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9 Oct 2018
GLOBAL MARKETS OVERVIEW:
Europe: All the major European stock indices closed negative yesterday. Italy (-2.43%, reaching its lowest level since April 2017) underperformed, on the back of comments from Deputy Prime Minister Salvini and Deputy Premier Di Maio that the government will not bow to EU demands, sticking to its budget targets. Spain (-0.59%) was the least affected. STOXX600 declined by 1.12%, reaching its lowest level since May 2018, with 18 out of 19 sectors closing negative. Real Estate (+0.22%) outperformed, while Technology (-1.99%) and Industrial Goods & Services (-1.70%) were hit the hardest.
According to press reports, the IMF lowered its forecast for global growth for the first time in more than two years, reflecting rising trade tensions and turmoil in emerging markets.
Eurozone sovereign debt market: 10-year EGB traded with a mixed tone. Italian yields increased sharply across the curve, with the 10-year BTPs yield up by 14.3 bps to 3.56%, and the 30-year BTPs yield up by 10.7bps to 3.944%. On the opposite side, German and French yields outperformed with the 10-year Bunds yield declining by 4.4bps to 0.527% and the 10-year OATs yield down by 3.2bps to 0.870% (reflecting the risk-off backdrop).
ECB Governing Council member and Bank of France’s President François Villeroy the Galhau said yesterday that Italy’s combination of weak growth and high debt is too unbalanced. He sees investors and European authorities asking whether Italian debt is sustainable. He added that it is up to Italy to decide how to improve growth without raising debt, or face risk of higher yields because some investors could judge Italian debt to be too risky.
ECB Governing Council member and Dutch central bank’s governor Klaas Knot said yesterday that the ECB was clear in saying that the Bank is on the path of a cautious normalization. From January, he considers that the ECB will need to focus on what need to be done about interest rates. Regarding the current rate guidance, he highlighted that it is an only an expectation.
PSPP net settlements for last week, reported yesterday, came in at €5,210mn. This comes after the previous week’s €3,294mn and brings the net total to €2,075.931bn. ABSPP3 net purchases came out at a negative €479mn in the week ending on 21 September, from net purchases of €142mn the week before, to a new net total of €26.957bn. CBPP3 net purchases stood at €245mn for the week ending on 21 September (vs. €936mn in the week ending on 14 September), to a new net total of €258,784bn. Finally, net additions in the CSPP reached €997mn, after €936mn the week before. The new net total stood at €169.097bn. Therefore, total net asset purchase settlements reached €5,973mn for the week ending on the 21 September, compared to €5,308mn the week before. The PSPP share in overall net additions stood at 87%, after 62% the week before.
Portugal: PSI20 followed all other major European stock indices in the region and closed negative for the 6th time in 7 sessions (-1.55%, reaching its lowest level since September 2017), with 15 out of 18 members suffering losses. Jerónimo Martins (-1.39%), Sonae (-0.93%), BCP (-4.1%) and Mota Engil (-4.88%) reached a new 52-week low.
FX & Commodities: Gold fell by 1.29% (+0.24% as we type), while the first future of Brent declined by 0.30% (+0.75% as we type). The euro fell by 0.28% against the US Dollar (-0.08% as we type).
US Equity & Debt Markets: S&P500 recovered from the session’s lows (-0.81%) and finished the day little changed (-0.04%). The Nasdaq Composite index underperformed once again (-0.67%). 6 out of the major S&P500 industry group recorded gains. Consumer Staples (+1.34%) and Real Estate (+1.32%) were the main outperformers, while Technology (-1.18%) was the main laggard.
St. Louis Fed President James Bullard (a non-voter this year on the rate-setting FOMC) said that we cannot read as much into US labour markets as used to. He reiterated that higher US interest rates are no longer necessary and considered that US growth surprise allowed rates to be hiked. According to James Bullard, the FOMC is already close to neutral, given market’s low inflation expectations. He added that there is not that much inflation pressure in the US economy that could push the Federal Reserve to go a lot higher with the policy rate. James Bullard stressed that the recent steeper yield curve is a healthy development, given that he believes that the US economy is late in the cycle.
As we type, 10-year UST yield is up by 1.9bps to 3.252%, after being closed yesterday due to the Columbus Day.
Dallas Fed President Robert Kaplan (a non-voter this year on the rate-setting FOMC) said that the central bank should continue with gradual interest-rate increases. Until June, he said that we could have three more increases. Therefore, according to Robert Kaplan, moving in December would be appropriate. Regarding the move in 10-year UST yields, he said that announcements were made about the trade agreements with Mexico and Canada. Moreover, there are expectations that growth can be higher for longer. On the flatter yield curve, Robert Kaplan considers that it is consistent with expectations for future growth, while it also tells that there is a lot of global liquidity. According to Robert Kaplan, the FOMC should move interest-rates to the best judgment of neutral, and to consider what is the sustainable rate of economic growth. He thinks that the economy is already past the natural rate of unemployment.
Atlanta Fed President Raphael Bostic (a voter this year on the rate-setting FOMC) said that the US economy has been stronger than expected in 2018, raising the issue of whether it could overheat. He sees uncertainty regarding tariffs and trade policy remaining a feature of the economic landscape, with inflation around 2%. He recognised increased ability of firms to pass on cost increases. Current conditions are consistent with interest-rates moving to neutral.
Latin America: In Chile, consumer prices increased by 0.3%m/m in September, below consensus expectations of a 0.4%m/m rise. The annual rate of change accelerated to 3.1%y/y in September, from 2.6%y/y in August. Core inflation reached 2.1%y/y in September (vs. 1.9%y/y in August), exceeding the 2% lower bound for the first time in several months. In Colombia, consumer prices rose by 0.16%m/m in September (vs. consensus +0.18%m/m), after +0.12%m/m in August and +0.04%m/m in September 2017. The annual rate of change accelerated to 3.23%y/y in September, from 3.10%y/y in August.
Asia: With South Korea’s indexes closed due to an holiday, stocks in the region traded with a mixed tone: TOPIX -1.76% (after yesterday’s holiday), HANG SENG +0.10% as we type, SHANGHAI COMPOSITE +0.15%, HSCEI +0.61% as we type, TAIEX +0.10% and S&P/ASX200 -0.97%.
In China, the State Council announced an increase to export tax rebate rates and the acceleration of the shanty town redevelopment programme.
The RMB index remains weak.
OUR TAKE ON THE LATEST MACRO DATA:
Germany: August Industrial Production:
German total industrial production fell by 0.3%m/m in August, much weaker than expected (+0.3%m/m), following a 1.3%m/m decline in July (revised from -1.1/m/m), which suggest that the economy could slow in 3Q18 when compared to the 0.5%q/q pace of expansion posted by real GDP in 2Q18.
While energy (+1.3%m/m) and consumer goods (+1.4%m/m) production rose in August, that of capital goods (-0.7%m/m) and construction (-1.8%m/m) fell.
The July/August average stands 1.2% below the 2Q18 average (or -1.6% considering only manufacturing and mining). This weakness is probably due to the auto sector (new emissions testing regime). Therefore, a pick-up in the coming months is likely.
Portugal: IMF sees real GDP growing by 2.3% this year, in line with the September forecast and with the Portuguese Government expectations. In 2019, IMF expects economic growth to slow down to 1.8% (also unchanged vs. September), and well below the Government forecast of 2.3%. IMF forecasts a lower unemployment rate in 2018 (7.0% vs. 7.3% before), declining further to 6.7% next year (unchanged vs. the September forecast). CPI inflation is expected to reach 1.7% this year and 1.6% in 2019 (Negócios)
Vista Alegre: Vista Alegre Atlantis and its shareholder Visabeira Indústria announced yesterday the intention to proceed to an offer to subscribe for new shares to be issued in the context of an increase in the share capital of the company and their admission to trading on the Euronext Lisbon, and to an offer to sell ordinary shares representing Vista Alegre’s share capital already issued and held by Visabeira.
Vista Alegre operates in five segments: VAA’s Porcelain and Other Products (with over €40mn in sales, this is still the main business sector for VAA (with 43% of its turnover), as of 31 December 2017), VAA’s Stoneware Tableware, with the main purpose of selling to the IKEA group, with an agreement until 2026 (with nearly €18.4mn in sales, this business segment corresponds already to 20% of VAA’s turnover, as of 31 December 2017), VAA’s Crystal and Glass (as of 31 December 2017, this segment represented near €11.5mn in sales and 12% of the Company’s turnover), VAA’s Earthenware which is produced by Bordalo Pinheiro (this segment amounts to near €6.1mn in sales and adds 7% to the Company’s turnover, with reference to 31 December 2017), and VAA’s Oven-to-Tableware, produced at Cerexport and Cerutil, with a strong focus on the European market and highly specialized in Oven-to-Tableware design and production (on 31 December 2017, this segment represented near €16.7mn in sales and 18% of VAA’s turnover). VAA recorded a turnover of €48.228mn as of June 2018, compared to €92.661mn in December 2017, an operating result of €5.415mn compared to €9.741mn in December 2017, and a Net Income of €4.024mn compared to €6.444mn in December 2017 (Vista Alegre’s filing on CMVM)
Ferrovial: Ferrovial’s Amey Unit won a contract from Highways England to maintain a network of roads linking Manchester and Liverpool. The 15-year contract has a value of £325mn (Bloomberg)
Spain: According to Celeste-Tel poll published by Eldiario.es, the Governing Socialist party has 27.7% of voting intentions (vs. 22.8% in 2016 election), followed by PP with 26.3% (vs. 33.3% in 2016 election), Ciudadanos with 19.3% (vs. 13.2% in 2016 election) and Podemos & allies with 17.4% (vs. 21.3% in 2016 election) (Bloomberg)
Italy: Italian Deputy Prime Minister Matteo Salvini said Europe’s real enemy is Jean-Claude Juncker and the Brussels bureaucracy that pushes budget restrictions and open borders (Bloomberg)
Italy: Italian Deputy Premier Luigi di Maio told reporters in Berlin that EU and markets will eventually understand Italy plan and that Italy does not want to exit the euro or the European Union (Bloomberg)
Eni: Eni, BP, and Libya’s National Oil Corporation signed an agreement expected to lead to Eni and BP working together to resume exploration activities on a major exploration and production contract in Libya. Eni agreed to acquire a 42.5% interest in the BP-exploration and production sharing agreement in Libya (Bloomberg)
WHAT TO WATCH TODAY:
On the data front, we will have the NFIB small business optimism index released for September in the US. In EM, we highlight Mexico’s CPI data for September. The IMF releases today its latest World Economic Outlook.
In Italy, Finance Minister Giovanni Tria, as well representatives of the Bank of Italy, the Auditing Court and of the Parliamentary Budget Office are scheduled to speak before the Joint Budget Committees of the Lower House and Senate on the 2019 budget law.
Netherlands to sell up to €1bn of 2047 bonds, while Germany is scheduled to sell €500mn of I/L 2026 bonds.
Fed’s Kaplan speaks at the Economic Club of New York. Fed’s Harker gives a speech on the Importance of Higher Education to the US Economy at a conference hosted by his bank in Philadelphia.
In Brazil, Datafolha releases the first poll for the run-off of the Presidential and legislative elections.
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