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Patris Daily - 19 October 2018

19 Oct 2018



Europe: With the exception of Portugal, all major European stock indices closed negative. Italy (-1.89%) and Spain (-1.20%, after bank shares plummeted over a court decision) were hit the hardest. STOXX 600 dropped 0.51%, with 12 out of 19 sectors closing negative. HealthCare (+0.92%) and Foods & Beverages (+0.82%) outperformed, while Construction & Materials (-1.83%) and Technology (-2.10%) underperformed.

Eurozone sovereign debt market: 10-year EGB yields traded with a mixed tone yesterday. 10-year Bunds yields were down 4.5bps to 0.414%, while 10-year PGBs yields were up by 8.3bps to 2.019%, 10-year BTPs yields rose 13.8bps to 3.680% (Italy-Germany spread reached 326 bps, the highest level since 2013), 10-year GGBs yields were up by 11.9bps to 4.397%, and 10-year SPGBs yields rose 7.8bps to 1.722%.

Spain sold yesterday €633mn of 5.75% 2032 SPGB, with an average yield of 1.959% (vs 1.798% in July) and a bid-to-cover ratio of 1.46x (vs 1.37x in July), €1.305bn of 1.4% 2028 SPGB, with an average yield of 1.644% (vs 1.540% previously) and a bid-to-cover ratio of 2.08x ( vs 2.38x previously), €1.525bn of 0.35% 2023 SPGB, with an average yield of 0.613% (vs 0.410% previously) and a bid-to-cover ratio of 1.78x (vs 1.70x previously), €1.028bn of 2.90% 2046 SPGB yields, with an average yield of 2.677% (vs 2.225% previously) and a bid-to-cover ratio of 1.43x (vs 1.27x previously).

In a letter addressed to Finance Minister Giovanni Tria, EU Commissioners Valdis Dombrovskis and Pierre Moscovici said that Italy’s Draft Budgetary Plan for 2019 constitutes “an obvious significant deviation” from EU rules. The size of the deviation from the structural improvement of 0.6% of GDP recommended by the EU Council is “unprecedented in the history” of the Stability and Growth Pact. EU Commission warned of “particularity serious non-compliance with the budgetary policy obligations”.

ECB Governing Council member and Bank of Finland’s Governor Olli Rehn said yesterday that if the economy develops roughly in line with the current outlook, the first rate increases will take place in 4Q19 (on October or December 2019). Therefore, he sees markets reading the ECB’s forward guidance correctly. He added that the ECB will clarify its strategy for reinvesting bonds from its bond-buying programme in the coming months. Olli Rehn reiterated that government and corporate debt reinvestments will continue for quite a long time. With core inflation at 1%, he sees grounds for retaining an accommodative monetary policy stance.

On Italy, Olli Rehn mentioned that the country needs to reach sustainable GDP growth and employment, which in his opinion is unlikely to be achieved through stimulus paid with debt. On BREXIT, he considered that risks have increased over the past few months of a no-deal BREXIT. Olli Rehn considered that a customs union arrangement or the UK remaining in the single market would be positive relative to the expectations that are set rather low at this moment.

ECB Governing Council member and Austria’s central bank Governor Ewald Nowotny said that higher interest rates will mean a higher budget deficit for Italy. He recognised that the Italian situation is serious, although not comparable to the problem seen in the past in Greece.

Portugal: PSI20 closed positive (+0.05%) for the third session in a row, with 7 out of 18 members closing positive. NOS (+2.53%) and Corticeira Amorim (+1.40%) outperformed, while Mota Engil (-2.34%) and BCP (-2.77%) underperformed.

FX & Commodities: Gold rose by 0.29% (+0.04% as we type), while the first future of Brent declined by 0.95% (+0.32% as we type).Euro fell 0.42% against the US Dollar, reflecting the situation in Italy.

US Equity & Debt Markets: S&P500 dropped by 1.44%. 9 out of 11 industry groups finished the day in the red, with Consumer Discretionary (-2.11%) and Technology (-2.02%) hit the hardest. 10-year UST yields declined by 2.6bps to 3.18%, on the back of the equity indices sharp fall.

US Federal Reserve St Louis President James Bullard (a non-voter this year on the FOMC) said yesterday that benchmark policy rules such as the Taylor rule show no reason to raise rates further when they are adjusted for recent developments, such as the lack of a link between the unemployment rate and inflation, slowing demographics and low inflation expectations.

James Bullard added that he does not see need to raise rates to prevent asset bubbles. He sees the economy in great shape, with 2018 real GDP growth on track for 3%, although he recognised that there is not a lot of inflationary pressure in the economy. Moreover, he added that we have not seen the increase in productivity needed to lift potential GDP growth. According to James Bullard, Fed’s dot plot peak is well into restrictive territory. On financial markets, he continues to see the yield curve as being relatively flat, despite the yield rise. He was not surprised by the stock market sell-off, after its previous gains, while being above inflation goal for a while is not a problem for James Bullard.

Federal Reserve Governor Randal Quarles considered yesterday there are reasons for optimism regarding a higher potential growth rate. He sees Fed’s gradual rate hike strategy still being appropriate given current uncertainties. Randal Quarles stressed that the FOMC cannot only rely on inflation to gauge the state of the economy and must pay attention to other indicators of tightness. He sees some potential for labour force participation to rise. According to Randal Quarles, the Fed is close to its dual mandate as it has been in a long time.

Latin America: In Brazil, Datafolha released its second presidential election poll on the second round between Jair Bolsonaro and Fernando Haddad. Jair Bolsonaro leads with a significant gap (59% vs. 41%). Considering total votes, Jair Bolsonaro has 50% of voting intentions (vs. Fernando Haddad 35%). 10% said that they would vote null or blank, while 5% do not know yet who to vote for. In Chile, the central bank raised the policy rate by 25bps to 2.75%, in a unanimous decision. The forward guidance suggests that the pace of monetary policy withdrawal will be gradual and cautious. In Mexico, the central bank released the minutes from the 4 October MPC meeting. The Bank said that it will remain vigilant regarding factors that could impact inflation, and will take the necessary actions so that inflation converges to target.

Asia: Stocks traded with a mixed tone, reflecting some improvement in sentiment: TOPIX -0.69%, HANG SENG +0.54% as we type, SHANGHAI COMPOSITE +2.58% (after top financial officials tried to stabilise confidence), HSCEI +0.95% as we type, TAIEX -0.35%, KOSPI +0.37% and S&P/ASX200 -0.05%.

The Chinese economy slowed for the second quarter in a row. Real GDP grew by 6.5%y/y in 3Q18, after 6.7%y/y in 2Q18 and 6.8%y/y in 1Q18. The September activity data showed industrial production up by 5.8%y/y (vs. consensus 6.0%y/y), after 6.1%y/y in August, nominal retail sales up by 9.2%y/y (vs. consensus 9.0%y/y), after 9.0%y/y in August and FAI up by 5.4% ytd y/y (vs. consensus 5.3% ytd y/y), following 5.3% ytd y/y in August.


UK: September Retail Sales

Retail sales volumes fell by 0.8%m/m in September (vs. consensus -0.4%m/m), following the upwardly revised 0.4%m/m gain in August. The annual rate of change slowed to 3.0%y/y in September, from 3.4%y/y in August. Over 3Q18 as a whole, retail sales rose by 1.2% 3m/3m y/y (3.4%y/y).

US: Initial jobless claims

Yesterday’s report was once again favourable. Initial jobless claims fell by 5k to 210k during the week ending on 13 October (vs consensus of 211k), while continuing claims dropped by 13k during the week ending on 6 October to 1640k (vs consensus 1663k).

US: October Philly Fed

The Philadelphia Fed manufacturing index declined slightly in October (-0.7 points to 22.2), above consensus expectations (20.0). New orders fell to 19.3, from 21.4 last month, while shipments rose to 24.5 (vs. 19.6 in September). The employment index rose to 19.5, from 17.6 in September. The average workweek increased to 20.8, from 14.6 last month. Price pressures for inputs declined (-1.4 points to 38.2), while price pressures for outputs increased (+4.5 points to 4.5).

US: September Leading Economic Indicator

The Conference Board’s leading economic index rose by 0.5%m/m in September, in line with consensus expectations. The annual rate of change remained unchanged at 6.4% and is consistent with the idea that the US economy keeps growing at a solid pace.


CTT: CTT is contesting a decision by regulator ANACOM that sets certain parameters for quality of service and performance goals for the universal postal service. CTT will seek to annul ANACOM’s decision through an arbitrary and administrative procedure based on the “disproportionate and inadequate nature” of that decision (Bloomberg)

Ence: The group intends to acquire Iberdrola’s 90% stake in a 50MW thermosolar plant in Spain (Bloomberg)

Spain: The Supreme Court ruled that banks must pay mortgage-documentation taxes. The Court altered previous rulings, so that the borrower no longer pays such taxes (Bloomberg)

Spain: The European Commission will send a letter to the Spanish government asking for more details on the country’s budget plans, news website El Espanol reported (Bloomberg)

Sabadell: Banco Sabadell is open to offers for its real estate unit Solvia, El Pais reported. The Spanish lender has mandated an investment bank for the process. Cerberus, Oaktree may be among funds interested (Bloomberg)

Italy: The Eurogroup will look at the subject of the Italian budget “in due time”, Eurogroup President Mário Centeno told reporters in Brussels. “A budget should comply with a set of rules. There is dialogue. The Italian budget should meet certain objectives” (Bloomberg)

Leonardo: Contract awarded by the Portuguese Ministry of Defense for a total value of about €20mn, company said in a statement. The contract includes options for two additional units; deliveries between late 2018 and early 2020 (Bloomberg)

WHAT TO WATCH TODAY: The event calendar is rather empty today. On the data front, focus should be the US Existing home sales indicator. 

Moody’s may update its credit rating for Belgium and Finland, while Fitch is expected to review Cyprus.

Honeywell and Procter & Gamble report quarterly results before the market opens.


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