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Patris Daily - 4 October 2018

4 Oct 2018

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GLOBAL MARKETS OVERVIEW:

Europe: All major European stock indices closed positive. Italy outperformed (+0.84%) and gained for the first time in 6 sessions. STOXX 600 rose by 0.50% with 18 out of 19 sectors closing positive. Telecoms (+1.17%) and Media (+1.17%) outperformed while Retail (-0.17%) was the only loser. Greek banking shares were down sharply, on investor fears regarding the stock of bad loans.

Eurozone sovereign debt market: 10-year EGB traded with a mixed tone. The periphery outperformed on the back of Italy. The 10-year BTPS yield fell by 13.9bps to 3.306%, reflecting signs that the government will lower the 2020-21 budget deficit, compared to the initial announcement. Bund and other core/semi-core have underperformed, reflecting the sharp rise in US yields, following the release of a strong ISM non-manufacturing index for September.

After 2.4% of GDP projected for 2019, the Italian government set deficit-to-GDP targets at 2.1% in 2020 and 1.8% in 2021. Debt to GDP is seen below 130% in 2019 (126.5% in 2021). The 2019 budget law will include citizens income, tax cuts for companies, increases for the lowest pensions and also a fund for “victims of banks”. The retirement pension age will be lowered starting in 2019. The Italian government targets real GDP growth at 1.5%, 1.6% and 1.4% for 2019, 2020 and 2021, respectively.

Portugal: PSI20 (+0.04%) closed positive for the first time in 4 sessions, with 10 out of its 18 members finishing the day with gains. Mota Engil (+1.86%), EDP Renováveis (+1.74%) and EDP (+1.62%) outperformed, while Pharol (-2.74%) and Jerónimo Martins (-3.59% to the lowest level since 2015) were hit the hardest.

FX & Commodities: The first future of Brent rose by 1.76% (-0.14% as we type). Gold declined by 0.50% (+0.11% as we type), while the euro fell by 0.61% against the US dollar on the back of strong US data and Chair Jerome Powell’s comments.

US Equity & Debt Markets: S&P500 finished the day little changed (+0.07%). 5 out of its 11 main sectors finished the day higher, with Energy (+0.82%) and Financials (+0.81%) being the main outperformers. Utilities (-1.23%), Consumer Staples (-1.06%) and Real Estate (-0.98%) were the main laggards, reflecting the sharp move on UST yields. 10-year UST yields rose by 11.9bps to 3.183% (vs. 3.199% as we type).

10-year UST yields jumped yesterday to multi year highs, on the back of the strong ISM non-manufacturing reading for September.

Chicago Fed President Charles Evans (a non-voter this year on the rate-setting FOMC) said he was comfortable with the expected path of rate hikes, including with a new 25bps rate hike in December. He recognised that inflation data has improved significantly, and said that he does not see any problem if inflation goes above 2% for some time (while inflation expectations could be a bit higher). He sees the labour market only a little below the sustainable jobless rate. On the economy, he stressed that activity is “firing on all cylinders”, and expects a good economic performance over the next few years. Nevertheless, he mentioned that trade concerns may hurt investment, while housing is soft.

On forward guidance, Charles Evans highlighted that the Federal Reserve should concentrate more explicitly and publicly on outcome-based policy settings such as threshold-based forward guidance. According to Charles Evans, monetary policy is still slightly accommodative.

Richmond Fed President Thomas Barkin (a voter this year on the rate-setting FOMC) stressed that inflation expectations are holding steady with the 2% target, while GDP growth is solid, jobless low and inflation on target. He said that the yield curve is amongst the factors he is carefully watching. Nevertheless, wage growth remains weaker than expected, as people are not switching jobs the way they used to. For Thomas Barkin, the main challenge is ensuring that growth continues. He still believes that the policy rate is below neutral, and supports a gradual path of rate hikes so long as data fits. According to Thomas Barkin, tariffs are not yet having a massive economic impact.

Philadelphia Fed President Patrick Harker (a non-voter this year on the rate-setting FOMC) said that employment numbers continue to surprise. He said labour market has very little slack left. He favours a total of three 25bps rate hike, but said he could support a December increase (if inflation move up before the end of the year). He sees some risks in the yield curve, which supports a gradual normalization of monetary policy. He expects unemployment to decline to 3.5% before rising. He sees the neutral rate around 3%, which the FOMC should reach in 2021. He worries about risks in EM and a potential acceleration in inflation. He said that he supports a slowdown in the pace of rate hikes.

Meanwhile, the spread between 2- and 10-year UST reached yesterday the highest reading since 7 August, which could be seen as reducing the worries of some Fed officials regarding the flattening of the US Treasuries curve.

Fed Chairman Jerome Powell said yesterday that he is very happy with the economy, as the unemployment is the lowest in 20 years and inflation right at the Fed’s 2% goal. Therefore, he stressed that the Federal Reserve is working to sustain the expansion. He still sees the Phillips curve framework as useful, and expects further gradual increases in wages. According to Jerome Powel, the economy is close to full employment. On monetary policy, he considered that the FOMC is balancing risks of moving too fast vs. too slow. He supported the view that rates are gradually moving back to normal, and that we are a long way from neutral rates (while interest rates are still accommodative). He even added that rates may go past neutral. Jerome Powell mentioned that we have not really seen any impact yet from trade disputes, while the Federal Reserve does not consider financial instability to be elevated now. Finally, he stressed that the Federal Reserve remains focused on its mandate.

Cleveland Fed President Loretta Mester (a voter this year on the rate-setting FOMC) said yesterday that it is still appropriate to raise rates gradually, and considered that the Federal Reserve is closer to a new phase of increased data dependence. She stressed that the pace of rate hikes will depend on inflation and employment, and that she not as concerned about the flat yield curve. According to Loretta Mester, there is not much evidence of a high risk on inflation that it will pick up precipitously. She thinks the risks around inflation are balanced.

Latin America: In Brazil, Ibope released a new 2018 presidential election poll. Jair Bolsonaro’s voting intentions grew from 31% to 32%. He is followed by Fernando Haddad, whose voting intentions increased from 21% to 23%. Ciro Gomes came third with 10%, followed by Geraldo Alckmin with 7% (vs. 8% before) and Marina Silva (4%). Jair Bolsonaro’s rejection rate fell by 2pp to 42%. He is followed by Fernando Haddad (37% vs. 38% before), Marina Silva (23%), Geraldo Alckmin (17%) and Ciro Gomes (16%). Second round simulations show Jair Bolsonaro in technical tie with Fernando Haddad (41% vs. 43%), Gerlado Alckmin (40% vs. 41%) and Marina Sila (43% vs. 39%). He would be beaten by Ciro Gomes (39% vs. 46%).

Asia: With Chinese domestic stocks still closed for holiday, most major equity indexes traded overnight in the red: TOPIX -0.09%, HANG SENG -1.75% as we type, HSCEI -2.28% as we type, TAIEX -1.33%, KOSPI -1.52% and S&P/ASX200 +0.49%.

OUR TAKE ON THE LATEST MACRO DATA:

US: September ISM Non-Manufacturing

The ISM non-manufacturing index rose by 3.1 points to 61.6 in September (vs. consensus 58.0), a new high for the expansion and the second highest reading in the history of the survey (since July 1997), pointing to a robust service sector. Activity increased by 4.5 points to 65.2, while new orders rose by 1.2 points to 61.6. The employment index increased by 5.7 points to 62.4, and stands now well above its three-month average (56.1).

The all-economy ISM index suggests a strong pace of expansion for the US economy.

September US ADP Employment Report

The ADP employment report for September showed private sector employment expanded by a solid 230k, above the consensus expectations of a 184k increase. The reading for August was revised to 168k, from 163k. The ADP series for goods producing employment growth showed employment rising by 46k, while service-providing employers added a net 184k to payrolls on the month. This report highlights upside risks to consensus expectations for a 180k increase in private sector payrolls in Friday’s employment report from the BLS. This report is also consistent with the upbeat message seen in other labour market indicators.

Eurozone: August Retail Sales

Euro area retail sales fell by 0.2%m/m in May (vs. consensus +0.2%m/m), following the 0.6%m/m decline recorded in April. The July/August average stands -0.3% below the 2Q18 average, which suggest a weak trend in retail spending.

GLOBAL HIGHLIGHTS:

Portugal: Novo Banco disclosed that losses recorded in 1H18 should trigger the activation of the Contingent Capitalisation Mechanism, resulting in a compensation of €726mn to be paid by the resolution fund next year. According to Novo Banco, the figure may change during 2H18 (Novo Banco, Negócios)

EDP: The Company will build a 5MW solar park in the city of Januária, on the state of Minas Gerais, which will provide renewable energy to Banco do Brasil (Jornal Económico)

Spain: According to IMF, the economic cycle is maturing and several downside risks are clouding the medium-term outlook. It is critical to strengthen the economy’s resilience to withstand shocks. Real GDP growth is projected to moderate to about 2.7% in 2018 and 2.2% in 2019, still above the euro area average. Downside risks to the economy are building: Externally, they include sudden changes in investors’ risk appetite, escalating global protectionism, and weakening conditions in emerging economies. Domestically, they still include pressures to reverse reforms and continued procyclical fiscal policy (IMF)

CaixaBank: The bank is seeking to sell Torre Sevilla for at least €265mn, according to El Confidencial (Bloomberg)

Italy: Saipem won four drilling contracts in South America, adding to recent wins in Africa, the Middle East and Europe (Bloomberg)

Italy: Italian government intends to play a critical and proactive role in expanding the monetary union and improving EU policies, Finance Minister Giovanni Tria said at an event in Rome. According to Tria, member nations’ economic imbalances must be corrected in a symmetrical fashion, involving more the nations that now have elevated current-account and budget surpluses (Bloomberg)

Italy: Italy to set aside extra €15bn for investments in the next 3 years. Government to back investments plans by state-controlled companies. (Bloomberg)

Naturgy: G3T and BNC GODIA agree to vote on Naturgy AGM in line with Criteria’s vote, the Company said in a regulatory filing (Bloomberg)

UK: The UK Prime Minister, Theresa May, has insisted that Britain is not afraid to leave the EU without a deal if necessary. In her speech to her party conference yesterday, Theresa May admitted that a no deal situation would introduce “tariffs and costly checks” at the UK border (Newstalk)

WHAT TO WATCH TODAY:

Mexico’s policy meeting will take place today. The central bank is likely to maintain interest rates at 7.75%. We will have regular auctions from Spain and France. Spain will sell today SPGBs October 2021, July 2028 and January 2029, as well as SPGBei 2023. France will sell OATs 0.75% 2028 and 2% 2048.

An advocate general of the European Court of Justice will issue an opinion on the legality of the ECB’s Public Sector Purchase Program in the form of a non-binding statement.

ECB Governing Council member Ewald Nowotny will speak about the financial market development at a conference.

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The information and opinion contained in this report was prepared by PATRIS - SOCIEDADE CORRETORA, SA ("Patris"), which is part of the group of companies whose holding is PATRIS INVESTIMENTOS, SGPS, SA (Patris Group), listed in Alternext, which holds 100% of the share capital and voting rights of REAL VIDA SEGUROS SA which, in turn, holds 100% of the share capital and voting rights of Patris.

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