Awaiting PM May's plan B on Brexit

Notes/Observations

- Awaiting PM May’s plan B for Brexit; abandoned cross-party talks to fix Brexit

- China 2018 GDP hits a 28-year low; data fuels stimulus hopes

Asia:

- China Q4 GDP data in-line with consensus; Overall 2018 GDP growth of 6.6% being the slowest annual pace since 1990)

- China Dec Industrial Production Y/Y: 5.7% v 5.3%e

- China Dec Retail Sales Y/Y: 8.2% v 8.1%e; 2018 Y/Y: 9.0% v 9.0%e

- China Stats Bureau (NBS) noted that the Govt would cut more taxes and fees, increase social bond quotas. Reiterated that China had ample room for macro policy adjustments. Services sector was still operating at high levels despite Dec PMI slowdown. China-US trade war had affected domestic economy, but the impact was manageable

- China PBoC Gov Yi Gang: top growth risks were Fed policy and the Brexit

Europe:

- UK PM May said to consider amending Good Friday Agreement to get her Brexit deal past MPs. PM said to have abandoned attempts to negotiate a cross-party deal to solve Brexit deadlock. PM would update Parliament on Monday, Jan 21st on her attempts to draw up a so-called "plan B" for Brexit following cross-party talks in Westminster and discussions with other EU leaders

- Ireland said to reject the idea of negotiating a bilateral agreement with the UK as an alternative to the so-called backstop mechanism for avoiding a hard border with Northern Ireland after Brexit. Reports circulated that PM May was planning to seek a bilateral treaty with Irish govt as a way to remove the backstop arrangement from the Brexit divorce deal. Aides believed the plan could win support for her Brexit plan from the DUP and pro Brexit MPs

Americas:

- President Trump: there was a false report about lifting China tariffs; trade talks were going well and a trade deal with China "could very well happen"

- President Trump offered 3 year extension of DACA protections in exchange for $5.7B for border wall funding. wanted $5.7B in wall funding in exchange for the BRIDGE Act, which would provide a 3 year extension of protections for Deferred Action for Childhood Arrivals (DACA), and also a 3 year extension of the legal status of Temporary Protected Status (TPS) holders. The $5.7B would pay for a steel barrier covering 230 miles of the border and proposed adding 2,750 more border agents. Sen majority leader McConnell has agreed to hold a vote on this proposal in the Senate. House Speaker Pelosi said the offer is unacceptable and not a good faith effort.

- Fed's Brainard (voter, dove): negative risks to the US economic outlook have grown; political uncertainty could hurt consumers and business confidence

Energy:

- Weekly Baker Hughes US Rig Count: 1,050 v 1,075 w/w (-2.3% w/w)

 

Macro

(CN) China: GDP eased to a 6.4% y/y pace in Q4 from 6.5% y/y in Q3. GDP grew 6.6% for the whole of 2018, the slowest rate since in 28 years. The government has already responded by previously announcing a raft of tax cuts for small business over the next three years. The PBoC has also cut the reserve ratio for banks, and has effectively been in easing mode since the middle of last year. Meanwhile negotiations to end the trade stand-off with the U.S. continue. It seems only an agreement with the U.S. would prompt a mark-up in China's growth expectations at this stage.

(UK) United Kingdom: According to a US financial press report citing four unnamed U.K. diplomats EU-27 governments disagree over giving the UK more time to negotiate and find consensus at home, possible after another referendum. Some are willing to agree an extension of up to a year, while others reportedly want to keep the pressure on London to come to an agreement as soon as possible and accept the deal that is on the table now.

(UK) United Kingdom: UK Prime Minister May will present Brexit Plan B to the House of Commons today. It seems most likely there will be a Brexit-lite version, and efforts redoubled to persuade Brussels to renegotiate the Irish border backstop. MPs will also today motion legislative amendments aimed at stopping a no-deal Brexit.

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -0.35% at 355.80, FTSE +0.23% at 6,984.75, DAX -0.54% at 11,144.99, CAC-40 -0.25% at 4,863.24, IBEX-35 -0.12% at 9,058.35, FTSE MIB -0.64% at 9,062.35, SMI -0.15% at 9,003.50, S&P 500 Futures -0.50%]

 

Market Focal Points/Key Themes:

Equities
European Indices trade mostly lower with the FTSE outperforming on PM May trying to break Brexit deadlock by more EU concessions.
On the corporate front, shares of Henkel trades sharply lower after announcing FY18 preliminary earnings and giving weaker than expected initial FY19 guidance. On the earnings front Just Eat trades higher on trading update as Revenue comes stronger than guided and CEO stepping down; William Hill trades 4% lower on trading update; Meggitt trades higher on significant contract award.
Scout24 trades higher in Germany after it rejected potential takeover offer; Alstom trades slightly lower on reports EU official might finally block deal between company and Siemens. Elsewhere Flybe rises 35% in London as Hosking Partners said to explore legal challenge to bid for company.
Looking ahead notable earners include Johnson & Johnson, Halliburton Co, The Travelers Companies, Steel Dynamics, Prologis, Allegheny Technologies and another banking name Union Bankshares Corp.

- Consumer discretionary: Just Eat [JE.UK] +1.5% (prelim earnings; CEO steps down), William Hill [WMH.UK] -3.5% (trading update), Casino Guichard-Perrachon [CO.FR] +0.5% (disposal), Scout24 [G24.DE] +1% (rejects takeover offer), Flybe [FLYB.UK] +35% (Hosking Partners said to explore legal challenge to bid for company), easyHotel [EZH.UK] -2.5% (trading update), Ryanair [RYA.UK] +3.5% (analyst action), Flughafen Zuerich [FHZN.CH] -1.5% (analyst action)

- Industrials: Henkel [HEN.DE] -5.5% (prelim earnings; FY19 outlook), Meggitt [MGGT.UK] +2.5% (awarded contract), BMW [BMW.DE] -0.5%, Daimler [DAI.DE] -0.5% (said to explore possibility of extensive alliances)

- Technology: Siemens [SIE.DE] +1%, Alstom [ALO.FR] -0.5% (EU antitrust officials reportedly intend to block Siemens-Alstom rail tie-up)

 

Speakers

- Northern Ireland DUP party official Donaldson (part of May coalition): Need to focus on Brexit solutions; would be good to meet with Ireland PM

- Ireland European Min Mcentee: Would not engage in bilateral talks with UK, DUP; had not changed position on Irish backstop and would not accept time limit on backstop. If UK red-lines shifted then maybe could address concerns

- Germany Dep Foreign Min Roth: Ready for talks on Brexit. Reiterated that UK must give clear signals on Brexit

- Spain Foreign Affairs Min Borrel: EU needed guarantee that PM May had political support; could not negotiate in a blind way

- France Fin Min Le Maire: Domestic growth was solid despite un certainty

- Sweden Central Bank (Riksbank) Jansson (dissenter): Reiterates view that was wrong to raise rate at Dec meeting, CPIF above target largely driven by energy prices

- China President Xi: Current economic situation was good but faced deep and complicated changes. Called for keeping healthy economic development

- China PBoC Dir of Monetary Policy Sun Guofeng: Banks must support real economy to improve supply of credit; PBoC will encourage market-based interest rate reform; changes in forex situation will result in banks facing mid to long-term liquidity constraints

- China PBoC official: To push for rate reform to improve policy transmission. Working to push to merge the benchmark lending rate with the borrowing costs of the 7-day reverse repurchase agreement. Move could guide cheaper funding to the real economy

 

Currencies/ Fixed Income

- USD was little changed in a quiet session with US markets closed for holiday. Market participants focused on Brexit outcomes as well as US-China trade talks

- GBP/USD continued to move off its recent test of the 1.30 level as high uncertainty was likely to prevail in markets because the current situation regarding the UK's plan to leave the EU did not appear to be any closer to a solution. Pair last at 1.2830 by mid-session.

- EUR/USD was listless at 1.1370 area with markets looking ahead to Thursday’s ECB meeting. The Draghi press conference to be the primary focus given the recent spat of continued weak economic data for the region.

- USD/JPY holding just below the 110 level with recent JPY currency weakness attributed to optimism on the US-China trade front.

 

Economic Data

- (DE) Germany Dec PPI M/M: -0.3% v -0.1%e; Y/Y: 2.7% v 2.9%e

- (JP) Japan Dec Convenience Store Sales Y/Y: 1.2% v 0.6% prior

- (TW) Taiwan Dec Export Orders Y/Y: -10.5% v -3.6%e

- (CH) Swiss Dec M3 Money Supply Y/Y: 3.1% v 2.9%e

- (CH) Swiss weekly Total Sight Deposits (CHF): 576.3B v 575.2B prior; Domestic Sight Deposits: 482.3B v 483.0B prior

- (SL) Sri Lanka Dec National CPI (NCPI) Y/Y: 0.5% v 1.0% prior

 

Fixed Income Issuance

- (SK) Slovakia Debt Agency (Ardal) sold total €206.6M in 2028 and 2047 Bonds

- (NO) Norway sold NOK2.0B vs. NOK2.0B indicated in 3-month Bills; Avg Yield: 0.90% v 0.85% prior; Bid-to-cover: 1.51x v 1.89x prior

 

Looking Ahead

- (UK) PM May to present ‘plan B’ on Brexit (vote scheduled for Jan 29th)

- (IL) Israel Central Bank Jan Minutes

- 05:30 (BR) Brazil Central Bank Weekly Economists Survey

- 06:00 (IL) Israel Nov Manufacturing Production M/M: No est v 0.4% prior

- 06:00 (RO) Romania to sell RON400M in 4.5% 2024 Bonds

- 06:00 (IL) Israel to sell combined ILS1.45B in 2021, 2023, 2026, 2028 and 2047 bonds

- 06:45 (US) Daily Libor Fixing

- 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)

- 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming issuance

- 08:00 IMF 2018 global GDP: No est v 3.7% prior

- 08:00 (UK) Baltic Dry Bulk Index

- 08:50 (FR) France Debt Agency (AFT) to sell combined €3.9-5.1B in 3-month, 6-month and 12-month BTF Bills

- To sell €0.9B in 12-month Bills

- 09:00 (BE) Belgium Jan Consumer Confidence Index: No est v -5 prior

- 09:00 (PT) ECB’s Costa (Portugal)