Notes/Observations Asia:
- Italian budget concerns remain on the front burner; recent Moody’s sovereign rating action sooths concerns of any near-term move into junk status
- Central banks are in focus this week – Sweden Central Bank ( Riksbank) and Bank of Canada on Weds) Norway Central Bank (Norges) and ECB on Thursday.
- Key data releases this week see s euro area ‘flash’ PMIs on Weds and US GDP on Friday
Asia:
- China released draft of tax cuts including reduction to cost of housing, education and healthcare in order to boost domestic consumption, to take effect Jan 1, 2019
- China State Council commission on financial development and stability: To balance need for stable growth and preventing risks; reiterates to implement prudent and neutral monetary policy – meeting on fending off financial risks
Europe:
- Moody’s cut Italy sovereign rating one notch to Baa3 from Baa2 (now lowest level of investment grade); Outlook Stable
- PM May: 95% of Brexit withdrawal deal is “now settled”. To repeat her opposition to the EU’s proposal for the Northern Irish backstop (Note: reports had circulated that May was prepared to drop demand for time limit on Ireland backstop agreement)
- PM May is facing a rebellion by more than 40 Tory MPs if she doesn’t back down to fresh demands from Brexiteers (Note: 48 votes are necessary for a leadership challenge)
Americas:
- President Trump: Russia has violated arms control treaty (INF) and we are going to terminate it (Note: The INF Treaty is a strategic arms reduction pact that President Ronald Reagan and Soviet leader Mikhail Gorbachev struck in 1987)
- Treasury Sec Mnuchin said to be open to changing how US names currency manipulators, which could open the window to official name China as one, which could then become leverage for trade dispute talks
Energy
- IEA chief Birol: Not worried about Saudi Arabia cutting oil exports in response to international pressure on journalist’s death
- Treasury Sec Mnuchin: Countries must reduce oil purchases from Iran by more than Obama administration’s level of 20% before they qualify for waivers from US sanction. Did not expect countries that import Iranian oil to reduce purchase to zero in Nov but they will eventually have to go to zero
Macro
- (UK) United Kingdom: The Conservative party’s 1922 Committee, formed of backbench members of parliament, reportedly only needs two more letters from party MPs to trigger a no confidence vote in the Prime Minister. This would pave the way for a leadership challenge. PM May is set to make unusual appearance before MPs in the House of Commons today to say that she is 95% of the way towards securing a workable Brexit deal. It remains to be seen whether this will grant her a stay of execution as her Chequers plan remains deeply unpopular among significant portions of both Eurosceptic and Europhile members.
- (IT) Italy: Late Friday Moody’s trimmed it’s sovereign bond to Baa3, the lowest investment grade, but with a stable outlook. Italy’s government faces a mammoth €270B worth of bond redemptions in 2019 alone. With interest on Italian government debt rising to its highest level in five years and its biggest buyer at the margin over past three years, the ECB, exiting the market, it’s looking like it become a significant issue.
SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM
Equities
- Indices [Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%]
Market Focal Points/Key Themes:
- European Indices trade higher across the board, the FTSE MIB outperforms after Moody’s cut the Countries rating the the lowest Investment grade, but put the outlook as stable, helping BTP futures rally.
- On the corporate front low cost Airline carrier Ryanair rises after H1 results and affirmed outlook, while Philips shares fall after missing on the top and bottom line. Daimler trades higher despite cutting its segment outlook. In the M&A space Rallye rises after an offer for a unit; Axis Communication trades higher on a takeover announcement. Fiat rises sharply after confirming the sale of Megnetti Marelli unit to KKR for €6.2B.
Looking ahead notable earners include Halliburton, Kimberly Clark and Lennox Interntational. - Consumer discretionary: Ryanair [RYA.UK] +4.5% (earnings), Rallye [RAL.FR] +5.4% (Rallye received offer to sell business unit), Salvatore Ferragamo [SFER.IT] +8% (Chairwoman passes away), Superdry [SDRY.UK] +0.3% (co-founder says company on completely wrong path)
- Financials: Lloyds Banking Group plc [LLOY.UK] +2% (said to prepare dividend increase and share buyback program)
- Healthcare: Koninklijke Philips NV [PHIA.NL] -5% (earnings), NMC Health PLC [NMC.UK] +6% (raised outlook), Galapagos NV [GLPG.BE] +1.8% (new Phase 3 data)
- Industrials: Daimler AG [DAI.DE] +1.0% (segment outlook cut), Fiat [FCA.IT] +4.5% (to sell components business), Leoni AG [LEO.DE] -7% (earnings; outlook cut)
- Technology: Siemens AG [SIE.DE] +1.5% (preliminary agreement with GE), Axis Communications [AXIS.SE] +5% (takeover announcement)
- Materials: Petra Diamonds Limited [PDL.UK] -2.5% (earnings)
Speakers
- Italy Govt to tell EU that it would move forward with its 2019 budget plan. PM Conte confirmed the 2.4% budget deficit to GDP target and believed that the fiscal plan was not reckless. If Bund to BTP spread hit 400bps then spending plan could change
- EU’s Moscovici reiterated view of seeking constructive dialogue with Italy on its 2019 budget plan
- Austria Chancellor Kurz: EU Commission must reject the Italian 2019 fiscal plan unless changes are made (**Note: Austria holds the current rotation of the EU Presidency)
- German Chancellor Merkel said not to expect Frankfurt diesel ban to go ahead
- Sweden Acting PM Lofven stated that held talks with Red-Green and Alliance Parties. Situation was hard and complicated to put together a govt
- Russia Econ Min Oreshkin stated that saw GDP growth accelerating in the coming months
- Bank of Japan (BOJ) Financial System Report: Domestic financial system maintaining stability; No sign of overheating from financial activities
- Saudi Oil Min Al-Falih: New OPEC+ oil agreement might be signed on Dec 7th. Saudi oil production likely to be up in near future to 11M bpd, could go to 12M bpd if necessary. Saudi Arabia could not guarantee that oil prices would rise above $100/barrel. Cautioned that too high of price for oil will slow down the global economy and trigger a recession. If 3M bpd of supplies disappeared in 2019 then would have to dip into reserves, could not cover such volume through capacity
Currencies/Fixed-income
- The EUR/USD was slightly lower at 1.1515 after testing as high as 1.1550 as part of the relief rally in the 10Y BTP-Bund spread. Dealers noted that headline risk persisted ahead of the deadline for Italy to respond to the EU Commission’s initial objections over the 2019 budget plan
- The implications of Italy’s downgrade by Moody’s ahead of the review by S&P on Friday remained the major driver for the euro this week. S&P was expected to leave Italy’s rating unchanged but to lower the outlook to negative from stable. Dealers noted that the ECB meeting on Thursday was likely to be closely watched for more color on how the ECB would reinvest maturing QE proceeds post December this year (likely end of QE program)
- GBP/USD was 0.2% lower at 1.3050 area as Brexit talks reached an impasse again. December seems to be the new target for a deal. Risks from the UK parliamentary vote seem elevated with more reports circulating that opposition with May own party could prompt a leadership challenge.
Economic Data:
- (NL) Netherlands Sept House Price Index M/M: 0.3% v 1.4% prior; Y/Y: 9.3% v 9.3% prior
- (CH) Swiss Sept M3 Money Supply Y/Y: 2.3% v 2.5% prior
- (JP) Japan Sept Convenience Store Sales Y/Y: 3.5% v 1.0% prior
- (MY) Malaysia Mid-Oct Foreign Reserves: $102.8B v $103.0B prior
- (CH) SNB Total Sight Deposits for Week Ended Oct 19th (CHF): 577.9B v 577.6B prior
- (TW) Taiwan Sept Export Orders Y/Y: 4.2% v 5.5%e
- (TW) Taiwan Sept Unemployment Rate: 3.7% v 3.7%e
- (EU) Euro Zone 2017 Govt Debt/GDP Ratio: 86.8% v 86.7% prior
Fixed Income Issuance
- (UR) Ukraine to sell USD-denominated 5-year and 10-year notes
Looking Ahead
- (PT) Portugal Aug Current Account: No est v €0.8B prior
- (IL) Israel Central Bank (BOI) Oct Minutes
- 05:30 (SL) Sri Lanka Sept National CPI (NCPI) Y/Y: No est v 2.5% prior
- 06:00 (IE) Ireland Sept PPI M/M: No est v -1.3% prior; Y/Y: No est v -0.9% prior
- 06:00 (RO) Romania to sell Bonds
- 06:00 (IL) Israel to sell Bonds
- 06:25 (BR) Brazil Central Bank Weekly Economists Survey
- 06:45 (US) Daily Libor Fixing
- 08:00 (PL) Poland Sept M3 Money Supply M/M: 0.5%e v 0.6% prior; Y/Y: 7.5%e v 7.5% prior
- 08:00 (DE) German Fin Fin Scholz holds Town Hall on Europe’s Future in Ludwigshafen
- 08:00 (IN) India announces details of upcoming bond sale (held on Fridays)
- 08:05 (UK) Baltic Dry Bulk Index
- 08:30 (US) Sept Chicago Fed National Activity Index: 0.22e v 0.18 prior
- 08:30 (CA) Canada Aug Wholesale Trade Sales M/M: -0.2%e v +1.5% prior
- 08:55 (FR) France Debt Agency (AFT) to sell combined €3.8-5.0B in 3-month, 6-month, 9-month and 12-month BTF Bills
- 09:30 (EU) ECB announces Covered-Bond Purchases
- 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender
- 15:00 (CO) Colombia Aug Economic Activity Index (Monthly GDP) Y/Y: 2.3%e v 1.9% prior
- 15:00 (MX) Mexico Citibanamex Survey of Economists
- 16:00 (US) Weekly Crop Progress Report
