Concerns Over Possible Turkey Contagion Sparks Some Safe-Haven Flows, UK Data Generally Data Vindicates The Recent BOE Rate Hike

Notes/Observations

• Concerns over European banking exposure to Turkey spark contagion fears; safe-have flow sends German 10-year Bunds yields testing 3-week lows
• EUR/USD break below the pivotal 1.15 level, opens the door to potentially retest the financial crisis low of 1.05
• Turkish lira currency opened the session in a free-fall and losing more than 13% before recovering
• Russia RUB currency (Ruble) at 2 year lows as recent US sanctions dim any hopes of a thaw in relations
• UK Q2 GDP data vindicates the recent BOE rate hike as annual pace of growth moved off recent 5-year lows); focus remains on Brexit negotiation

Asia:

• Japan Q2 Preliminary GDP Q/Q: 0.5% v 0.3%e; GDP Annualized Q/Q: 1.9% v 1.4%e
• RBA Quarterly Statement on Monetary Policy (SOMP) reiterates stance that it did not see a strong case to adjust interest rates in the short term. Reiterated view that higher interest rates were likely appropriate at some point

Europe:

• ECB said to be concerned about the exposures that Unicredit and BBVA have to Turkey

Americas:

• Fed’s Evans (non-voter): US economy performing very well, 1 or 2 more hikes reasonable by year end

Economic Data:

• (FI) Finland Jun Industrial Production M/M: 1.6% v 0.4% prior; Y/Y: 5.4% v 2.3% prior
• (NO) Norway July CPI M/M: 0.7% v 0.3%e; Y/Y: 3.0% v 2.6%e
• (NO) Norway July CPI Underlying M/M: 0.6% v 0.3%e; Y/Y: 1.4% v 1.2%e
• (NO) Norway July PPI (including Oil) M/M: 1.1% v 2.2% prior; Y/Y: 22.6% v 20.0% prior
• (DK) Denmark July CPI M/M: 0.8% v 0.5%e; Y/Y: 1.1% v 0.8%e
• (DK) Denmark July CPI EU Harmonized M/M: 0.8% v 0.6%e; Y/Y: 0.9% v 0.7%e
• (RO) Romania July CPI M/M: -0.5% v -0.2%e; Y/Y: % v 5.1%e
• (FR) France Jun Industrial Production M/M: 0.6% v 0.5%e; Y/Y: 1.7% v 1.4%e
• (FR) France Jun Manufacturing Production M/M: 0.6% v 0.0%e; Y/Y: 1.6% v 0.5%e
• (FR) France Q2 Preliminary Private Sector Payrolls Q/Q: 0.2% v 0.3%e; Wages Q/Q: 0.4% v 0.4%e
• (TR) Turkey Jun Current Account: -$3.0B v -$3.0Be
• (CN) Weekly Shanghai copper inventories (SHFE): 171.1K v 192.8K tons prior
• (SE) Sweden July CPI M/M: 0.5% v 0.5%e; Y/Y: 2.1% v 2.0%e (2nd straight month above target)
• (SE) Sweden July CPIF M/M: 0.5% v 0.5%e; Y/Y: 2.2% v 2.2%e, CPI Level: 330.33 v 330.22e
• (IT) Italy Jun Trade Balance: €5.1B v €3.4B prior; Trade Balance EU: €1.5B v €1.0B prior
• (RU) Russia Narrow Money Supply w/e Aug 3rd: 10.25T v10.26 T prior
• (UK) Jun GDP M/M: 0.1% v 0.2%e
• (UK) Q2 Preliminary GDP Q/Q: 0.4% v 0.4%e; Y/Y: 1.3% v 1.3%e
• (UK) Q2 Preliminary Private Consumption Q/Q: 0.3% v 0.4%e, Government Spending Q/Q: 0.4% v 0.3%e, Gross Fixed Capital Formation Q/Q: 0.8% v 0.7%e, Exports Q/Q: -3.6% v +0.7%e, Imports Q/Q: -0.8% v +0.8%e
• (UK) Q2 Preliminary Total Business Investment Q/Q: 0.5% v 0.4%e; Y/Y: 0.8% v 2.0% prior
• (UK) Jun Industrial Production M/M: 0.4% v 0.3%e; Y/Y: 1.1% v 0.7%e
• (UK) Jun Manufacturing Production M/M: 0.4% v 0.3%e; Y/Y: 1.5% v 1.0%e
• (UK) Jun Construction Output M/M: +1.4% v -0.4%e; Y/Y: 2.2% v 0.7%e
• (UK) Jun Visible Trade Balance: -£11.4B v -£12.0Be, Overall Trade Balance: -£1.9B v -£2.5Be, Trade Balance Non EU: -£2.9B v -£3.6Be
• (UK) Jun Index of Services M/M: 0.0% v 0.2%e v; 3M/3M: 0.5% v 0.6%e
• (HK) Hong Kong Q2 GDP Q/Q: -0.2% v +0.2%e; Y/Y: 3.5% v 3.9%e

Fixed Income Issuance:

(IN) India sold total INR120B vs. INR120B indicated in 2023, 2028, 2035 and 2055 bonds

(IT) Italy Debt Agency (Tesoro) sold €6.0B vs. €6.0B indicated in 12-month Bills; Avg Yield: % v 0.337% prior; Bid-to-cover: x v 2.01x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.8% at 386.8, FTSE -0.6% at 7693, DAX -1.6% at 12470, CAC-40 -1.2% at 5438, IBEX-35 -1.1% at 9648, FTSE MIB -1.4% at 21323, SMI -0.9% at 9067 S&P 500 Futures -0.5%]
• Market Focal Points/Key Themes: European Indices trade lower across the board with reports of ECB concern on some banks exposure to Turkey setting the negative tone. BNP Paribas, Unicredit and BBVA trade lower being among the mentioned banks in this report. On the earnings front Bechtle trades higher after earnings, while Novozymes, Hella, Hapag Lloyd, Innogy and Datetwyler among the names trading lower. K+S trades shaply lower after guiding its full year EBITDA below forecasts. Looking ahead notable earner include Applied industries Tech and Meredith Corp.

Movers

• Consumer Discretionary Bechtle [BC8.DE] +4.8% (Earnings), Hella [HLE.DE] -2.2% (Earnings)
• Materials K+S [SDF.DE] -10% (Guides below consensus)
• Financials TLG Immobilien [TLG.DE] +3.0% (Earnings), BBVA [BBVA.ES] -3.2%, Unicredit [UCG.IT] -3.1%, BNP Paribas [BNP.FR] -3.6% (mentioned in ECB sources piece related to exposure to Turkey)
• Industrials Hapag Lloyd [HLAG.DE] -1.2% (Earnings)
• Healthcare Novozymes [NZYMB.DK] -2.4% (Earnings)

Speakers

• Italy Dep PM Di Maio (Five Star party leader): Should scrap the balance budget clause in Constitution but this is not a immediate priority
• Italy govt said to plan 2019 budget deficit to GDP ratio at 1.7% (increased from 0.8%)
• Czech Central Bank (CNB) Aug Minutes had policy makers prefer rate hikes in smaller, gradual steps. Saw a risk of excessive FX moves in reaction to larger hikes
• Turkey President Erdogan reiterated view that attempts to exert economic pressure on Turkey were futile
• Russia Economy Ministry forecast Aug CPI between 2.9-3.1%. A weaker RUB currency (Ruble) could help boost CPI in H2 but saw the impact from weaker FX being limited and pass-through effect had declined in 2017-18 period
• Russia Central Bank: Could change volume of daily FX purchases to limit currency market volatility
• Japan LDP party politician Ishiba confirmed his intentions to run for LDP leader (**Reminder: LDP party expected to hold its leadership elections on Sept 20th, as PM Abe was seeking his third consecutive term)
• IEA Monthly Oil Report raised its 2018 global oil demand from 99.1M bpd to 99.2M bpd and 2019 global oil demand from 100.5M bpd to 100.7M bpd. It did maintain itss 2019 global oil demand growth forecast at 1.5M bpd. Trimmed Non-Opec suplly from 62.0M bpd to 61.8M bpd. Non-OPEC compliance with production cuts declined to 44% in July

Currencies

• USD at 1-year highs on safe haven flows. EU session began with a heightened amount of risk aversion as contagion concerns stemming from the Turkey market meltdown.
• EUR/USD broke a key technical level below the 1.15 level after reports circulated that ECB was concerned about the exposures that Unicredit, BNP Paribas, and BBVA have to Turkey. Dealers noted that a weekly close below 1.15 could open the door for a significant move lower in the coming weeks. Some press reports on the Italian budget also provided a headwind for the Euro as the new Italian govt looks to fight the EU on deficit rules
• GBP/USD was at 1-year lows ahead of key UK economic data. The in-line UK GDP reading and better production and trade data seemed to vindicate the recent BOE rate hike but did not provide any relief to the pound’s recent spat of weakness. Pair trading in the mid-1.27 area just ahead of the US morning as focus remains on Brexit negotiations
• Risk aversion flows also help the JPY currency. USD/JPY was lower by 0.4% to test 110.60 in the session. The yen was also aided by better-than-expected Q2 GDP data during the Asian session
• TRY currency (Lira) fell over 13% against the USD at test a record low just under 6.29 over concerns about the souring relations between Turkey and the US and over runaway inflation. Markets for the time being ignored Turkey Fin Min Albayrak pending plan regarding a new economic model but speculation was abound that the CBRT could hike by 500bps to counter FX and inflationary concerns

Fixed Income

• Bund Futures trades at 163.01 up 43 ticks as European stocks trade lower as concerns over European banking exposure to Turkey spark contagion fears. A move back above 163.25 would target 164.25 then 164.75, with a move below 162.50 targeting 161.45 then 160.45.
• Gilt futures trades at 123.47 up 39 ticks as the UK economy rebounds with 0.4% growth, but manufacturing falls into recession, with continuing upside targeting 123.18 then 124.44, with a move lower seeing initial support at 122.23 then 121.85.
• Friday ‘s liquidity report showed Thursday’s excess liquidity rose from €1.903T to €1.903T. Use of the marginal lending facility fell from €35M to €M.
• Corporate issuance saw 3 issuers raise $4.8B in the primary market. For the week ended Aug 8th Lipper fund flows reported IG funds show outflows of $962M, with High Yield fund show inflows of $828M .

Looking Ahead

• (TR) Turkey Fin Min Albayrak announces new economic model
• 05:30 (ZA) South Africa to sell ZAR600M in I/ L 2029, 2033 and 2050 bonds
• 06:00 (PT) Portugal July Final CPI M/M: No est v -0.6% prelim; Y/Y: No est v 1.6% prelim
• 06:00 (PT) Portugal July Final CPI EU Harmonized M/M: No est v -0.4% prelim; Y/Y: No est v 2.2% prelim
• 06:00 (UK) DMO to sell €5.5B in 1-month, 3-month and 6-month bills (£2.0B, £2.0B and £1.5B respectively)
• 06:45 (US) Daily Libor Fixing
• 07:00 (BR) Brazil Aug IGP-M Inflation (1st Preview): 0.2%e v 0.4% prior
• 07:30 (IN) India Weekly Forex Reserves
• 08:00 (BR) Brazil Jun Retail Sales M/M: +0.1%e v -0.6% prior; Y/Y: 2.4%e v 2.7% prior
• 08:00 (BR) Brazil Jun Broad Retail Sales M/M: +2.1%e v -4.9% prior; Y/Y: 3.1%e v 2.2% prior
• 08:00 (IN) India Jun Industrial Production Y/Y: No est v 3.2% prior
• 08:15 (UK) Baltic Dry Bulk Index
• 08:30 (US) July CPI M/M: 0.2%e v 0.1% prior; Y/Y: 2.9%e v 2.9% prior
• 08:30 (US) July CPI Ex Food and Energy M/M: 0.2%e v 0.2% prior; Y/Y: 2.3%e v 2.3% prior
• 08:30 (US) July CPI Index NSA: 251.968e v 251.989 prior, CPI Core Index SA: 257.794e v 257.305 prior
• 08:30 (US) July Real Avg Weekly Earnings Y/Y: No est v 0.2% prior; Real Avg Hourly Earning Y/Y: No est v 0.0% prior
• 08:30 (CA) Canada July Net Change in Employment: +17.0Ke v +31.8K prior; Unemployment Rate: 5.9%e v 6.0% prior
• 08:30 (CL) Chile Central Bank Economists Survey
• 08:30 (CL) Chile Central Bank Traders Survey
• 09:00 (MX) Mexico Jun Industrial Production M/M: 0.0%e v 0.1% prior; Y/Y: 0.3%e v 0.3% prior, Manufacturing Production Y/Y: 2.7%e v 2.8% prior
• 09:00 (RU) Russia Jun Trade Balance: $15.5Be v $15.2B prior; Exports: $37.3Be v $36.5B prior; Imports: $22.0Be v $21.4B prior
• 12:00 (IS) Iceland July International Reserves (ISK): No est v 682B prior
• 12:00 (US) USDA World Agricultural Supply and Demand Estimate (WASDE) Crop
• 13:00 (US) Weekly Baker Hughes Rig Count data
• 14:00 (US) July Monthly Budget Statement: -$76.0Be v -$42.9B prior
• (PE) Peru Jun Trade Balance: No est v $0.4B prior