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Patris Daily - 24 October 2018 - Part 1

24 Oct 2018

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GLOBAL MARKETS OVERVIEW:

Europe: For the second session in a row, all major European stock indices closed negative yesterday. Germany (-2.17%), Portugal (-1.72%) and France (-1.69%) underperformed, while Spain (-0.91%) and Italy (-0.86%) were hit the least.

STOXX 600 also closed negative (-1.58%), with all 19 sectors closing negative. Personal & Household Goods (-0.19%) and Utilities (-0.52%) were hit the least, while Basic Resources (-2.59%), Oil & Gas (-2.60%), and Technology (-3.73%) were the main laggards.

Eurozone sovereign debt market: With the exception of Italy, 10-year EGB traded on a positive note yesterday, reflecting the risk-off day recorded in equity markets. Spain, Germany, and France outperformed, with 10-year SPGBs yields down 3.4bps to 1.657%, 10-year Bunds yields down 3.9bps to 0.406% and 10-year OATs yields down 3.5bps to 0.781%. On the opposite hand, Italy (after the EU asked the Italian government to resubmit its budget) underperformed. Italian yields increased across the curve, with 10-year BTPS yields up 10.2bps to 3.585% and 2-year BTPS up 8.4bps to 1.208%.

The ECB released yesterday its 3Q18 Bank Lending Survey. Banks in the region continued to loosen their credit standards on loans to firms and for mortgage loans, while they tightened slightly their credit standards for consumer credit. Demand for all types of loans eased in 3Q18. Banks expect demand for credit to do so again in 4Q18. Fewer banks said that the negative deposit rate had resulted in a net decline in lending rates than they did in April. The banks expect this trend to continue.

The EU Commission said that Italy should resubmit its 2019 budget. The EU issued a negative opinion on Italian budget, while EU commissioner Valdis Dombrovskis said that the country is openly going against the EU rules with a major deterioration in the structural deficit. Valdis Dombrovskis added that there will be intensive talks with Italy over the next 3 weeks. He sees 1.9% real GDP growth targeted for 2019 as being optimistic, which means there is a strong risk 2019 deficit will be above 2.4% of GDP.

The country will now have three weeks to reply. If the Italian government decides to not backtrack, the EU Commission could then move towards the launch of (or to start the procedure to launch) an Excessive Debt Procedure and/or impose sanctions.

Meanwhile, Italian PM Conte ruled out a Plan B and reiterated that the 2.4% of GDP target is a ceiling. He added that the government will not bring Italy out of the EU or the Euro.

Meanwhile, Italy Cabinet Undersecretary Giancarlo Giorgetti said Italian banks would need recapitalisation if the spread with German bonds continues to rise towards 400 basis points.

Portugal: PSI20 followed its major European counterparts and closed negative yesterday (-1.72%, reaching its lowest level since April 2017). 16 out of 18 members closed negative with Corticeira Amorim (-3.02%), Semapa (-3.05%), Galp (-3.86%), Altri (-4.03%), Mota-Engil (-4.18%) and Ramada (-8.02%) all falling more than 3%. Sonae Capital (+0.14%) and Jerónimo Martins (+1.33%) were the sole winners of yesterday’s session.

FX & Commodities: Gold rose by 0.67% (+0.22% as we type), while the first future of Brent fell by 4.25% (-0.05% as we type). Theeuro finished the day little changed against the US dollar, +0.06% (+0.02% as we type).

US Equity & Debt Markets: S&P500 posted a 0.55% decline yesterday. Nevertheless, the index recovered sharply from the lows of the session. At the worst point in the day, S&P500 was declining by 2.34%. Only 3 out of the main 11 industry groups recorded gains: Real Estate (+0.69%), Consumer Staples (+0.41%) and Communications (+0.40%). Energy (-2.67%) was the sector hit the hardest. 10-year UST yields fell by 3bps to 3.169% (3.146% as we type).

Latin America: In Argentina, the trade balance posted a $314mn surplus in September, well above the $150mn deficit expected by market consensus and the $698mn deficit recorded in September 2017. This is probably the first sign of the expected trade balance adjustment expected after the strong ARS depreciation. In Mexico, the monthly economic activity indicator IGAE showed real GDP rising 1.67%y/y in August (vs. consensus 1.90%y/y), after 3.32%y/y in July. In Brazil, IPCA-15 consumer prices for mid-October increased by 0.58%m/m (vs. consensus +0.64%m/m), after +0.09%m/m in September. The annual rate of change stood at 4.53%y/y (vs. consensus 4.59%y/y), after 4.28%y/y in September. Services and core inflation continued to point towards a moderate evolution from inflation.

Asia: stocks traded with a mixed tone overnight in the region: TOPIX +0.08%, HANG SENG -0.44% as we type, SHANGHAI COMPOSITE +0.33%, HSCEI -0.31% as we type, TAIEX -0.16%, KOSPI -0.40% and S&P/ASX200 -0.24%.

In Japan, manufacturing PMI rose from a final value of 52.5 in September to a flash reading of 53.1 in October. This is the highest reading since April.

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