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29 Oct 2018
GLOBAL MARKETS OVERVIEW:
Europe: Stocks traded in the red across the region, reflecting sharp losses in US equity markets. Portugal (-1.27%) and France (-1.29%) underperformed, while Spain (-0.62%) was hit the least. The German DAX index underperformed last week (-3.06%).
STOXX 600 fell 2.45% last week and is now 9.45% down since the beginning of the year. 18 out of 19 sectors closed negative on Friday, with Food & Beverages outperforming (+0.04%), while Telecoms (-1.99%) and Media (-1.82%) were the main laggards.
Eurozone sovereign debt market: 10-year EGB yields dropped on Friday reflecting the risk off backdrop in equity markets. 10-year German Bund yields fell 4.5bps to 0.35% to the lowest level since the beginning of September. 10-year Italian BTPS yield were down 4.8bps to 3.439%. 10-year Italy-Germany spread remained broadly stable at 309bps.
Respondents to ECB’s Survey of Professional Forecasters see growth of 2.0%, 1.8% and 1.6% in 2018, 2019 and 2020, revising down projections for the first two years. Average longer-term inflation expectations (which refers to 2023) remain at 1.9%. Core inflation forecasts revised lower to 1.1% for 2018 and 1.4% for 2019 (2020 forecast unchanged at 1.7%). Forecasts for unemployment revised down through 2020.
ECB Executive Board member Benoît Coeuré said on Friday that significant monetary policy stimulus is still needed. This support will continue to be provided by the net asset purchases until the end of the year, by the sizable stock of acquired assets and the associated reinvestments, and by the ECB enhanced forward guidance on the key ECB interest rates.
Portugal: PSI20 underperformed STOXX600 by falling 1.27% on Friday. The main Portuguese stock index declined 2.01% last week and is now down 8.60% since the beginning of the year. Altri finished the day flat. The other 17 members of the index showed losses, with Mota-Engil (-2.9%) and BCP (-2.8%) as the main laggards.
FX & Commodities: Gold rose by 0.11% (-0.07% as we type), while the first future of Brent increased 0.95% (-0.39% as we type). Theeuro strengthened by 0.25% against the US dollar (-0.03% as we type).
US Equity & Debt Markets: S&P500 fell by 1.19% on Friday and is now down by 8.76% since the beginning of the month. 10-year UST yields fell by 4.2bps to 3.076% (3.069% as we type).
Federal Reserve Bank of Dallas President Robert Kaplan (a non-voter this year on the rate-setting FOMC) said that he has been expecting some moderation of growth, amid waning fiscal stimulus in 2019 and 2020. He supports a patient and gradual move to a neutral stance, which he puts at 2.5%-2.75% or 2.75%-3.00%. On the weak home sales data, Robert Kaplan sees the effect coming from the input costs, labour shortages, higher input costs and mortgage rates. He added that the FOMC is watching carefully housing market data. According to Robert Kaplan, input costs are higher across the board (labour, materials, steel and aluminium), and companies are struggling over whether they can pass that on. Moreover, he added that tariffs are not having a big effect on headline GDP growth but they are having a big effect on companies and industries.
Federal Reserve Bank of Dallas President Loretta Mester (a voter this year on the rate-setting FOMC) mentioned on Friday that market volatility, so far, has been typical. She acknowledged that there are risks that are being reassessed, but that recent market volatility has not changed her outlook. She recognises some slowing in US growth, with the economy still growing above-average (as financial conditions are still accommodative). The global economy is also slowing, with tariffs adding uncertainty. Loretta Mester sees the long-run federal funds rate at 3%. The Fed should continue to gradually remove accommodation. She sees signs that some firms are raising wages.
The increase in US high yield spreads is, so far, modest…
Asia: Stocks in the region traded with a mixed tone: TOPIX -0.40%, HANG SENG -0.24% as we type, SHANGHAI COMPOSITE -2.50% as we type, HSCEI -1.25% as we type, TAIEX +0.29%, KOSPI -1.53% and S&P/ASX200 +1.11%.
OUR TAKE ON THE LATEST MACRO DATA:
US: 3Q18 GDP (first reading)
Real GDP expanded at a 3.5% annualised rate in 3Q18, slightly above expectations (3.3%). Consumption growth accelerated to 4.0% annualised, from 3.8% in 2Q18. Government consumption also picked up to 3.3%, from 2.5%. Non-residential investment increased only 0.8%, reflecting weakness in structures investment. Equipment investment rose only 0.4%, while residential investment contracted by 4.0% (the third quarterly contraction in a row).
Net exports subtracted 1.78ppt from GDP growth in 3Q18, after the 1.22ppt positive contribution recorded in 2Q18. Inventories added 2.07ppt to GDP growth in 3Q18, after subtracting 1.17ppt in 2Q18.
ACS: The Company was announced as “apparent low builder” for Joint Water Pollution Control Plant Effluent Outfall Tunnel Project for sanitation districts of Los Angeles County in California. The project has a value greater than $630mn (Bloomberg)
Bankia: 3Q18 net income reached €229mn (vs. consensus €226.4mn), while NII stood at €495mn (vs. consensus €508.9mn). 3Q18 CET1 fully loaded stood at 12.5%, while 3Q18 bad loans ratio reached 7.8% (Bloomberg)
WHAT TO WATCH TODAY: The September personal income/spending report in the US is the highlight of today’s data calendar.
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