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6 Sep 2018
GLOBAL MARKETS OVERVIEW:
Europe: The session was negative for the major European stock indices, with France (-1.54%) and Germany (-1.39%) underperforming. STOXX600 finished the day 1.09% lower. Banks (+0.37%) was the only sector that closed positive. Technology (-3.04%) and Oil & Gas (-1.71%) were the biggest losers.
British and German governments were said to have abandoned key BREXIT demands to ease the path for the UK to reach a deal with the EU.
Eurozone sovereign debt market: with the exception of Italy (-8.4bps to 2.923%, reflecting the more constructive view of markets on Italian fiscal policy stance), 10-year EGB increased yesterday. 10-year Bund yields closed 2.4bps higher at 0.377%.
According to the Italian press, Luigi Di Maio, Deputy Prime Minister and leader of 5 Stelle, backs the nationalization of Autostrade, while the Abertis transaction is expected to proceed as planned. Meanwhile, Lega and 5 Stelle are reported to seek a 2019 budget deficit between 2.0% and 2.5% of GDP, but Finance Minister Giovanni Tria is said to seek a deficit up to 1.5%-1.8% of GDP.
ECB Executive Board Member Benoît Coeuré said in an interview that Greece shouldn’t expect that building trust amongst investors will be easier than convincing its bailout creditors. He sees investor confidence as relying on continued implementation of reforms and being able to avoid backtracking on past improvements. Reducing bank sector’s NPLs should be top of the list of priorities for Greece, as the quality of Greek banks’ capital is lower than elsewhere in Europe. Finally, he mentioned that once Greek government bonds regain investment grade status, they could be included in all ECB programmes.
Portugal: PSI20 lost 1.39%. Semapa (+1.14%) and BCP (+0.04%) were the only members that closed with gains. Sonae Capital (-5.66%), Mota-Engil (-4.32%) and Galp (-3.66%) were hit the hardest.
FX & Commodities: The first future of Brent finished the day falling 1.15% (-0.17% as we type). Gold closed 0.44% higher (+0.07% as we type). EUR/USD finished the day rising 0.41% (-0.04% as we type).
10-year UST yields have been trading around 3% over the last few months. Meanwhile, the ratio between copper and gold has declined from its highs recorded in June.
The MSCI Emerging Markets Currency Index fell to the lowest levels since May 2017.
US Equity & Debt Markets: S&P500 lost 0.28% on Wednesday. Consumer Staples (+1.27%) and Utilities (+1.18%) registered the strongest gains, while Technology (-1.50%, reflecting the news flow coming out of the latest congressional hearings on misinformation and election interference) and Consumer Discretionary (-1.10%) were hit the hardest. 10-year UST yields were little changed at 2.903%.
St. Louis Fed President James Bullard (a non-voter this year on the rate-setting FOMC) said that markets are generally more dovish that latest FOMC forecasts, which suggests that monetary policy has reached a neutral level or is even already somewhat restrictive.
James Bullard considers that more hiking could unnecessarily raise recession risk. He stressed that financial stability risks are moderate and that economic recovery could have much further to go.
James Bullard sees financial market signals such as the slope of the yield curve and market-based inflation expectations as important signals that can help the FOMC to identify the neutral policy rate and possibly extend the US economic expansion.
According to James Bullard, financial market information suggests the policy rate path in the June 2018 SEP is too hawkish for the current macro environment.
He sees the FOMC revisiting the issue of the balance sheet and expects the yield curve to invert later this year or in 2019. He considers that the FOMC has been preemptive against inflation pressure.
While the backdrop for the US economy remains inflationary, the 10-year breakeven rate has been broadly stable over recent months, probably reflecting increasing concerns on spillover from EM market turmoil into the US.
Latin America: The 3Q18 Monetary Policy Report released yesterday by the central bank of Chile reiterated the view that it sees as less necessary to maintain the current monetary policy stimulus given the evolution of the macro backdrop. The Bank now projects real GDP growth at 4.0%-4.5% this year (vs. 3.25%-4.00% previously). The Bank also upgraded its estimate for 2018 inflation to 3.1%, from 2.8% (from 2.3% to 2.7% for core inflation), reflecting the weaker currency.
In Brazil, CNI-Ibope released the first poll since the Electoral Court blocked Lula’s candidacy. Jari Bolsonaro now has 22% of voting intentions vs. Marina Silva and Ciro Gomes with 12%, followed by Geraldo Alckmin (9%) and Fernando Haddad (6%). Jair Bolsonaro continues to lead the rejection list, as he was appointed by 44% of the voters as the candidate they wouldn´t vote by any means, followed by Marina Silva (26%), Fernando Haddad (23%), Geraldo Alckmin (22%) and Ciro Gomes (20%). In second-round scenarios, Jair Bolsonaro would lose against any of the main contenders, with the exception of Fernando Haddad, which he is in a technical draw.
In Argentina, press reports suggest that the IMF has made progress in its talks with Argentine Economy Minister and central bank Deputy Governor. In Colombia, annual core inflation slowed to 3.10%y/y in August, from 3.12%y/y in July, in line with market expectations.
Asia: Stocks in the region traded with a negative tone overnight, as EM turmoil continues to weigh on sentiment: TOPIX -0.74%, HANG SENG -1.38% as we type, SHANGHAI COMPOSITE -0.47%, HSCEI -1.08% as we type, TAIEX -0.64%, KOSPI -0.18% and S&P/ASX200 -1.12%.
OUR TAKE ON THE LATEST MACRO DATA:
Eurozone: July retail sales
The report disclosed by Eurostat showed that retail sales declined by 0.2%m/m in July in volume terms (vs. consensus -0.1%m/m). The annual rate of change slowed to 1.1%y/y in July, from 1.5%y/y in June. The July reading is 0.1% above the 2Q18 average suggesting a soft start for the quarter.
Portugal: Cristina Casalinho, head of Portugal’s government debt agency, doesn’t expect any significant impact from the end of the ECB’s asset purchase programme (Bloomberg)
Portugal: According to UTAO, the Portuguese Parliament Technical Unit for Budget Support, the budget deficit stood at 1.6% of GDP in 1H18, in its analysis of the budget execution until July, reflecting the loan made by the Portuguese State to the Resolution Fund due to Novo Banco. According to UTAO, the 0.7% of GDP target for this year is not at risk (Negócios).
Santander: According to VozPopuli, Santander is in advanced negotiations with Cerberus to sell real estate assets for around €3bn. The same sources say that assets are valued at €5.1bn and account for half the real estate Santander holds from Spanish crisis (Bloomberg)
IAG: The group traffic measured in revenue-passenger-kilometers rose by 7.0% in August, while the capacity measured in available seat-kilometers rose by 6.5%. Total passengers in August stood at 11.42mn, 7.2% higher than in the same month of 2017 (Bloomberg)
Italy: Deputy Premier Di Maio said that the upcoming budget law will keep finances in order and that flat tax and citizens´ income are not mutually exclusive (Bloomberg)
France: Finance Minister Bruno Le Maire said that economic uncertainties hanging over France are at their highest for several years (Bloomberg)
Vivendi: the company is deeply concerned by the disastrous management of Telecom Italia since Elliott took control of the company´s board of directors following the AGM that took place on 4 May. Meanwhile, the chairman of the Telecom Italia rejected the accusations issued by Vivendi on the company’s operations (Bloomberg)
WHAT TO WATCH TODAY: US ISM non-manufacturing index for August is the main release of the day on the economic front. In Brazil, we will get the release of IPCA inflation data for August. In Mexico, we will get the gross fixed investment indicator.
We will have the closing of the public comment period regarding the likely imposition of US tariffs on $200bn in Chinese exports.
EGB supply is expected to come from Spain (0.35% Jul 2023, 0.3% I/L Nov 2021, 1.4% Jul 2028 and 2.7% Oct 2048 bonds) and France (0.75% Nov 2028, 1.5% May 2031, 1.25% May 2034 and 1.75% Sep 2066 bonds).
L Brands releases its August sales and Broadcom publishes its quarterly earnings, both after market close.
Destatis released this morning a 0.9%m/m decline in German factory orders, well below consensus expectations (+1.8%m/m), following the 4.0%m/m fall recorded in June. The annual rate of change stood at -0.9%y/y in July, after -0.8% in June.
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