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Patris Daily - 3 October 2018

3 Oct 2018



Europe: Major European stock indices closed negative, with Spain (-1.08%) being hit the hardest. STOXX 600 declined by 0.52% with 16 out of 19 sectors closing on the red. Basic Resources (+0.76%) and Utilities (+0.71%) outperformed, while Retail (-1.26%) and Industrial Goods & Services (-1.32%) were the major laggard.

Eurozone sovereign debt market: 10-year BTPs remained at centre stage (+15.3bps to 3.448%). The risk off backdrop helped Bunds yesterday (-4.9bps to 0.421%).

More than EU confrontation, market pressure will probably be key to force the Italian government to change its fiscal goals. The 10-year Germany-Italy spread reached 300bps. Spanish and Portuguese government bonds are experiencing, for now, only very contained pressure. 

According to newspaper Corriere della Sera, the Italian government will stick with its plan for 2.4% of GDP budget deficit in 2019, while reducing the targeted gap to 2.2% and 2.0% for the two following years (vs. the originally aimed 2.4% of GDP deficit for the next three years). The Italian press adds that the Finance Minister has reassured the President of the Republic on the changes.

ECB Governing Council and central bank of France’s President François Villeroy de Galhau said that the ECB will not alter its course to accommodate highly indebted nations. He sees the gradual normalization of ECB policy as “more and more warranted” by inflation and growth in the Euro Area. According to François Villeroy de Galhau, countries should avoid to take on more debt in a cyclical upswing.

ECB Governing Council and central bank of Finland’s President Olli Rehn considered that ECB’s forward guidance is appropriate. In the future, he sees the ECB sticking to the clear communication of the Bank’s reaction function, recalling that policy is data dependent.

PSPP net settlements for last week, reported yesterday, came in at -€410mn. This comes after the previous week’s €5,210mn and brings the net total to €2,075.931bn. ABSPP3 net purchases came out at a negative -€28mn in the week ending on 28 September, from net purchases of -€479mn the week before, to a new net total of €26.929bn. CBPP3 net purchases stood at €486mn for the week ending on 28 September (vs. €245mn in the week ending on 21 September), to a new net total of €259,270bn. Finally, net additions in the CSPP reached €1281mn, after €997mn the week before. The new net total stood at €170.378bn. Therefore, total net asset purchase settlements reached €1,329mn for the week ending on the 28 September, compared to €5,973mn the week before.

Total net asset purchase settlements stood at €29.7bn in September. The PSPP share in overall additions reached 78% in September (14% for CSPP). The monthly pace of net asset purchases will decline to €15bn over 4Q18. For Portugal, PSPP net settlements reached €546mn in August, or 2.5% of the total.

Portugal: PSI20 dropped for the third session in a row and closed down by 0.39%. 12 out of its 18 members finished the day on the red. The main Portuguese stock index was punished by the poor performances of BCP, Jerónimo Martins, CTT and NOS. Navigator and Semapa were the main outperformers.

FX & Commodities: The Euro declined against the US Dollar for the fifth consecutive session (-0.26%, and +0.31% as we type). The first future of Brent finished the day down by 0.21% (+0.25% as we type), while gold rose 1.21%.

US Equity & Debt Markets: The S&P500 finished the day little changed, -0.04% (Nasdaq Composite -0.47%). 7 out of the main 11 industry groups in the S&P500 finished the day with gains. Utilities (+1.28%) and Consumer Staples (+0.62%) were the main outperformers, while Consumer Discretionary (-1.43%) was the main laggard. 10-year UST yields fell 2.1bps to 3.064%.

Minneapolis Fed President Neel Kashkari (a non-voter this year on the rate-setting FOMC) said that he remained focused on the labour market. He added that the Federal Reserve is not seeing impact of tariffs in aggregate data, while most economic indicators are sending positive signals. He expressed concern with the flattening of the yield curve. He sees no reason for moving rates further up in order to slow the economy.

Neel Kashkari recognised that business investment has picked up, led by the oil sector. Nevertheless, he believes that the tax cut has not led to a huge uptick in business capex. On the labour market, he does not see a big uptick in wages yet, although some firms are using tariffs as an excuse to raise prices. On the US dollar, he considered that its strength reflects in part the domestic economy. Neel Kashkari sees EM, trade wars and the FOMC rate hiking cycle as risks to the economic outlook.

Boston Fed President Eric Rosengren (a non-voter this year on the rate-setting FOMC) said that inflation is still quite well behaved, as the Phillips curve is pretty flat. He does not see the FOMC rate hiking cycle as posing an imminent danger to Emerging Markets, but considered the US commercial real estate as a “yellow warning light”. He considered that next shock will come from abroad and that Europe is not well positioned for next negative shock. On the yield curve, he added that he watches the 10yr-2yr spread but is not obsessed with it.

US Federal Reserve Chairman Jerome Powell spoke yesterday at the annual NABE conference. On inflation, he said that there are no signs of a big shift in long-term inflation expectations. He sees the Phillips curve as neither dead nor showing an inflation surge. He considered the recent pickup in wages as “quite welcome” and stressed that higher wage growth alone need not to be inflationary.

The economy was characterized as operating with limited slack, supporting ongoing gradual hikes. He stressed that the Federal Reserve will act with authority if inflation expectation shift. He considered that a big inflation rise is unlikely if expectations are anchored.

He mentioned that the yield curve is not signaling that policy is tight, according to the signals that he watches. Finally, he stressed that fiscal policy is providing a real support to demand but long-term fiscal path is not sustainable.

Dallas Fed President Robert Kaplan (a non-voter this year on the rate-setting FOMC) said that he supported the FOMC’s removal of the word “accommodative” from its statement. He added that he is comfortable with one more hike in December and sees as a base case two hikes next year. He repeated that his current estimate for the neutral interest rate is 2.5%-2.75%. Once the Fed get to neutral, he mentioned that he is not prepared to say whether the Bank should move past neutral. He intends to look to several factors, including the outlook for GDP growth, labour slack, labour momentum and the yield curve.

Higher BTPs yields could also push lower UST yields.

Latin America: In Brazil, Datafolha released a new 2018 presidential election poll. Jair Bolsonaro’s voting intentions grew to 32% (vs. 28% in the previous poll), followed by Fernando Haddad (-1pp to 21%), Ciro Gomes (11% for the second poll in a row), Geraldo Alckmin (-1pp to 9%) and Marina Silva (-1pp to 4%). Jair Bolsonaro continues to lead the rejection list (-1pp to 45%). Fernando Haddad’s rejection rate increased sharply to 41% (vs. 32% in the previous poll). They are followed by Marina Silva with 30%, Geraldo Alckmin (24%) and Ciro Gomes (22%). Second round simulations show Jair Bolsonaro and Fernando Haddad technically tied even if slightly better at 44% vs. 42% (vs. 39%/45% before). Jair Bolsonaro would lose in a second round to Geraldo Alckmin (36% vs. 43%) and Ciro Gomes (37% vs. 42%).

Asia: With Chinese domestic stocks and Korea closed, most major stock indices in the region traded with a negative tone: TOPIX -1.17%, HANG SENG -0.06% as we type, HSCEI +0.36% as we type, TAIEX -0.51% and S&P/ASX200 +0.32%.


Spain: Registered Unemployment

According to data released by the “Ministry of Employment and Social Security”, registered unemployment rose by 0.64% m/m (-6.09% y/y) in September. This is the second month in a row that registered unemployment rises after an increase of 1.50% in August. Still, registered unemployment remains consistent with a favourable evolution of the Spanish labour market, having decreased 6.09% since September 2017.


BCP: Marshall Wace reduced its net short position by 17.39% to 86.1mn shares, or 0.57% of the Company’s stock (Bloomberg)

Portugal: Caixa Geral de Depositos could be close to selling a €850mn NPL portfolio (ECO)

Spain: The government said that a Catalan referendum is not an option and sees no reason to suspend Catalan self-rule (Bloomberg)

Red Electrica: The group intends to invest €7bn in transportation through 2025, Chairman Jordi Sevilla said at an event in Madrid. He added that Red Electrica has margin to take on further debt. He considered that Hispasat is interesting, but not a priority (Bloomberg)

Almirall: US FDA approved Seysara antibiotic treatment for acne. Almirall to launch Seysara in January 2019 in the US, with an estimated sales peak of $150mn-$200mn (Bloomberg)

Ryanair: The group wants to reach an agreement with Spanish pilots before Christmas and said that good progress is being made (Bloomberg)


The Italian budget remains the focus for financial markets. According to statements from the deputy prime minister Luigi Di Maio, the government will publish today the Update to the Economic and Financial Document, which will later be disclosed to the parliament. The discussion in both chambers of parliament starts next week.

Fed Chairman Jerome Powell will speak today in Washington.

Germany’s DAX index will be closed today.

On the data front, focus should be on September’s PMI/ISM indices. We will have an MPC meeting in Poland. The IMF releases today some chapters of the World Economic Outlook.


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