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Patris Daily - 27 August 2018

27 Aug 2018

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GLOBAL MARKETS OVERVIEW:

Europe: Main European stock indices rose on Friday, with Italy outperforming (+0.65%). Stoxx 600 closed 0.05% higher, with 9 out of 19 sectors closing positive. Basic Resources (+1.49%) and Oil & Gas (+0.90%) outperformed, while Personal & Housing Good (-0.76%) was hit the hardest.

Eurozone sovereign debt market: 10-day EGB yields rose across the board on Friday. Italy underperformed, closing 6bps higher at 3.138%.

Portugal: PSI20 gained 0.12% on the session, with 6 out of 18 members closing positive. Pharol (+6.1%) and Jerónimo Martins (+1.90%) outperformed, while Mota-Engil (-1.93%) was hit the hardest.

FX & Commodities: The first future of Brent finished the day +1.46% higher (-0.11% as we type). Gold closed 1.65% higher (-0.06% as we type). EUR/USD finished the day gaining 0.71% (-0.17% as we type).

US Equity & Debt Markets: S&P500 increased 0.62% on Friday, closing at a new historical high. With exception of consumer staples (-0.17%), all the remaining 10 major sectors closed positive on the day. Materials (+1.22%) and Technology (+1.10%) outperformed.

Federal Reserve Bank of St. Louis President James Bullard (a non-voter in 2018 on the rate-setting FOMC) said on Friday that the Fed shouldn’t knowingly invert the yield curve. He added that there isn´t much inflation pressure, which means that the current environment isn´t a situation where the Federal Reserve have to be preemptive.

According to James Bullard, sluggish productivity is hampering wage growth. He recognised that the US economy is having a good 2018, mas pointed to a possible slowdown in 2019 and 2020.

He added that the Fed is at or very close to neutral interest rates. This support a gradualist approach in the current environment, as inflation has been very low.

Cleveland Fed President Loretta Mester (a voting member this year on the rate-setting FOMC) said that she has been increasing her growth forecast for 2018 to around 3% and expects the central bank to continue its gradual interest-rate increases. She sees the neutral interest rate at 3%. Loretta Mester considered that 3Q18 real GDP growth is coming in strong so far, on the back of fiscal stimulus. Despite recognising that some asset values are elevated, she said that she doesn´t see signs of an overheating economy.

According to Loretta Mester, the Fed is at or near its goals of price stability and maximum sustainable employment, yet monetary policy remains accommodative. She considered that the US economy is a little beyond full employment.

Loretta Mester acknowledged that firms are concerned about tariffs, but stressed that they have not reacted strong to tariffs so far. She suggested that tariffs over time can impact inflation. On the yield curve, she said that it may not be signaling what it did in the past. Loretta Mester sees reasons to think longer-run rates could be lower in the future.

Dallas Fed President Robert Steven Kaplan (a non-voter in 2018 on the rate-setting FOMC) showed concerns that fiscal stimulus tailwind could turn into headwind in the future. In the near-term, he sees the US economy outlook for the next 6-12 months as being very strong. Regarding the yield curve, Robert Steven Kaplan sees the long-end of the curve as signaling that medium-term economic growth will be weaker, while the short-end reflects rate-hike expectations. He added that tariffs have not yet impacted significantly the US economy.

Federal Reserve Chairman Jerome Powell supported on Friday in his speech at the Fed’s annual policy symposium in Jackson Hole the idea of further gradual increases in interest rates as the best way to steer between the risks of doing too much harming to the economy or doing too little and letting it overheat.

He expects the US economy to continue to deliver a strong performance, on the back of solid household and business confidence, healthy levels of job creation, rising incomes and fiscal stimulus.

On inflation, Jerome Powell said that while it recently moved up near 2%, there is no clear sign of an acceleration above that level, which suggest that the risk of overheating is not elevated. Regarding the monetary policy, he mentioned that the ongoing normalisation process has moved the policy stance gradually closer to the FOMC’s rough assessment of neutral. He added that, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.

Atlanta Fed President Raphael Bostic (a voting member this year on the rate-setting FOMC) said that he is watching to see whether inflation accelerates, as firms are starting to feel wage pressure and the impact of tariffs on inputs. He considered that a lot of businesses are holding back on capex because of tariffs. On monetary policy, Raphael Bostic said that “the slow, steady, take on action and stop and see how the markets respond approach makes a lot of sense”. According to Bostic, a pause would allow the FOMC to wait until the committee gets a signal that the economy is going in the desired direction. He added that the yield curve is one of the many signals that the FOMC looks at.

Latin America: In Mexico, real GDP increased 2.6%y/y in 2Q18 (vs. 2.7% in the first estimate), after 1.4%y/y in 1Q18, reflecting favourable calendar effects. Sequentially, real GDP declined 0.2%q/q (vs. -0.1%q/q in the first estimate), following a 1.0%q/q rise in 1Q18. Meanwhile, Mexico’s economy minister confirmed breakthroughs on autos and energy issues. Press reports suggest that a NAFTA deal between Mexico and the US could be reached as soon as today. In Colombia, the central bank co-director Zarate said that the real neutral interest rate has risen slightly. He suggested that it could be close to 1.75% (vs. 1.4% previously). On GDP, Zarate believes that 2H18 will be better, with growth close to 3%. He considered capital flows are the most important risk that all emerging economies including Colombia face. According to Zarate, a current account deficit of 2%-3% is a level that makes the economy less vulnerable. The central bank sees inflation ending 2018 a little above 3%, and sees potential GDP growth between 3.3% and 3.5%. Zarate does not see as foreseeable any additional movements of the interest rates.

Asia: stocks traded with a positive tone in the region, following the new historical closing high recorded by the S&P500: TOPIX +1.16%, HANG SENG +2.15% as we type, SHANGHAI COMPOSITE +1.89%, HSCEI +2.80% as we type, KOSPI +0.27%, TAIEX +0.86% and S&P/ASX200 +0.34%.

CFETS/PBOC said in a statement that since August most banks in the CNY fixed panel have been adjusting the countercyclical factor to mitigate the CNY sentiment. Markets sees this instrument as a way for the Chinese authorities to communicate their CNY guidance.

OUR TAKE ON THE LATEST MACRO DATA:

US: July Durable Goods Orders (Preliminary):

US durable goods orders declined by 1.7%m/m in July (vs. consensus -1.0%m/m), after +0.7%m/m in June. Excluding transportation equipment, durable goods orders rose 0.2%m/m, also weaker than expected (+0.5%m/m), following a 0.1%m/m rise in the previous month. Core capital goods orders rose by 1.4%m/m, higher than consensus expectations (+0.5%m/m), after +0.6%m/m in June, while shipments of core capital goods rose by 0.9% (vs. consensus +0.3%m/m), after +0.9%m/m in June, suggesting positive momentum for equipment investment.

The July reading for core capital goods orders is 2.1% above 2Q18 average (+1.6% for shipments).

GLOBAL HIGHLIGHTS:

Siemens: The company denied the report that it may cut 20k jobs as part of its Vision 2020+ strategy (Reuters)

Dia: Spanish supermarket chain dismissed CEO Ricardo Curras amid the retailer’s weak stock performance and ahead of a new strategic plan (Bloomberg)

EON: Fitch affirmed the company´s rating at BBB+ and raised the outlook from negative to stable (Bloomberg)

Europe: Air France-KLM Group and British Airways, said they’ll suspend services to Iran by the end of September, citing the reduced commercial viability of the route in the wake of the latest US sanctions (Bloomberg)

Unicredit: The bank has hired Rothschild to work on a potential merger with Societe Generale (Bloomberg)

Italy: The Italian government foresees a consortium for Genoa bridge reconstruction project that would include both Atlantia’s Autostrade unit and CDP-controlled companies including Fincantieri (Bloomberg)

Italy: Deputy Premier Luigi Di Maio accused his European partners of not taking in migrants arriving on Italy’s coasts and threatened to stop financial contributions to the European Union (Bloomberg)

Italy: Italy Deputy Prime Minister said the rehearsal of an economic attack versus Italy has already started (Bloomberg)

BPI: An independent auditor will determine the minimum compensation that will be offered to BPI shareholders, for the bank´s exit from the stock exchange (Negócios)

WHAT TO WATCH TODAY: IFO business climate for August will be released in Germany. In the US we will get Dallas Fed manufacturing activity index for August.

Brazil will publish current account balance data for July, while Mexico will release trade balance for the same month.

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