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Patris Daily - 6 July 2018 part 1

6 Jul 2018

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Europe: The main European indices closed the session higher, with the German DAX (+1.19%) outperforming. STOXX600 rose 0.41%, with 14 of its 19 main sectors closing with gains. Automobiles & Parts increased the most (+3.41%) as the US ambassador in Germany was reported to have proposed to the European Union a non-tariff plan on cars. However, Merkel said later in the day that she is only open to talks that conform the global rules. Meanwhile, China is said to weigh further cuts in electric-car subsidies.

Eurozone sovereign debt market: mixed session in the region, with the periphery registering higher 10-year yields on the day (Italy +7.2 bps, Portugal +5.3 bps, Spain +3.0 bps and Greece +5.8 bps), while core recorded slight declines (France -0.4 bps and Germany -0.7 bps).

The Spanish government sold €0.961bn of 2030 bonds (with an average yield of 1.58% and a bid-to-cover of 1.92x), €1.565bn of 2021 bonds (with an average yield of -0.098% and a bid-to-cover of 2.22x) and €1.307bn of 2041 (with an average yield of 2.216% and a bid-to-cover of 1.27x).

ECB Executive Board member and chief-economist Peter Praet reiterated yesterday in Brussels that patience, prudence and persistence is still needed when implementing ECB monetary policy.

 

At a business summit in Newcastle, BoE Mark Carney said that he sees some signs that trade spats are hurting global growth. He added that global protectionism will have BREXIT-like effects, by dampening growth and stoking inflation. On the domestic economy, Mark Carney considered that he’s more confident that 1Q18 slowdown was temporary, as the UK economy evolved as expected in May. Finally, he stressed that the MPC will have enough information to make a decision at its August meeting.

ECB Executive Board member Yves Mersch said yesterday in a speech that a central fiscal capacity should be designed to increase the euro area’s ability to counter severe area-wide recessions, thereby supporting monetary policy. He added that any fiscal capacity should come with appropriate incentives for sound fiscal and economic policymaking. On the Franco-German proposal, Yves Mersch considers that it does not sufficiently counteract moral hazard. Finally, Yves Mersch said that the recent Franco-German proposal to introduce single-limb collective action clauses and moves to align the roles of the ESM and the IMF in debt restructuring negotiations are sensible first steps towards building a more predictable framework for the orderly resolution of debt crisis.

ECB Governing Council member and Germany’s Bundesbank president Jens Weidmann said at a conference in Austria that a Eurozone budget does not necessarily mean an increase of the overall size of fiscal transfers. He provided support towards further progress on a capital-markets union, in order to foster private risk-sharing within Europe.

ECB Governing Council member and Austria’s central bank governor Ewald Nowotny said that risks to euro area’s economic outlook are primarily political and include protectionist trade policies, as well as political uncertainty in Turkey and Italy. He added that a trade war could turn into a currency war.

Portugal: PSI20 rose 0.98% on Thursday. Altri (-0.23%) and Ibersol (-1.27%) were the only members of the index that closed in the red. Mota-Engil (+5.44%), EDPR (+2.00%) and Semapa (+1.58%) registered the strongest gains.

FX & Commodities: oil prices traded lower, with the first future of Brent down by 1.09% (+0.06% as we type). Gold rose 0.23% during the session. EUR/USD closed higher +0.29% (+0.20% as we type). U.S. President Donald Trump accused the OPEC of driving gasoline prices higher and urged the oil producer group to do more to reduce prices.

US Equity & Debt Markets: S&P500 finished the day 0.86% higher, with 10 of its 11 main sectors closing positive. Technology (+1.47%) and Consumer Staples (1.46%) registered the strongest gains. 10-year UST yields finished the day little changed at 2.830%.

The Federal Reserve released yesterday the Minutes for the 12/13 June FOMC meeting. Most Fed officials saw intensified risks around trade policy, as many business contacts were concerned by risks from a trade war. Many Fed officials also saw downside risks from emerging markets and Europe, while a few Fed officials saw US fiscal policy as an upside risk.

Nevertheless, the Minutes showed broad support for gradual rate hikes. The Federal Reserve sees some businesses passing higher costs to consumers, although a number of Fed officials considered that it is premature to declare inflation victory. Some officials highlighted that running the economy too hot increases risks.

The Committee sees gradual rate hikes as needed amid a very strong economy, while recent price moves support the outlook of reaching the 2% inflation target, with economic growth supported by fiscal policy.

A number of Fed officials said it was important to watch the slope of the yield curve. Finally, the Minutes showed that the FOMC discussed the “remains accommodative” language in the statement.

Latin America: In Mexico, the consumer confidence rose from 88.3 in May to 89.8 in June (vs. consensus 88.7), continuing the April and May rebound. Consumers were more optimistic about the outlook for their own situation and the overall economy but were more cautious about their current situation. Despite the positive evolution over recent months, overall consumer confidence remains relatively soft. In Chile, the proxy for monthly real GDP expanded by 4.9% y/y in May (vs. consensus 4.0% y/y). Non-mining GDP grew 4.7% y/y in May, following 6.2% y/y in April. Sequentially, real GDP expanded by 0.7% m/m, more than offsetting the 0.3% decline recorded in April.

Asia: stocks in the region erased earlier losses, as investors considered that the implementation of US tariffs on Chinese imported goods were already priced in: TOPIX +0.92%, HANG SENG +0.19% as we type, SHANGHAI COMPOSITE +0.46% as we type, HSCEI -0.01% as we type. TAIEX -0.03%, KOSPI +0.68% and S&P/ASX200 +0.91%.

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