Brexit negotiations poised to move into phase 2

Notes/Observations

- EU to recommend sufficient progress in Brexit talks; EU leaders to make final decision on progress after Britain made substantive changes to its proposed border text for a deal with the European Union

- US Senate passing an interim spending bill through to December 22nd

- Looking ahead; Nov US Payrolls in focus with wage data being key for inflation developments

Asia:

-China Nov Trade Balance: $40.2B V $35.0BE; Exports registers its fastest growth since March) (Y/Y: 12.3% v 5.3%e); Imports best suggesting that China's rebalancing strategy was working

- Japan Q3 Final GDP Q/Q: 0.6% v 0.4%e; GDP Annualized Q/Q: 2.5% v 1.5%e

Europe:

- German SPD Party Congress voted in favor of entering talks on joining a ‘grand coalition' with Chancellor Merkel's CDU party. SPD wants open-ended talks that leave form of support open; talks could take months before next German government takes office - Ireland Dep PM Coveney (Foreign Min): Deal Confirmed! Ireland supports Brexit negotiations moving to Phase 2 now that we have secured assurances for all on the island of Ireland; no hard border

Americas:

- US Congress passed legislation to fund Govt through Dec 22nd. House of Representatives voted 235-193; Senate voted 81-14

- GOP congressional leaders reportedly mulling 22% corporate tax rate level (vs 20%) as bill deadline nears

- White House Press Sec Sanders: expect Congress will pass a 'clean' stopgap spending measure

 

Economic Data:

- (NL) Netherlands Oct Manufacturing Production M/M: -0.7% v +1.4% prior; Y/Y: 4.0% v 5.2% prior, Industrial Sales Y/Y: 6.6% v 6.0% prior

- (DE) Germany Oct Current Account: €18.1B v €20.0Be; Trade Balance: 18.9B v €21.9Be; Exports M/M: -0.4% v +1.0%e; Imports M/M: 1.8% v 1.0%e

- (DE) Germany Q3 Labor Costs Q/Q: 0.7% v 0.1% prior; Y/Y: 2.2% v 2.3% prior

- (FR) France Oct Industrial Production M/M: +1.9%% v -0.1%e; Y/Y: 5.5% v 2.9%e

- (FR) France Oct Manufacturing Production M/M: 2.7% v 0.4% prior; Y/Y: 6.9% v 3.1% prior

- (FR) France Oct YTD Budget Balance: -€77.1B v -€76.3B prior

- (TW) Taiwan Nov Trade Balance: $6.0B v $5.0Be; Exports Y/Y: 14.0% v 9.4%e; Imports Y/Y: 9.0% v 6.7%e

- (CZ) Czech Nov Unemployment Rate: 3.5% v 3.5%e - (HU) Hungary Nov CPI M/M: 0.4% v 0.5%e; Y/Y: 2.5% v 2.6%e - (IS) Iceland Q3 GDP Q/Q: +2.2 v -1.1% prior; Y/Y: 3.1% v 3.4% prior

- (UK) Oct Industrial Production M/M: 0.0% v 0.0%e; Y/Y: 3.6% v 3.5%e

- (UK) Oct Manufacturing Production M/M: 0.1% v 0.0%e; Y/Y: 3.9% v 3.8%e

- (UK) Oct Visible Trade Balance: -£10.8B v -£11.5Be, Overall Trade Balance: -£1.4B v -£3.0Be, Trade Balance Non EU: -£2.4B v -£3.3Be

- (UK) BoE/TNS Nov Quarterly Inflation Survey (next-12months): 2.9% v 2.8% prior

- (GR) Greece Nov CPI Y/Y: 1.1% v 0.7% prior; CPI EU Harmonized Y/Y: 1.1% v 0.5% prior

**Fixed Income Issuance:

- (IN) India sold total INR150B vs. INR150B indicated in 2022, 2031, 2033, 2035 and 2055 bonds

- (ZA) South Africa sold total ZAR900M vs. ZAR900M indicated in I/L 2029, 2033 and 2050 bonds

- (SE) Sweden sold SEK770M in 0.25% I/L 2022 bond; Avg Yield: -2.0557 v -1.8724% prior; Bid-to-cover: 1.77x v 4.04x

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx600 +0.9% at 389.7, FTSE +0.2% at 7338, DAX +1.1% at 13185, CAC-40 +0.7% at 5419, IBEX-35 +1.0% at 10366, FTSE MIB +1.3% at 22741, SMI +0.3% at 9297, S&P 500 Futures +0.2%]

Market Focal Points/Key Themes: European Indices trade higher across the board, with strong gains in Germnay Spain and Italy, as the EU recommends Brexit negotiation move on phase 2. The FTSE 100 underperforms as the rise in Cable weighs on the Index. Berkeley Group outperforms in the UK after first half results, while Carl Zeiss trades higher after full year results which came slightly ahead of views. In the Healthcare space Erytech trades over 25% lower afters its phase 2b study failed to meet primary endpoint; Thrombogenics trades sharply lower after its Circle trial has been discountinued. The Banking Sector outperforms afteBasel Committee publishes the results of a cumulative quantitative impact study alongside the finalisation of the Basel III post-crisis reforms

 

Equities

- Consumer discretionary [Air France [AF.FR] +1.2% (Nov Metrics), Carl Zeiss [AFX.DE] +1.2% (Earnings)]

- Financials: [ Swiss Re [SREN.CH] +0.7% (CFO Steps down)]

- Healthcare: [ Erytech [ERYP.FR] -31% (Trial did not meet primary endpoint), Thrombogenics [THR.BE] -18% (Discontinues Phase II Circle trial)]

- Real Estate: [Berkeley Group [BKG.UK] +9% (Earnings)]

 

Speakers

- EU Commission stated that it had reached a breakthrough in Brexit negotiations and now ready for second phase of negotiations as it got the breakthrough needed via compromise. UK PM May assured that she had backing for deal. EU to recommend sufficient progress in Brexit talks while EU leaders to make final decision on progress, Hopeful member States share the Brexit assessment (**Note Summit is on Thurs, Dec 14th)

- EU's Tusk confirmed that Brexit progress had been made; should begin negotiating the transition period for clarity. To ask EU leaders to begin transition period immediately and ready to explore close EU-UK trade links. UK wanted a transition period of 2 years; UK should respect all EU laws during the transition period as well as budgets and courts. EU decision making during the period will be without UK

- EU Chief Brexit Negotiator Barnier to recommend that Brexit move into phase two of negotiations. Needed final version of withdrawal by Oct 2018. UK to honor all financial commitments and contributed to 2019 and 2020 budget. All phases are difficult in the Brexit negotiations; still need to spell out details . UK trade deal to be modeled after Canada's

- UK Brexit Min Davis: Big step forward in delivering the Brexit

- Ireland PM Varadkar: Sufficient progress made on Irish issues; UK committed to avoid a hard border. Citizens rights and common travel area remain. The Good Friday agreement was protected, Northern Ireland and UK will not drift apart

- Northern Ireland's Democratic Unionist Party (DUP) saw a breakthrough in Brexit border talk as Britain made substantive changes to its proposed text for a deal with the European Union. No red line down the Irish Sea and clear confirmation that the entirety of the United Kingdom was leaving the European union

- Swiss Stats Office updated its inflation forecasts which maintained 2017 CPI forecast at 0.5% and 2018 CPI forecast at 0.2%. It set 2019 CPI at 0.1%

- Sweden Central Bank (Riksbank) Gov Ingves: Investigating whether an e-Krona currency is needed

- Russia Central Bank's Morozov: 2018 CPI more likely to be below 4% than above it. Saw economic growth stabilizing around 1.5%

- China govt to implement new concepts in its 2018 economic work. To curb leverage ratio in 2018

 

Currencies

- The Brexit breakthrough paved the way for the 2nd phase of negotiations has aided the GBP currency. Britain made substantive changes to its proposed text for a deal with the European Union . EUR/GBP cross hit 6-months lows as it tested below the 0.87 level. GBP/USD did manage to retest above 1.35 but remained far below the key resistance of 1.36.

- Overall the USD continued to gain ground across the board against the major pairs. EUR/USD at 1.1735 and USD/JPY at 113.55. Focus on the US jobs report due out later today.

 

Fixed Income

- Bund futures trade 163.29 down 22 ticks, staying in a tight range so far in December. Continued downward pressure sees 162.10 followed by 161.50. A reversal targets 163.75 then 164.33.

- Gilt futures trade at 124.68 down 54 ticks, sliding amid risk-on tone and Brexit progress. Continued upside eyeing 125.25 then 126.35. Downside targets include 124.25 then 123.75.

- Friday's liquidity report showed Thursday's excess liquidity fell to €1.907T from €1.914T. Use of the marginal lending facility rose to €146M from €123M prior.

- Corporate issuance saw 7 issuers raise $4.8B in the primary market. Lipper reports equity fund inflows of $3B in week ending Dec 6th. High yield funds saw inflows of $217.4M in the week.

 

Looking Ahead

- (MX) Mexico Nov Nominal Wages: No est v 3.8% prior

- (UR) Ukraine Nov CPI M/M: No est v 1.2% prior; Y/Y: No est v 14.6% prior

- 06:00 (BR) Brazil Nov IBGE Inflation IPCA M/M: 0.4%e v 0.4% prior; Y/Y: 2.9%e v 2.7% prior

- 06:00 (FI) Finland Parliament could hold confidence vote

- 06:00 (UK) DMO to sell combined £4.5B in 1-month, 3-month and 6-month Bills (£2.0B, £1.0B and £1.5B respectively)

- 06:30 (IS) Iceland to sell Bonds - 06:30 (IN) India Weekly Forex Reserves

- 06:45 (US) Daily Libor Fixing

- 08:00 (UK) Nov NIESR GDP Estimate: 0.4%e v 0.5% prior

- 08:00 (IN) India announces upcoming Bill auction (held on Wed)

- 08:05 (UK) Baltic Dry Bulk Index

- 08:15 (CA) Canada Nov Annualized Housing Starts: 213.0Ke v 222.8K prior

- 08:30 (US) Nov Change in Nonfarm Payrolls: +195Ke v +261K prior, Change in Private Payrolls: +198Ke v +252K prior, Change in Manufacturing Payrolls: +15Ke v +24K prior

- 08:30 (US) Nov Unemployment Rate: 4.1%e v 4.1% prior, Underemployment Rate: No est v 7.9% prior

- 08:30 (US) Nov Average Hourly Earnings M/M: 0.3%e v 0.0% prior; Y/Y: 2.7%e v 2.4% prior; Average Weekly Hours: 34.4e v 34.4 prior

- 08:30 (CA) Canada Q3 Capacity Utilization Rate: No est v 85.0% prior

- 10:00 (US) Dec Preliminary University of Michigan Confidence: 99.0e v 98.5 prior

- 10:00 (US) Oct Final Wholesale Inventories M/M: -0.4%e v -0.4% prelim; Wholesale Trade Sales M/M: 0.3%e v 1.3% prior

- 11:00 (EU) Potential Sovereign ratings after EU close

- (EG) Egypt Sovereign Debt to be rated by Moody's

- (IS) Iceland Sovereign Debt to be rated by Fitch

- (PL) Poland Sovereign Debt to be rated by DBRS

- (PL) Poland Sovereign Debt to be rated by Fitch

- (RO) Romania Sovereign Debt to be rated by Moody's

- 13:00 (US) Weekly Baker Hughes Rig Count data

- 20:30 (CN) China Nov CPI M/M: No est v 0.1% prior; Y/Y: 1.8%e v 1.9% prior, PPI Y/Y: 5.8%e v 6.9% prior