13 September’s ECB Governing Council meeting were released yesterday. The ECB discussed the impact of downside growth risks on inflation, including protectionism. The Council viewed risks as broadly balanced on domestic strength, while recent growth moderation was seen as reflecting the return to potential. The Council considered that uncertainty about the inflation outlook appears to be receding, reflecting rising wage growth.

Credit has also been under pressure.

Portugal: PSI20 closed negative (-0.82%, reaching its lowest level since April 2017) for the 8th time in 10 sessions. 13 out of 18 members closed negative. Navigator (+6.67%, after reporting that the US Department of Commerce amended downwards the final anti-dumping tax from 37.34% to 1.75%) and Semapa (+6.10%) outperformed, while Altri (-4.60%, after already losing 10.83% on Wednesday), and Sonae Capital (-6.01%) were the main laggards.

The Bank of Portugal cut its forecasts for export and investment growth in 2018 as global trade slows. The Portuguese central bank left his June 2018 GDP growth estimate unchanged at 2.3% and raised the outlook for private consumption from 2.2% projected in June to 2.4%. Investment will grow by 3.9%, slower than previously projected (5.8%), while Exports will grow by 5%.0, less than the 5.5% projected in June. Inflation is still expected to reach 1.4% in 2018.

According to Bank of Portugal, wages should increase over the year, given the reduction of the unemployment rate, the increase of the national minimum wage and the gradual unfreezing of wage increases in the public administration. The central bank forecasts employment to grow 2.3% this year (down 0.3 pp from the June forecast), in line with GDP growth of 2.3%, and that the unemployment rate will reach 7% (down 0.2 pp from the June forecast). These two factors will pressure wages, according to Bank of Portugal. The Bank of Portugal also stated that the target budget deficit of 0.7% for 2018 is “feasible, “although there still is some uncertainty”.

FX & Commodities: The euro rose 0.63% against the US Dollar (+0.06% as we type). Gold increased by 2.45% (-0.44%), on the back of the risk-off environment. The first future of Brent declined by 3.41%.

US Equity & Debt Markets: Another session of strong losses for US equity indices (S&P500 -2.06%, DJIA -2.13% and Nasdaq Composite -1.25%). As we type, S&P futures are pointing to a 1.9% gain. All 11 major S&P500 industry groups finished yesterday in the red. Energy (-3.09%), Financials (-2.93%) and Real Estate (-2.90%) were hit the hardest. 10-year UST yields fell by 1.3bps to 3.151% (3.175% as we type).

According to media reports, the US reached a deal with Turkey to release detained American pastor Andrew Brunson. Elsewhere, the US Treasury Department’s staff has advised Secretary Steven Mnuchin that China is not manipulating the CNY, according to press reports.

Latin America: In Brazil, Jair Bolsonaro said that the pension reform must be done and reaffirmed the plan to privatize non-strategic companies. He considered that the golden share used in Embraer is a very good model. Meanwhile, central bank chief Ilan Goldfajn said at the IMF/World Bank annual meeting that a robust balance of payments position, floating exchange rate and well-anchored inflation expectations are amongst the factors showing that Brazil has the capacity to withstand shocks. He added that there is a rising consensus that reforms and adjustments must continue, and reaffirmed that economic conditions still prescribe stimulative monetary policy. Stimulus will begin to be removed gradually if the outlook for inflation and/or its balance of risks worsen. In Colombia, the central bank chief said that the biggest risk to the global economy is a trade war, but for Latin America, it is probably capital outflows.

Asia: Stocks traded with a positive toner across the region: TOPIX +0.03%, HANG SENG +2.09% as we type, SHANGHAI COMPOSITE +0.91%, HSCEI +2.16% as we type, KOSPI +1.51%, TAIEX +2.44% and S&P/ASX200 +0.20%.

In China, exports in USD terms rose by 14.5%y/y in September (vs. consensus +8.2%), while imports increased by 14.3%y/y (vs. consensus 15.3%y/y). The trade balance stood at $31.69bn (vs. consensus $19.20bn).


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