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5 Nov 2018
GLOBAL MARKETS OVERVIEW:
Europe: Major European stock indices traded with a mixed tone last Friday. Italy (+1.07%) outperformed, while the UK (-0.29%) and Portugal (-0.70%) underperformed. STOXX600 closed positive (+0.28%) for the 5th session in a row, with 13 out of 19 sectors closing positive. Auto & Parts (+1.60%) and Media (+1.35%) outperformed, while Oil & Gas (-0.72%) and HealthCare (-0.72) were the main laggards.
Eurozone sovereign debt market: 10-year EGB traded with a mixed tone on Friday. Italy and Portugal outperformed, while Greece, France and Germany underperformed. 10-year BTPS yields were down 6bps to 3.315% and 10-year PGBS yields were marginally down 0.1bps to 1.873%. On the other hand, 10-year GGBs yields were up 5.4bps to 4.239%, 10-year OATs yields were up 2.5bps to 0.779% and 10-year Bunds yields were up 2.8bps to 0.425%.
The 2-year Italy-Spain bond spread has declined over the last few weeks, following the rating decisions by Moody’s (Baa3/Stable) and S&P (BBB/Negative).
However, the 10-year spread between the two countries remains close to the high recorded at the end of 2011.
ECB Executive Board member Peter Praet stressed in an interview that there is a need for more European integration, which will take time. He sees European banks mainly exposed to the national economy and to national debt. Peter Praet added that fiscal profligacy can lead a country into crisis.
Italian Deputy PM Luigi Di Maio told to the FT in an interview that budget plans will not change under EU pressure.
Portugal: Despite the positive tone seen across most of the region, PSI20 finished the day 0.70% lower, with 11 out of 18 sectors closing negative. BCP gained 1.2% and extended the rally seen over the previous sessions. The bank will report 3Q18 results on Thursday (after market close). Semapa (-3.3%) and Altri (-2.7%) were the main laggards.
FX & Commodities: The euro fell by 0.18% against the US dollar (-0.04% as we type). Gold finished the day little changed, -0.04% (+0.02% as we type), while the first future of Brent declined by 0.08% (-0.32% as we type).
US Equity & Debt Markets: S&P500 finished the day 0.63% lower (Nasdaq Composite -1.04%). Only 2 of the 11 major industry groups registered gains: Consumer Discretionary (+0.41%) and Financials (+0.01%). Technology (-1.89%) was the main laggard. 10-year UST yields rose by 8.2bps to 3.213%, following the release of the October employment report. 2s10s increased by 2bps to 31bps on Friday.
Latin America: In Colombia, the central bank published on Friday the minutes from the 26 October MPC meeting. At that meeting, the MPC left the policy rate unchanged at 4.25% in a unanimous vote, in line with consensus expectations. The minutes showed the MPC remains uncertain on the expected economic recovery, and sees inflation converging to the target. The minutes noted the recent COP depreciation.
Asia: Stocks traded overnight with a negative tone: TOPIX -1.11%, HANG SENG -2.08%, SHANGHAI COMPOSITE -0.41%, HSCEI -1.34%, TAIEX -0.17%, KOSPI -0.91% and S&P/ASX200 -0.53%.
In China, Caixin PMI services fell from 53.1 in September to 50.8 in October (vs. consensus 52.8). This is the lowest level in 13 months. The new business component fell to the lowest level since late 2008.
BoJ’s Kuroda said in a speech that it is necessary to continue the powerful easing persistently. He recognised the inflation improvement compared to 5 years ago (but not like the US or Europe). Therefore, he considered that the large deflation policy is no longer appropriate. He said that he was aware that the monetary policy causes side effects on banks, which the BoJ will try to continue to minimize. On the economy, he highlighted higher risks from abroad recently.
OUR TAKE ON THE LATEST MACRO DATA:
Eurozone: October Markit Manufacturing PMI (final):
Key conclusions: The Markit manufacturing PMI for the euro was revised slightly downwards (from 52.1 to 52.0), which put the decline recorded in October in 1.2 points. This is the lowest reading since August 2016. The September/October average stands at 52.6 (vs. 4Q18 average of 54.3), suggesting that the slowdown of the eurozone manufacturing sector is continuing in 4Q18.
The country data showed Italy slipping into contraction territory, after registering its lowest PMI reading in just short of four years. Growth in Germany was the weakest in nearly two-and-a-half years, while France and Spain registered only modest expansion in manufacturing activity. Ireland, Austria, the Netherlands and Greece registered all slower rates of expansion in October.
The new orders sub-index posted the first value in contraction territory since November 2014 (although only marginally below 50).New export orders declined for the first time since mid-2013. The production sub-index fell to the lowest level since December 2014. Employment growth continued to slow, easing to the lowest level since December 2016. Input inflation accelerated in October, while output charges were raised (albeit at the lowest level in 14 months). Business confidence for the year ahead fell to the lowest level since the end of 2012.
Spain: The Markit manufacturing PMI rose 0.4 points in October to 51.8 (vs. consensus 50.9). The September/October average stands at 51.6, which compares to 3Q18 average of 52.4, suggesting that the manufacturing sector in Spain continues to lose momentum during the last quarter of the year.
According to the press release disclosed by Markit, output and new orders sub-indexes rose in October (although both remain lower than earlier in the year). Confidence regarding the future fell to the lowest level since June 2013 (on the back of the recent downturn in underlying demand, worries over global trade and political uncertainties). New export orders rose at the fastest pace since July, with the press release citing that a number of panelists reported an upturn in demand, especially from international clients. On the price front,output charge inflation accelerated to a three-month high, reflecting higher input prices.
Italy: The Markit manufacturing PMI fell by 0.8 points in October to 49.2 (vs. consensus 49.7). this is the first reading below 50 since August 2016. The September/October average stands at 49.6 (vs. 3Q18 average of 50.5), suggesting that the output for the Italian manufacturing sector could contract in 4Q18.
The details of the survey showed declines in both output and new orders. The decline in production was the third in successive months (with the sub-index reaching the lowest level in almost five-and-a-half years), as the downturn in order books gathered pace. New business from abroad also fell in October, after an almost six-year sequence of expansion. According to the press release disclosed by Markit, there were reports of weaker demand from key export partners, especially in Asia.
Other countries: The final Markit manufacturing PMI in France stood at 51.2, unchanged from the flash reading, and representing 1.3 points fall in October. In Germany, the PMI was slightly revised downwards (from 52.3 to 52.2), and is now 1.5 points below the September reading. Greece (-0.5 points to 53.1, the lowest reading since April), Ireland (-1.4 points to 54.9, to the lowest level since March), the Netherlands (-2.7 points to 57.1, the lowest level since January 2017) and Austria (-1.2 points to 53.8, the lowest reading since September 2016) all posted declines in October.
US: October Employment Report
At a gain of 250k in October (vs. consensus 200k, probably helped by the unwinding of hurricane disruption in September) with null net revisions to previous months of data and 0.2%m/m earning growth (in line with expectations), the establishment survey was solid. The latest data bring the three-month average pace of payroll growth to 218k, which compares to an average of 212.5k since the beginning of 2018 and 182k in 2017. Therefore, the pace of payroll growth has even accelerated in 2018 when compared to 2017.
The unemployment rate remained stable at 3.7%, in line with expectations. With three decimals, the unemployment rate increased from 3.683% in September to 3.735% in October, reflecting the 0.2pp rise in labour force participation to 62.9%. The labour force participation rate has remained between 62.7% and 63.0% since mid-2016.
Manufacturing added a strong 32k jobs in October, while construction payrolls increased also by a solid 30k. The private services sector payrolls expanded by 222k.
Elsewhere in the establishment survey, average hourly earnings increased 0.18%m/m on the month, consistent with the annual rate of change accelerating from 2.79%y/y in September to 3.14%y/y in October (helped by favourable base effects). Average weekly hours rose from the downwardly revised 34.4 in September to 34.5 in October.
Employment in the household survey increased by 600k in October, the highest reading since February. The 6-month average now stands at 230k (vs. 216k in the establishment survey). The labour force rose by 711k in October. The underemployment rate (U6) fell by one-tenth to 7.4%.
BCP: Bank Millennium agreed to buy Euro Bank for 1.83 zloty, with the final price being subject to adjustments (Bloomberg)
IAG: IAG aims for average EPS growth of +12% per annum. The company now sees L/T EBITDAR around €7.2bn average per annum. IAG targets long-term operating profit margin of 12% to 15%. IAG sees average net capex of €2.6bn per annum. The company wants to reduce ex-fuel unit costs by about 5% by 2023, and could lift level airline’s fleet to 42 aircrafts by 2023. The company says it can be profitable even in a global downturn scenario. IAG sees up to average €2.5bn dividend, plus buybacks next 5 years (Bloomberg)
Grifols: Net revenues for 9M18 stood at €3.26bn, while EBIT reached €773mn. 9M18 Net income reached €529mn (Bloomberg)
WHAT TO WATCH TODAY: On the data front, focus should on the US ISM non-manufacturing release for October.
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