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23 Oct 2018
GLOBAL MARKETS OVERVIEW:
Europe: All major European stock indices closed negative yesterday. Spain (-0.96%) and France (-0.62%) underperformed, while Portugal (-0.14%) and the UK (-0.10%) were hit the least. STOXX 600 closed negative (-0.42%), with 16 out of 19 sectors closing negative. Chemicals (+0.31%), Personal & Household Goods (+0.21%) and Food & Beverages (+0.20%) outperformed, while Telecoms (-1.0%) and Oil & Gas (-1.47%) were the main laggards.
Core equity markets (France and Germany) have clearly outperformed periphery equity markets (Spain, Italy and Portugal) since the April low.
Eurozone sovereign debt market: With the exception of Italy, 10-year EGB traded in a positive note yesterday. Italian yields were up once again with 10-year BTPS yields up 1.1bps to 3.483. On the other hand, Spain and France outperformed, with 10-year SPGBs yields down 3.3bps to 1.691% and 10-year OATs yields down 1.8bps to 0.815%.
Italian PM Giuseppe Conte said yesterday that the 2019 deficit target of 2.4% of GDP is the “upper-limit”. Therefore, the government can still reassess during the budget implementation whether to contain the target so that the 2.4% target is not reached. Giuseppe Conte stressed that the 2.4% will not surely be exceeded. He said that the government will not pass the wealth tax in case of economic difficulties. Giuseppe Conte added that in case of difficulties, the government would cut spending.
Italy’s reply to the European Commission showed that the government is aware that the budget plan is not in line with the EU’s Stability and Growth Pact, but explained that a looser policy was needed considering the country’s weak pace of economic expansion. The government stressed that it wants a constructive dialogue on budget with the EU, and that it does not intend to raise the structural deficit after 2019. Moreover, the government said that it would bring the structural deficit towards the target if GDP growth speeds up. The letter ends with the government saying that Italy’s place is in Europe and in the euro area. The EC has now until the 29 October to give a formal reply. If there is a request for the Italian government to submit a revised budget, it would have to do it within three weeks. Otherwise, the matter would be referred to the European Council.
In its latest monthly report, the Bundesbank said that the economic upswing in Germany is still fundamentally intact. However, the Bundesbank considers that it may have come to a temporary halt in the summer quarter, reflecting difficulties in adapting to new emission-test procedures in auto industry. Construction is also likely to have slowed after strong growth in spring, while retail sales were modest over the period. According to the Bundesbank, the growth break should not be long-lasting, as business expectations in the auto industry as well as overall business confidence have improved. Headline inflation is expected to remain above 2% in coming months.
PSPP net settlements for last week, reported yesterday, came in at €191mn. This comes after the previous week’s €1,331mn and brings the net total to €2,083.893bn. ABSPP3 net purchases came out at €199mn in the week ending on 19 October, from net purchases of €80mn the week before, to a new net total of €27.260bn. CBPP3 net purchases stood at €642mn for the week ending on 19 October (vs. €510mn in the week ending on 12 October), to a new net total of €260.923bn. Finally, net additions in the CSPP reached €826mn, after €744mn the week before. The new net total stood at €172.656bn. Therefore, total net asset purchase settlements reached €1,858mn for the week ending on the 19 October, compared to €2,665mn the week before. The PSPP share in overall net additions stood at 10%, after 50% the week before.
Portugal: PSI20 followed its major counterparts and also closed negative yesterday (-0.14%), with 11 out of 18 members closing in the red. Navigator (+0.98%) and Sonae (+0.88%) outperformed, while Mota-Engil (-1.78%, down 51.68% YTD) and F. Ramada (-2.60%) were the main laggards. Mota-Engil is down by 51.68% since the beginning of the year.
FX & Commodities: Gold fell by 0.36% (+0.57% as we type), while the first future of Brent finished the day little changed, +0.06% (-0.66% as we type). The euro weakened by 0.43% against the US dollar (+0.01% as we type).
US Equity & Debt Markets: S&P500 declined by 0.43% yesterday. Technology (+0.81%) and Consumer Discretionary (+0.48%) were the only two sectors that finished the day with gains. The other 9 major industry groups posted losses, with Financials (-2.06%) being the major laggard. 10-year UST yields were little changed at 3.199% (3.155% as we type).
Federal Reserve Bank of Atlanta President Raphael Bostic (a voter this year on the rate-setting FOMC) said that the US economy presents an inflation near the Fed’s 2% goal, while the unemployment rate is extremely low by historic standards. He added that the FOMC can keep this backdrop going over the coming quarters. Furthermore, he considered that uncertainty over trade policy is causing some investors to wait. He sees the Fed balance sheet shrinking to $3trn-$3.5trn.
Federal Reserve Bank of Dallas President Robert Kaplan (a non-voter this year on the rate-setting FOMC) said he worries about a yield curve inversion because it might slow credit creation. Nevertheless, he recognises that the Federal Reserve has basically met its dual mandate objectives. He added that US consumer is strong (with a positive outlook for coming years) and that rates are likely to increase three more times over the next nine months to around a neutral setting. For now, Robert Kaplan is not prepared to say that the FOMC should move beyond a neutral stance. Robert Kaplan said that he is not sure that the housing data slowdown suggests a weakening in the economy. He sees higher productivity in 2019 and 2020. According to Robert Kaplan, the stimulus impact is seen waning in 2019 and further in 2020.
Latin America: In Argentina, the central bank President said multilateral real exchange rate is now competitive. He sees interest rates falling in next few months as inflation slows. He added that the central bank is slowly achieving the goal of limiting the growth of the monetary base to zero percent.
Asia: The session saw a very weak sentiment: TOPIX -2.63%, HANG SENG -2.95% as we type, SHANGHAI COMPOSITE -2.25%, HSCEI -2.58% as we type, TAIEX -2.00%, KOSPI -2.57% and S&P/ASX200 -1.05%. S&P500 future is down by 1.22% as we type.
According to press reports, the Financial Stability and Development Committee under China’s cabinet recently held a meeting in which it was decided that a series of policies will soon be issued in order to lift market confidence. Tax cuts and fee reductions next year are expected to reach or exceed 1% of GDP. Moreover, substantial measures will soon be issued to ease the financing difficulties of private firms.
It was also reported that PBOC plans to give CNY10bn to China Bond Insurance to provide credit support for debt sales by private enterprises.
In Indonesia, the central bank decided to keep it key interest rate at 5.75%, in line with expectations.
EM currencies have recently showed some encouraging signals. However, a weaker Chinese currency remains a key risk…
OUR TAKE ON THE LATEST MACRO DATA:
China: September Housing Prices
New home prices rose by 1.00%m/m in September, after a 1.49%m/m gain in August, according to the NBS 70-city house index.
64 out of the 70 cities recorded monthly price increases in September (91% of the total), following 67 cities in August (96% of the total).
Portugal: Portugal’s 2019 budget plan maintains the strong commitment to fiscal consolidation that has supported the country’s sovereign credit profile, Fitch said. Some spending commitments reflect the approach of elections next year and legacy banking sector costs are still being felt in the debt dynamics, but the government aims to achieve a close-to-balanced budget, Fitch added (Bloomberg)
CaixaBank: CaixaBank, Mutua Madrilena, Santalucia withdrew from bidding process for Telefonica’s insurance unit, after Telefonica modified the initial conditions of the sale, according to Expansion (Bloomberg)
Spain: Spanish Supreme Court’s session to decide on mortgage documentation tax will take place on the 5th November (Bloomberg)
Telefonica: UK unit IPO plans delayed amid uncertainty in the market (Bloomberg)
El Corte Ingles: Fitch has assigned Spanish retailer El Corte Ingles 3% €600mn notes due 2024 a final senior unsecured rating of BB+ (Bloomberg)
Luxottica: Luxottica confirmed outlook on positive trend in the retail and e-commerce business and return to growth of wholesale division. 3Q18 sales reached €2.22bn vs consensus of €2.21bn. 3Q18 sales rose 3.5% at constant exchange rates, up 2.9% at current FX (Bloomberg)
Renault: 3Q18 revenues stood at 11.5bn (vs. consensus €12.2bn), or €10.1bn excluding Avtovaz. Confirms financial guidance for 2018. The group now expects Chinese market to grow 2% in 2018 (vs. 5% previously). Sees global market up by 2% this year, vs. 3% previously. Sees European market up more than 1.5% (in line with previous expectation). Sees France market up more than 4% (vs. 2% previously) (Bloomberg)
Klepierre: Klepierre reported revenue for the 9-month period of €1bn. Still sees FY group net current cash-flow per share at least €2.62 (Bloomberg)
Italy: Deputy PM and head of Lega Matteo Salvini may have requested that PM Giuseppe Conte discuss possible Russian purchases of the Italian government at his meeting with President Putin, La Stampa reported (Bloomberg)
Italy: Eurogroup head Mario Centeno said latest messages from Italy and the European Commission over the country’s 2019 budget are very positive, according to Reuters. He added that he expects an agreement to be reached on the 2019 budget (Bloomberg)
WHAT TO WATCH TODAY: The European Commission’s Euro area consumer confidence survey for October will be published today, along with the ECB’s Bank Lending Survey. In EM, Brazil releases IPCA-15 inflation for mid-October. In the UK, we will have the CBI survey.
McDonald’s, 3M, Verizon and Caterpillar report quarterly earnings before market opens, while Texas Instruments will do so after market closes.
In Portugal, BPI discloses 3Q18 results, after market closes.
Netherlands sells €1.5-2.5bn DSL 0.75% July 2028. In the US, the Treasury will issue around $38bn across the 2-year sector.
In the UK, the cabinet meets on BREXIT.
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