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Patris Daily - 26 October 2018

26 Oct 2018



Europe: All major European stock indices closed positive yesterday. Italy (+1.78%) and France (+1.60%) outperformed, while Germany (+1.03%) and the UK (+0.59%) gained the least.

STOXX 600 closed positive for the first time in 7 sessions (+0.51%). 15 out of its main 19 sectors closed positive, with Auto & Parts (+3.10%) and Chemicals (+1.85%) outperforming, while HealthCare (-1.70%) and Media (-2.02%) underperformed.

Eurozone sovereign debt market: With the exception of Germany, 10-year EGB traded on a positive note yesterday. Italy, Portugal and Greece outperformed, with 10-year BTPS yields down 11.2bps to 3.487%, 10-year PGBS yields down 4.3bps to 1.931%, and 10-year GGBs down 6.3bps to 4.190%. On the other hand, 10-year Bunds yields finished the day marginally up by 0.2bps to 0.395%.

Key Takeaways from the October ECB meeting

Bottom-Line: The press release disclosed by the ECB showed no changes to policy or forward guidance, as widely expected. Interest rates are still seen as remaining at current level at least through the summer of 2019, and as long as necessary to ensure the continued convergence of inflation to target over the medium-term. Moreover, the Bank still expects to end net purchases under the APP by the end of the year.

Mario Draghi highlighted that we are seeing a weaker economic momentum, but not a downturn as survey indicators are still above long-term averages. On inflation, Mario Draghi repeated the same message. With domestic cost pressure strengthening and broadening, underlying inflation is seen increasing over the medium-term. Therefore, the ECB has no reason to doubt its confidence in inflation, according to Mario Draghi.

Overall, the ECB is sticking to its plans. However, and as Mario Draghi said in his press conference, December forecasts by the ECB staff could be important for the risk assessment. Therefore, all eyes should remain on the economic data over coming months.


Press release: The Governing Council stressed that it will continue to make net purchases under the APP at the €15bn monthly pace until the end of December 2018 and reaffirmed the intention to end net purchases at that moment, subject to incoming data confirming the medium-term outlook for inflation. The Governing Council also reiterated the intention to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of net asset purchases and as long as necessary to maintain an ample degree of monetary accommodation. Finally, interest rates are expected to remain at current level at least through the summer of 2019.

Press Conference: Mario Draghi acknowledged that incoming data has been weaker than expected, although still consistent with the baseline scenario. Mario Draghi highlighted that we are seeing a weaker momentum, and not a downturn as survey indicators are still above long-term averages. Protectionism, emerging and financial markets, BREXIT and Italy were cited as risks, while sector specific developments have impacted growth in the near-term (with Mario Draghi highlighting the hit to 3Q18 output from the German car sector). Risks to the growth outlook are still seen as being broadly balanced. Mario Draghi added that December forecasts by the ECB staff could be important for the risk assessment.

On inflation, Mario Draghi repeated the same message. Inflation should remain around current levels for next months. Underlying inflation remains muted, but is expected to pick up towards the end of the year. Moreover, with domestic cost pressure strengthening and broadening, underlying inflation is seen increasing over the medium-term. Mario Draghi stressed that the increase in negotiated wages are a “comforting sign”, while the labour market is tightening progressively.

On Italy, Mario Draghi said once again that spillovers to other countries are limited so far. The Governing Council has not talked about extending QE, although Mario Draghi mentioned that some officials raised questions around TLTROs.

Portugal: PSI20 followed its major European counterparts and also closed positive yesterday (+1.13%) for the first time in 5 sessions. 16 out of 18 members closed positive with Altri (+8.31%) and Navigator (+4.75%) outperforming, while EDP (-0.29%) was the only loser of yesterday’s session.

FX & Commodities: The euro weakened by 0.15% against the US dollar (+0.01% as we type). Gold fell by 0.13% (+0.25% as we type), while the first future of Brent rose 0.95% (-1.07% as we type).

US Equity & Debt Markets: S&P500 finished the day with strong gains (+1.86%). Utilities finished the day in the red (-1.50%). The other 10 major industry groups posted gains, with Consumer Discretionary (+3.41%), Technology (+3.32%) and Communications (+2.66%) outperforming. 10-year UST yields rose 1.4bps to 3.118%.

Federal Reserve Bank of Cleveland Loretta Mester (a voter this year on the rate-setting FOMC) recognised that the relationship between unemployment and inflation has flattened out, but added that it could make a comeback. She defended the SEP and the dot plot, as the Federal Reserve needs to be transparent. Loretta Mester considers that it would be a mistake to overreact if inflation goes temporarily above-target. Nevertheless, she considered that the FOMC is getting close to normal policy-making, which means having to react to the data. 

She considered higher long-run growth in the US economy from fiscal policy as unlikely. Risks to the economic outlook as still seen as being balanced and stressed that she has not changed her long-run outlook due to the Trump tax reforms

According to Loretta Mester, we are seeing the impact of rate hikes in interest-rate sensitive sectors, which is was is intended to happen. Loretta Mester sees the neutral rate of interest at 3% on the longer-run. On the flattening of the yield curve, she believes that it reflects all the QE that was done, not just in the US, but globally.

Lorreta Mester sees inflation staying near 2% with the appropriate monetary policy. She does not see a big housing slump. Lorreta Mester recognizes that the economy is doing very well, and expects a 3% pace for real GDP growth this year (2.75%-3.00% next year). On the market volatility, Loretta Mester mentioned that she has not changed her medium-term outlook. Risks to the economic outlook are still see as being balanced.

Federal Reserve Bank of Atlanta Rafael Bostic (a voter this year on the rate-setting FOMC) said that, with an unemployment rate near a 50-year low, the US economy is near or at full employment. Trade policy is seen as a risk on the downside, as it introduces uncertainty.

Federal Reserve Vice Chairman Richard Clarida considered yesterday that some further gradual Fed rate adjustment is appropriate, as monetary policy remains accommodative. He added that it would adjust the rate-hike path based on economic performance

On the labour market, he sees scope for the job market to strengthen without more inflation, but stressed the importance of monitoring inflation expectations closely. According to Richard Clarida, high savings and lower taxes are tailwinds for the US economy. Wage gains remain consistent with productivity, while the pickup in capex is not just an oil industry story. Overall, he sees very solid economic fundamentals.

Latin America: In Argentina, the EMAE monthly GDP proxy rose by 1.3%m/m in August, after +1.4%m/m in July. The annual rate of change improved from -2.7%y/y in July to -1.6%y/y in august (vs. consensus -2.9%y/y). Tighter financial conditions are likely to remain a headwind to the economy over coming months.

Asia: Stocks traded in the red overnight in the red, as US earnings from some tech-heavyweights disappointed expectations: TOPIX -0.31%, HANG SENG -1.22% as we type, SHANGHAI COMPOSITE -0.19%, HSCEI -1.39% as we type, TAIEX -0.33%, KOSPI -1.75% and S&P/ASX200 +0.02%.


Germany: October Ifo Survey

The Ifo Business Climate Indicator fell by 0.9 points in October to 102.8. The decline was slightly stronger than the one expected by consensus (103.2). The fall was driven by declines in both current conditions (-0.7 points to 105.9) and expectations (-1.1 points to 100.9). Both remains above their averages since 2005.

The details of the survey showed stronger declines in Manufacturing (probably reflecting the impact from the new auto emissions standards) and Retailing. The current conditions index for the manufacturing sector declined to the lowest level since March 2017. Confidence in the services sector fell 1.3 points and remains at a high level by past standards (in contrast with the sharp decline recorded yesterday in the Markit services PMI), while the Business Expectations index for the sector even showed a slight gain in October. Sentiment in construction improved in October and reached a new high for the expansion.

Overall, the less dramatic fall in the Ifo Business Climate Indicator when compared to the Markit composite PMI is more reassuring on the pace of expansion for the German economy at the beginning of 4Q18.

US: September Advance Goods Trade Balance

Trade deficit of goods widened to -$76bn in September from -$75.5bn in August. Market consensus expected a decrease to -$75.1bn. Looking at the details, Exports rose in September to $140.952bn from $138.422bn in the prior month, while imports rose to $216.988bn in September from $213.878bn in August.

US: Initial Jobless Claims

US Initial Jobless claims for the week ending on the 20 October rose 5k to 215k (matching consensus) vs. 210k the previous week. Continuing unemployment claims for the week ending on the 13 October decreased from 1641k to 1636k.


EDP: EDP - Energias do Brasil, 51% held by EDP, signed a sale and purchase agreement with Statkraft Energias Renováveis, for the sale of all the shares held by EDP Brasil at EDP Pequenas Centrais Hidroelétricas, owner of 7 mini-hydro plants, and Santa Fé Energia, owner of one mini-hydro plant. The total amount of the transaction is R$704mn, including an estimated net debt of R$113mn. Therefore, the expected proceeds amount to R$591mn, subject to adjustment between the signing and closing dates, common to this type of transaction (EDP’s filing on CMVM)

Portugal: January-September tax revenues rose by 5.4%y/y. Public administration spending increased 2.2%y/y over the same period (Bloomberg)

CTT: Gsa Capital Partners reduced its net short position in CTT by 11.11% to 1.32mn shares, or 0.88% of the company’s stock (Bloomberg)

Spain: Ruling PSOE leads state-pollster CIS poll with 31.6%. Ciudadanos has 21% and is followed by PP with 18.2% and Podemos with 11.4% (Bloomberg)

Aena: Aena and First State to bid jointly for Sofia airport. Sofia airport auction requires minimum €200mn bid, commitment to invest €600mn more, Expansion reports. Other bidders include Aeroports de Paris, Fraport, and Manchester Airport Group, among others. Winner could be announced next week. Concession is for 35 years (Bloomberg)

IAG: IAG has concluded its share buyback programme, the company said in a Spanish regulatory filing Wednesday. The company acquired 65,956,660 ordinary shares, representing 3.2% of its share capital. IAG will proceed in coming days to reduce share capital in the amount of €33mn through cancellation of 65,956,660 treasury shares (Bloomberg)

Bankinter: Bankinter is “stupefied” by mortgage tax ruling. The bank set aside no provisions for mortgage tax ruling. The Spanish lender hasn’t raised mortgage rates after court ruling (Bloomberg)

IAG: 3Q18 revenues reached €7.14bn (vs. consensus €7.10bn), while 3Q adjusted operating profit stood at €1.46bn (vs. consensus €1.39bn). Sees 2018 adjusted operating profit up €200mn at current fuel and FX levels (Bloomberg)

MedioBanca: MedioBanca reported yesterday results for 1Q19. Revenue reached €638mn vs estimated €625mn, Net Income €254.4mn vs. €219.2mn (Bloomberg)

ENI: 3Q18 adjusted net income stood at €1.39bn (vs. consensus €1.04bn). Production reached 1.8mboe/d (vs. consensus 1.81mboe/d) (Bloomberg)

Continental: Continental sees FY revenue about €44.5bn, 3Q revenue about €10.8bn and 3Q adjusted operating profit about €770mn (Bloomberg)

BASF: 3Q18 sales reached €15.61bn (vs. consensus €15.02bn), while 3Q18 adjusted EPS stood at €1.51 (vs. consensus €1.44) (Bloomberg)

Total: 3Q18 adjusted net income reached $3.96bn (vs. consensus $3.84bn). The group raised 2018 production growth target from “above 7%” to “about 8%”. Total will pay an interim dividend of €0.64 (Bloomberg)

WHAT TO WATCH TODAY: On the data front, focus should be on Germany and France’s consumer confidence indicators, while the US will announce 3Q18 GDP.

ECB President Draghi will deliver the Lamfalussy lecture at the National Bank of Belgium today. ECB Board member Benoît Coeuré will be giving a speech in France.

The ECB Survey of Professional Forecasters will be released today.

Moody’s may update its credit rating for France and Luxembourg today, while Fitch may review Latvia, the Netherlands, Ukraine and the UK. In the calendar of Standard & Poor’s we find EFSF, Italy and the UK. Finally, DBRS may review Sweden.

We will have MPC meetings in Russia and Colombia.

Colgate-Palmolive will report quarterly earnings before market opens.

Italy will sell up to €3bn of 0% 2020 and €1bn of 1.3% 2028 Linkers.

In Germany, on Sunday, the election in Hesse will take place.


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