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2 Oct 2018
GLOBAL MARKETS OVERVIEW:
Europe: Major European stock indices traded with a mixed tone. Germany (+0.75%) outperformed while Portugal (-0.86%) was hit the hardest. STOXX 600 rose 0.20%, with 11 out of 19 sectors closing positive. Technology (+1.37%) and Chemicals (+1.13%) outperformed, while Banks (-0.74%) were hit the hardest, as top Eurozone officials showed concern about the budget deficit set by the Italian Government.
Eurozone sovereign debt market: 10-year EGB rose across the region, with Italy underperforming once again. Italian yields increased across the curve, with 10-year BTPs up by 15.2bps to 3.290%, and 2-year BTPS higher by 29.4bps to 1.289%.
Italy’s Finance Minister announced a bond swap to Wednesday. Bonds accepted for the exchange operation will be BTP February 2019, BTP October 2020, BTP November 2020, and BTP May 2021. Italy to issue a maximum nominal amount of €2.5bn of BTP September 2028. Despite the recent increase, 2-year BTPs yields remain well below May’s highs.
In Greece, the finance minister submitted the 2019 draft budget to parliament including two different scenarios, depending on whether or not the agreed pension cuts are implemented next year. The country's primary budget surplus target will reach 3.56% of GDP if the pension cuts are not implemented and 4.14% if they are.
ECB chief economist Peter Praet stressed that economic conditions in Europe have improved very much in the last three years, and are expected to remain favourable in spite of all the headwinds. He reiterated that a high degree of monetary stimulus remains necessary and that the normalisation process is expected to be long. He added that he does not see “generalised financial excesses” in Europe, although there are “pockets of excesses”.
ECB Governing Council Member and Central Bank of Ireland’s Governor Philip Lane said that wage data coming from the Euro Area is increasingly positive. Therefore, the Governing Council sees core inflation in an upward path, not spectacular but steady enough. He stressed that current guidance from the ECB means that the Governing Council does not intend to raise interest rates before the end of the summer next year.
ECB Governing Council and Central Bank of Finland’s Governor Olli Rehn sees reasonably good growth prospects in Euro Area. He recognised that there are work to be done on completing the banking union. On Italy, he stressed that the country must continue to reduce NPLs. According to Olli Rehn, markets expect rate hikes in 4Q19, which is in line with ECB guidance.
ECB Executive Board Member Benoît Coeuré said that price pressure is gradually picking up, in an interview with Tagesspiegel newspaper. ECB Governing Council Member and French Central Bank’s President François Villeroy de Galhau considered it is “now or never” for the Euro Area to build an economic union.
According to data released by IEFP, registered unemployment rose 2.3%m/m (-19.1%y/y) in August, while job openings fell by 3.9%m/m (-17.1%y/y). Registered unemployment remains consistent with a favourable evolution on the Portuguese labour market.
Portugal: PSI20 dropped for the second session in a row and closed down by 0.86%. 12 out of 18 members finished the day on the red. The main Portuguese stock index was punished by the poor performances of BCP, Galp Energia and EDP (already well below the €3.26 CTG offer price). Navigator and Corticeira Amorim were the main outperformers.
According to data released by the Bank of Portugal, Maastricht debt rose by 0.4%m/m (or +€1.012bn) to €249.269bn. In annual terms, Maastricht debt declined by 0.5%y/y (or -€1.152bn) Maastricht debt net of assets in deposits of general government fell by 1.2%m/m (or -€2.751bn) to €224.868bn. In annual terms, net debt rose by 0.9%y/y (or €2.069bn).
FX & Commodities: The Euro fell by 0.22% against the US dollar (-0.35% as we type), reflecting higher Italian bond yields (see chart). Gold declined by 0.16% (+0.36% as we type), while the first future of Brent rose 2.73% (+0.19% as we type), the highest level since November 2014.
US Equity & Debt Markets: S&P500 finished the day 0.36% higher (Nasdaq Composite -0.11%). 6 out of the 11 major sectors showed gains, with Energy (+1.47%) and Materials (+1.04%) as the major outperformers. Real Estate was the main laggard (-0.85%). 10-year EGB yields rose by 2.3bps to 3.085%.
Latin America: In Argentina, the country expects to receive $26.8bn from the IMF and other multinational organisations in 2019, according to a central bank report released yesterday. In Brazil, Ibope released a new 2018 presidential election poll. Jair Bolsonaro leads with 31% of voting intentions (+3pp vs. the previous poll), followed by Fernando Haddad with 21% (-1.0pp), Ciro Gomes (11%, for the third poll in a row), Geraldo Alckmin (8% for the second poll in a row) and Marina Silva (4%, -1.0pp vs. the previous poll). Jair Bolsonaro continues to lead the rejection list with 44% (-2.0pp vs. the previous poll), followed by Fernando Haddad with 38% (vs. 30% before), Marina Silva (25%), Geraldo Alckmin (19%) and Ciro Gomes (18%). Second round simulations show Fernando Haddad tied with Jair Bolsonaro with 42% of voting intentions (vs. 43%/37% before). Jair Bolsonaro would lose to Geraldo Alckmin (39% vs. 42%) and Ciro Gomes (39% vs. 45%), while he would win against Marina Silva (43% vs. 38%).
Asia: With domestic Chinese indices still closed due to the golden week holiday, stocks traded with a negative tone across most of the region: TOPIX +0.33%, HANG SENG -2.44% as we type, HSCEI -2.53% as we type, TAIEX -1.20%, KOSPI -1.25% and S&P/ASX200 -0.75%.
OUR TAKE ON THE LATEST MACRO DATA:
Eurozone: August Unemployment Rate
According to data released by Eurostat, the unemployment rate fell by 0.1pp to 8.1% in August, in line with consensus expectations and 0.9pp below the year ago level. The unemployment rate continues to decline at a faster pace than expected by the ECB staff’s expectation. The decline in the unemployment rate for the region in August relied mainly in Italy (-0.5pp to 9.7%). The unemployment rate in Italy reached the lowest level since January 2012. The unemployment rate was stable in Portugal, Finland, Germany, Spain, declined in Ireland, Austria and rose in France, the Netherlands.
US: September ISM Manufacturing
The US ISM manufacturing index fell to 59.8 in September, following 61.3 in August. The decline was slightly larger than expected by the consensus (60.0). This is still one of the highest readings for the current expansion. New orders fell by 3.3 points to 61.8, while production recorded a slight increase (+0.6 points to 63.9). Prices paid recorded a sharp decline (-5.2 points to 66.9), while employment was little changed (+0.3 points to 58.8).
The gap between new orders and inventories, as well as the assessment of customers inventories, suggest the outlook for US manufacturing output remains favourable.
EDP: Moody's warned that China Three Gorges ' offer for EDP is in a "critical" situation following the ongoing lawsuit against the Portuguese Government (Jornal Económico)
Italy: European Commissioner for Economic and Financial Affairs Pierre Moscovici said Italy’s plans for a 2.4% of GDP budget deficit is a “very, very significant” deviation from previous commitments (Bloomberg)
Italy: The head of the lower house budget committee said in an interview that the country could resolve debt problems with its own currency. He added that Italy would have declared a 3.1% budget deficit for 2019 instead of 2.4% of GDP, if it had wanted to go up against the EU (Bloomberg)
Italy: Deputy Prime Minister and 5 Stelle party leader Luigi Di Maio said in an interview that the Italian government will hold firm on targets in its budget plan for 2019. He added that the government is not willing to exit the euro or the EU (Bloomberg)
Italy: Finance Minister Giovanni Tria recognised that the 2.4% of GDP deficit does not comply exactly with some European rules, but stressed that it has always happened to some countries in the last few decades. According to Tria, previous governments’’ strategies didn´t work as debt kept rising, while in the 2019 budget law it is envisaged a decline although limited in the debt-to-GDP ratio (Bloomberg)
Italy: Deputy Premier Luigi Di Maio said the country will do all it can to continue to have a very important role in the European Central Bank after Mario Draghi’s term ends (Bloomberg)
Akzo Nobel: The Company will distribute a total of €6.5bn, including €1bn advance proceeds paid out in December 2017, to holders following completion of the sale of its Specialty Chemicals business. The further €5.5bn out of €7.5bn in total sale proceeds will be distributed through a capital repayment and share consolidation (€2bn), special dividend (€1bn) and share buyback (€2.5bn) (Bloomberg)
WHAT TO WATCH TODAY:
Brazil’s industrial production data for August is the highlight of today’s economic calendar.
EGB supply today to come from Austria (0% 2023 bonds and 0.75% 2028 bonds).
The BoE's Chief Economist Haldane, will speak today, as will BoE's Haskel. In the US, focus should be on Fed Chairman Jerome Powell speech at the annual NABE conference. Fed’s Powell will deliver another speech tomorrow in Washington.
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