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Patris Daily - 5 October 2018

8 Oct 2018



Europe: All major European stock indices closed negative. France (-1.47%) and UK (-1.22%) underperformed, while Germany (-0.35%) was the least affected by the negative tone. STOXX 600 lost 1.08%, reaching its lowest level since 19 September, with only 3 out of 19 sectors closing positive. Insurance (+0.96%) and Banks (+0.38%) outperformed, while Personal & Household Goods (-3.02%) and Real Estate (-2.88%) were the biggest losers.

Eurozone sovereign debt market: 10-year EGB yields rose across the region, with core countries such as France and Germany underperforming. French and German yields increased across the curve, with 10-year OATs up by 5.5bps to 0.870%, and 10-year Bunds higher by 5.6bps to 0.529%.

An advocate general of the European Court of Justice issued yesterday a non-binding opinion on the legality of the ECB’s PSPP programme. He considered that the programme does not infringe the prohibition of monetary financing and does not exceed the powers of the ECB. Therefore, the Court of Justice should rule that the decision of the ECB establishing a program for the purchase of government bonds on the secondary markets is valid.

ECB Governing Council Member and Bank of Finland’s President Olli Rehn said that the ECB should normalise its monetary policy at a measured pace to prevent any unforeseen negative effects. In the report published yesterday, he added that the euro area still needs a stance supportive of employment and growth to ensure that inflation remains on a path consistent with the price-stability objective.

ECB Governing Council and Central Bank of Ireland’s Governor Philip Lane said yesterday in parliament that the ECB may extend its portfolio duration in reinvestments. He added that models understate BREXIT’s potential negative impact.

ECB Executive Board Member Benoît Coeuré said yesterday that policymakers see a gradual build-up in price pressure on the back of stronger growth and rising employment. He added that the euro-area economy is in the best shape it has been in for many years, although regional divergences still exist.

Elsewhere, and according to unidentified sources, the ECB might consider conducting “twist-like” reinvestment of maturing debt portfolios next year. Moreover, the ECB may stick to current capital-key shares rather than aligning QE portfolio with new shares as capital key is due for rebalancing. Nonetheless, a Fed-style Operation Twist is not being evaluated, but there could be less rigid restrictions placed on what kind of bonds to be repurchased. According to the same sources, the next version of the forward guidance should signal policy will remain extremely accommodative for a long time and will continue to be conditional on data. Officials consider that downside risks are increasing, including trade headwinds, a potential slowdown in emerging markets, BREXIT and Italy’s growing budget deficit. Finally, MNI said that the ECB enhanced guidance should give an indication of ECB thinking as to how it could respond to events over a one to two-year horizon.

Spain sold yesterday SPGBs €885.4mn 6% January 2029 (bid to cover ratio: 1.96), and SPGBs €2,718bn 0.05% January 2021(bid to cover 1.77, average yield 0.126%).

Portugal: PSI20 (-0.76%) closed negative for the third time this week, following all other major European stock indices, with only 3 out of 18 members closing positive. The main Portuguese Stock Index reached its lowest level since 11 September. Altri (+5.13%) was the big winner, while EDP Renováveis (-2.05%), BCP (-2.20%), Sonae (-2.47%) and Pharol (-4.41%, reaching its lowest level since July 2016) were the big losers.

According to data released by Bank of Portugal, in August, the annual rate of change of loans granted to non-financial corporations stood at -1.0%y/y. This represents an increase of 0.3 percentage points from the previous month. The ratio of overdue loans of non-financial corporations reached 12.5%, -0.1pp vs. the previous month. The annual rate of change of loans granted to households stood at 0.7%y/y, up by 0.2pp from July. The annual rate of change of loans for house purchase remained unchanged compared with the previous month at -1.0%y/y, while the annual rate of change of loans for consumption and other purposes increased by 0.4pp to 7.4%. The ratio of overdue loans of households remained unchanged from July at 3.9%.

FX & Commodities: The Euro gained 0.31% against the US Dollar. This was the first gain over the last seven sessions. The first future of Brent declined by 1.98% (+0.58% as we type), while gold increased by 0.21% (-0.21% as we type).

A strong US Dollar remains a key headwind to gold prices.

US Equity & Debt Markets: S&P500 finished the day 0.82% lower, the highest daily decline since the end of June. Only 2 of the major 11 industry groups posted gains at the end of the day: Financials (+0.71%) and Utilities (+0.55%). Technology (-1.79%), Consumer Discretionary (-1.60%) and Communications (-1.48%) were the main laggards. 10-year UST yields were little changed at 3.188% (3.207% as we type). Nasdaq underperformed (-1.81%).

Latin America: In Brazil, Datafolha released a new 2018 presidential election poll. Jair Bolsonaro’s voting intentions increased to 35% (vs. 32% before). He is followed by Fernando Haddad with 22% (vs. 21% on Tuesday). Looking only at valid votes, Jair Bolsonaro has 39% (vs. 25% for Fernando Haddad). Ciro Gomes came out third (11%), followed by Geraldo Alckmin (8%) and Marina Silva (4%). Jair Bolsonaro continues to lead the rejection list with 45% (unchanged vs. the previous poll), followed by Fernando Haddad (40% vs. 41% before), Marina Silva (28%), Geraldo Alckmin (24%) and Ciro Gomes (21%). Second round simulations show Jair Bolsonaro in a technical tie with Fernando Haddad (44% vs. 43%). In Mexico, the central bank MPC decided yesterday to leave the policy rate unchanged at 7.75%, in line with market expectations. One official from the Bank dissented for a 25bps rate hike. The MPC said that it will continue to watch factors that could impact core inflation. It added that monetary policy will be adjusted to secure the convergence of inflation to the 3% target. In Chile, the government increased 2018 real GDP forecast from 3.8% to 4.1%. The fiscal deficit is seen at 1.9% of GDP this year. Consumer prices to rise by 3%. For 2019, the government sees real GDP growth at 3.8% and CPI inflation at 3%.

Asia: With Chinese domestic indices still closed, most of the main equity indexes traded in the red, following the negative sentiment in US stocks: TOPIX -0.47%, HANG SENG -0.14% as we type, HSCEI -0.20% as we type, TAIEX -1.88%, KOSPI -0.31% and S&P/ASX200 +0.15%.

Yields at the long-end of the yield curve have also been rising in Japan.


US: Initial Jobless Claims

Yesterday’s jobless report was once again favourable, despite some temporary disruptions that could have been caused by Hurricane Florence. Initial jobless claims fell by 8k to 207k during the week ending on 29 September (vs. consensus 215k), while continuing claims dropped by 13k during the week ending 22 September to 1650k (vs. consensus 1665k).


Portugal: Portuguese banks showed “consistent progress” in terms of asset quality and profitability in their 1H18 results as they continue to reduce non-performing loans, DBRS said (Bloomberg)

Sonae: The price range for the IPO of Sonae MC has been set at €1.40 to €1.65 per share, implying a base offer size of approximately €304mn to €359mn. The free float of Sonae MC is expected to amount to 21.74% before exercise of the overallotment option and to 25.00% if the over-allotment option is exercised in full. The listing and first day of unconditional trading of the shares on Euronext Lisbon is expected to take place on 23 October (Sonae’s filing on CMVM)

NOS: The group disclosed the presentation regarding its Transformation Plan. The plan is expected to address c.45% of the total 2017 OPEX (€455mn) (NOS’ filling on CMVM)

CaixaBank: A Spanish judge accepted a complaint by two shareholders and will investigate irregularities in acquisition of Portugal’s BPI by CaixaBank. The judge will investigate allegedly irregular operations surrounding share swap between CaixaBank and Criteria in 2015 as well as €400mn loan given to Angolan bank BFA (Bloomberg)

Italy: Italian Finance Minister Tria said governments must provide reasons for not complying with EU rules (Bloomberg)

France: INSEE cuts France 2018 GDP growth forecast to 1.6% vs 1.7% before, and unemployment rate is said to reach 8.9% at end-2018. Also, according to INSEE, France’s economic rebound in the second half the year won’t be quite strong enough to meet targets (Bloomberg)


All eyes will be on the US September Job Report.

Fed’s Bostic will speak today at the Annual Financial Literacy and Economic Education Conference in Atlanta. ECB’s Klaas Knot will speak at a student conference in Groningen, while ECB’s Vice President Luis de Gindos gives a lecture at the University Carlos III in Madrid.

The first round of Brazil’s presidential and parliamentary elections takes place on Sunday. Jair Bolsonaro and Fernando Haddad are leading for the first round.

Standard & Poor’s may update its credit rating for France. Moody’s may update the credit rating for Ireland and Spain (Baa1/Stable).


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