Global risk-off sentiment continues; awaiting EU formal response to Italy 2019 budget

Notes/ObservationsAsia:

- Earnings season showing that companies mostly missed expectations; safe-haven flows dominate the session

- Awaiting the formal EU decision on Italy’s budget but both sided look to sort out differences

Asia:

- China govt official Zhang Qingli reportedly told US investors at meeting that 'We don't fear a trade war with the US'

- Japan Fin Min Aso: 'In principle' the sales tax increase will happen as planned, some disruption expected when it takes place but will not delay for that

Europe:

- PM May: the broad shape of a Brexit deal is now clear and could guarantee UK would leave EU in March 2019. Must make the UK backstop legally binding. Had not committed to extending transition period; any transition extension would be undesirable. Extending the transition might be preferable to a backstop

- UK Brexit Min Raab: It's up to the speaker to decide on the terms of a meaningful vote on Brexit deal. Amendments to meaningful vote cannot delay or prevent Brexit; it's important parliament is presented with a clear choice in a meaningful vote

- UK Conservative MP Baker said to withdraw amendments that could have torpedoed Brexit talks on the Irish backstop

- Eurogroup chief Centeno stated that he still expected a deal to be reached over Italian budget; the latest reaction by Italy to the EU commission's budget warning was constructive

- OBR underestimate on tax receipts gives Finance Ministry a £13B/yr windfall in budget to ease pressure on National Health Service (NHS)

Americas:

President Trump seeking extra tax cut of 10% for middle income (Reminder: On Oct 20th Trump stated that was studying a major tax cut for middle income Americans; would give details in early November

 

Macro

(US) United States: Markets are likely to become increasingly nervous as the November 6 Midterms get closer. Most polls point to the Democrats flipping the House and gaining the majority, while a still Republican-controlled Senate likely leading to gridlock. Such a result would obviously stall the Trump administration's agenda, limit spending, block further tax cuts, and delay action on tariffs. A split Congress though could see lawmakers try to reach across the aisle to strike deals on trade, infrastructure, taxes, and drug policies. A Democratic sweep would see heightened probability of impeachment proceedings, keeping the government in limbo, though again likely a net negative for stocks, while GOP control of both Houses likely would see support for the market.

(US) United States: 3M Libor has risen to 2.4874%, the highest since late 2008, as the FOMC continues its normalization path. This, along with the firmer dollar, are adding to global financial concerns - the rise in rates at the beginning of the year actually weighed on the markets, although that was likely due to the surge in bill issuance that pushed up short rates.

(DE) Germany: PPI inflation unexpectedly ticked up to 3.2% y/y in September. Energy price inflation accelerated to 8.5% y/y during the month - the highest rate since November 2011. Prices for mineral oil products rose 18.5%% y/y. Cost pressures continue to increase then, which in combination of ongoing capacity constraints in some sectors should gradually push up underlying inflation.

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -1.38% at 354.78, FTSE -0.90% at 6,979.19, DAX -2.16% at 11,275.03, CAC-40 -1.43% at 4,981.00, IBEX-35 -1.19% at 8,702.00, FTSE MIB -1.02% at 18,773.50, SMI -1.12% at 8,762.50, S&P 500 Futures -1.21%]

 

Market Focal Points/Key Themes:

Equities

European Indices trade lower across the board tracking weaker Asian Indices and lower US futures. Underwhelming corporate earnings pressuring markets as Renault, Whitbread, Logitech, AMS, Sartorius, SAAB, AMS and ATOS among the notable decliners following earnings and guidance. Ingenico trades higher despite cutting their EBITDA outlook after growth in revenue, Luxottica also bucks the trend with a slight Rev beat while Innate pharma trades higher after a partnership with Astrazeneca.
Looking ahead notable earners include Catepillar, 3M, Verizon, Lockheed Martin, United Technologies and McDonalds among others.

- Consumer discretionary: Ingenico [ING.FR] +0.5% (earnings), Whitbread [WTB.UK] -3% (earnings), Communisis [CMS.UK] +37% (proposed to be acquired)

- Consumer staples: Scandinavian Tobacco Group [STG.DK] -2% (transformation program)

- Financials: Swedbank [SWEDA.SE] +0.5% (earnings; comments on Danske Bank case), St. James Place plc [STJ.UK] -4.5% (reports increase in FUM), Gam Holding AG [GAM.CH] -18% (reports fall in AUM)

- Healthcare: Bayer [BAYN.DE] -7% (new press speculation on Roundup case; Trump drug prices comments), Innate Pharma [IPH.FR] +29%, AstraZeneca [AZN.UK] -0.5% (partnership with Astrazeneca; sold stake to it), UCB [UCB.BE] -1.5% (positive topline results with Biogen),

- Industrials: Renault [RNO.FR] -2.5% (earnings; global market growth cut), Anglo American plc [AAL.UK] -1.5% (reports copper production; raises platinum production outlook), Saab AB [SAABB.SE] -13% (earnings), DP World [DPW.UK] +1.5% (trading update),

- Technology: Logitech International [LOGN.CH] -6% (earnings), AMS AG [AMS.CH] -30% (earnings), Atos SE [ATO.FR] -23% (earnings, outlook cut), Avast Software [AVST.UK] -7% (one of holders sold shares), Sartorius [SRT.DE] -7% (earnings)

 

Speakers

- Italy said to have expressed hope that ECB would purchase the country's securities if needed

- ECB said to have raised its monitor of the Italian banking sector liquidity

- ESM chief Regling: Worried about Italy due to its fiscal plans. Reiterated view that Italy was not Greece; contagion risk seen limited

- Bank of Spain: Aug Non-performing Loans (NPLs) Ratio at 6.32%

- Bank of Italy (BOI) Lending Survey: Banks saw credit standards unchanged for both households and companies in Q4

- Indonesia Central Bank (BI) left the 7-Day Reverse Repo Rate unchanged at 5.75% (as expected)

- Indonesia Central Bank Policy Statement noted that the current level of Interest rate was in-line to lower the current account deficit and would continue to monitor C/A balance, inflation and exchange rate. Reiterated stance that would continue with stabilization measures. Did not see Q3 GDP as strong as previously expected due to weak exports. Inflation remained low and stable; govt to strengthen the coordination to manage CP. Remained committed to lowering the current account deficit and would guard IDR currency (Rupiah) to be in-line with fundamentals.

- Japan Cabinet Office Oct Monthly Economic Report: Maintained economic assessment, economy is recovering at moderate pace. Lowered assessment on exports from ‘recent pause’ to 'almost flat'

- Japan Econ Min Motegi: Domestic fundamentals remained solid

- Saudi Oil Min Al-Falih: Oil demand to reach 120M bpd in three decades time

 

Currencies

- The slide in equity markets prompted the usual safe-haven flows but overall dealers cited the absence of clear trends.

- Awaiting the formal EU decision on Italy’s budget but both sides looked to sort out differences . Analysts forecast a relatively market-friendly outcome from S&P Ratings on Italy this coming Friday (Oct 26th). EUR/USD began the session on soft footing but hope expressed by Italy that the ECB would stand by with support helped to calm any volatility in the BTP markets for now. EUR/USD little changed but still below the 1.15 handle.

- GBP/USD main focused remained on Brexit negotiations. PM May will meet her cabinet on Tuesday and no leadership challenge appears to be the norm for the moment. GBP/USD holding below the 1.30 level ahead of the NY morning.

 

Economic Data:

- (DE) Germany Sept PPI M/M: 0.5% v 0.3%e; Y/Y: 3.2% v 3.0%e

- (DK) Denmark Oct Consumer Confidence: 5.1 v 6.9 prior

- (FI) Finland Sept Unemployment Rate: 6.3% v 6.8% prior

- (JP) Japan Sept Final Machine Tool Orders Y/Y: 2.9% v 2.8% prelim

- (ZA) South Africa Aug Leading Indicator: 104.9 v 105.4 prior

- (TR) Turkey Oct Consumer Confidence: 57.3 v 59.3 prior

- (PL) Poland Sept Unemployment Rate: % v 5.8%e

- (TW) Taiwan Sept Industrial Production Y/Y: 1.5% v 1.6%e

- (ES) Spain Aug Trade Balance: -€3.1B v -€3.3B prior

- (HK) Hong Kong Sept CPI Composite Y/Y: 2.7% v 2.6%e

- (IS) Iceland Sept Wage index M/M: +0.6% v -0.1% prior; Y/Y: 5.9% v 6.0% prior

 

Fixed Income Issuance

- (NL) Netherlands Debt Agency (DSTA) sold €1.925B vs. €1.5-2.5B indicated range in 0.75% July 2028 DSL Bonds; Avg Yield: 0.555% v 0.471% prior

- (ID) Indonesia sold total IDR20T vs. IDR10T target in 3-month and 9-month Bills, 5-year, 15-year, 20-year bonds

 

Looking Ahead

- (UR) Ukraine Sept Industrial Production M/M: No est v -0.5% prior; Y/Y: No est v -0.5% prior

- (RO) Romania Sept M3 Money Supply Y/Y: No est v 10.8% prior

- (SA) Saudi Investment Conference begins (Davos in the desert)

- (UK) PM May holds Cabinet meeting

- 05:30 (UK) Weekly John Lewis LFL sales data

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO)

- 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

- 05:30 (ZA) South Africa to sell combined ZAR2.4B in 2023, 2032 and 2048 bonds

- 05:30 (UK) DMO to sell 0.125% Index-linked 2028 Gilts

- 06:00 (UK) Oct CBI Industrial Trends Total Orders: +2e v -1 prior, Selling Prices: 15e v 13 prior, Business Optimism: -4e v -3 prior

- 06:00 (TR) Turkey to sell Bonds

- 06:30 (UK) BOE’s Haldane (chief economist) in Paris

- 06:45 (US) Daily Libor Fixing

- 08:00 (BR) Brazil Mid-Oct IBGE Inflation IPCA-15 M/M: 0.7%e v 0.1% prior; Y/Y: 4.6%e v 4.3% prior

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:05 (UK) Baltic Dry Bulk Index

- 08:55 (US) Weekly Redbook Sales

- 09:00 (MX) Mexico Aug IGAE Economic Activity Index (monthly GDP) Y/Y: 1.9%e v 3.3% prior

- 09:00 (EU) Weekly ECB Forex Reserves

- 09:00 (RU) Russia announces weekly OFZ bond auction (held on Wed)

- 09:30 (US) Fed’s Kashkari (dove, non-voter)

- 10:00 (US) Oct Richmond Fed Manufacturing Index: 24e v 29 prior

- 10:00 (EU) Euro Zone Oct Advance Consumer Confidence: -3.2e v -2.9 prior

- 11:20 (UK) BOE Gov Carney in Toronto

- 11:30 (US) Treasury to sell 4-Week Bills

- 13:00 (US) Treasury to sell 2-Year Notes

- 13:30 (US) Fed’s Bostic (dove, voter)

- 14:15 (US) Fed’s Kaplan (dove, non-voter)

- 15:00 (AR) Argentina Sept Trade Balance: +$0.2Be v -$1.1B prior

- 16:30 (US) Weekly API Oil Inventories

- 18:15 (US) Fed’s Evans (dove, non-voter)