Optimism remains for a potential minority government in Germany run by Merkel

EU Mid-Market Update: Optimism remains for a potential minority gov't in Germany run by Merkel

Notes/Observations

- German coalition talks fall apart but optimism remains for a potential minority govt run by Merkel

Overnight

Asia:

- China PBOC Q3 monetary policy implementation report: To maintain a prudent and neutral monetary policy and keep liquidity conditions stable, to fend off systemic risks. To improve its “twin pillar” framework by combining its monetary policy with macro-prudential assessment (MPA), while using multiple monetary policy tools to manage liquidity. Reiterated to the CNY currency (Yuan) stable while increasing the currency’s two-way flexibility.

- China NDRC Deputy Sec Gen Fan Hengshan: Initial 2018 GDP growth seen at 6.5%

- Japan Oct Trade Balance: ¥285.4B v ¥330.0Be; Exports y/y: 14.0% v 15.7%e (11th month of increase); Imports y/y: 18.9% v 20.2%e (highest annual pace since Jan 2014)

- Moody’s forecasted G20 2017 and 2018 GDP growth slightly above 3% 2018 compared to 2.5% registered in 2016. Expected China GDP growth to slowly decelerate in 2018. Potential protectionist turn in US trade policy could pose risk to trade-reliant economies

Europe:

- German Chancellor Merkel: Tried everything to make coalition talks work; regrets FDP’s decision. Main sticking point was immigration. To stay on as acting-Chancellor and inform German president on Monday, Nov 21st and would do everything possible to get Germany through difficult weeks

- Chancellor of Exchequer Hammond (Fin Min): We are on the brink of serious progress in Brexit talks; UK to make proposals to EU in time for the December EU Leader Summit. Needed to get transition period in place as soon as possible, preferably within the next few months

- UK Cabinet said to be ready to give UK PM a green light to increase Brexit divorce bill offer in an attempt to break deadlock in talks with Brussels

Americas:

- OMB Director Mulvaney: President Trump would agree to removing repeal of Obamacare mandate from the Senate tax bill if it becomes an impediment to passage

- US Special Prosecutor Mueller said to send request for documents to DoJ related to Russia probe

Economic Data:

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

- (JP) Japan Oct Convenience Store Sales Y/Y: -1.8% v 0.0% prior

- (NG) Nigeria Q3 GDP Y/Y: 1.4% v 1.5%e

- (TW) Taiwan Oct Export Orders Y/Y: 9.2% v 7.8%e

- (TW) Taiwan Q3 Current Account: $20.5B v $16.8B prior

- (IL) Israel Nov CPI 12-month Forecast: 0.8% v 0.6% prior

Fixed Income Issuance:

- (SK) Slovakia Debt Agency (ARDAL) sells total €229.9M in 2026 and 2037 bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -0.1% at 3,545, FTSE -0.2% at 7,366, DAX -02% at 12,970, CAC-40 flat at 5,320, IBEX-35 +0.1% at 10,019, FTSE MIB flat at 22,086, SMI +0.6% at 9,236, S&P 500 Futures -0.2%]

Market Focal Points/Key Themes: European stocks open lower but turned around after digesting situation in Germany; concern over German Chancellor Merkel potentially being unable to forma government dragged on risk sentiment, impacting German stocks at the start of the session; energy stocks supported by oil prices; commodity prices underperforming, but not enough to significantly impact material stocks; attention turning to events later in the week before Thanksgiving holiday; Argentina, Brazil and Mexico will be closed for holidays today; upcoming earnings in the US session include Cubic, Palo Alto Networks and Agilent

Equities

- Consumer discretionary: Air France AF.FR +2.9% (analyst action), D'ieteren DIE.BE +7.8% (partnership), Elior ELIOR.FR -4.2% (analyst action)

- Consumer staples: Dixy Group DIXY.RU -5.1% (potential delisting)

- Energy: Petroleum Geoservices PGS.NO +9.7% (settlement in Brazil)

- Financials: Bollore BOL.FR +2.0% (continuation following results), Julius Baer BAER.CH +1.1% (results)

- Healthcare: Ablynx ABLX.BE +5.4% (analyst action), DBV Technologies DBV.FR +12.4% (positive study results), Galapagos GLPG.BE +4.3% (positive data), Roche ROG.CH 4.2% (positive study results)

- Industrials: Gaussin ALGAU.FR +6.3% (awarded order)

- Materials: DSM DSM.NL +1.8% (acquisition)

- Technology: Xaar XAR.UK -17.7% (trading update)

- Telecom: Altice ATC.NL +10.7%(not planning capital issue), Mediaset MS.IT +3.9% (CFO comments over weekend)

Speakers

- German FDP parliamentary whip Marco Buschmann: Would support a minority govt lead by Angela Merkel

- Netherlands Min Zijlstra: EU expecting a substantial offer from UK on its Brexit offer and its must be concrete and on the table

- Former Italy PM Monti saw difficult elections in Italy. Believed that Gentiloni or Tajani could be PM; unlikely for Renzi or Berlusconi

- Poland Central Bank's Osiatynski: Interest rate hike might needed to maintain macroeconomic stability as country could not sustain GDP growth of 4.5-5.0% range

- UAE Oil Min Mazrouei saw logic in having OPEC extend the current phase of production cuts. He saw OPEC extending but not deepening the production cuts

- Iran Oil Min Zanganeh: Most OPEC members favor extending the current round of production cuts

Currencies

- Focus in FX markets was on Germany with the current German coalition talks collapsing. The EUR/USD tested 1.1722 during the Asians session. Some analysts noted that despite the political uncertainty in Germany the domestic economic engine remained robust and thus would not need the help of near-term reform efforts to continue to boom. The EUR/USD clawed back the majority of its losses on reports that FDP would support forming a minority government run by Merkel (rather than new elections. EUR/USD hovering aeound 1.18 area just ahead of the NY morninrg.

- The uncertainty in Germany initially weighed upon the EUR/JPY cross and trickled over into the USD/JPY pair as the JPY currency firmed. Both pairs managed to move higher on optimism that Merkel could remain as Chancellor in a minority govt

- GBP/USD was higher as optimism bubbled that the UK would soon bump up its offer for the Bexit financial settlement. GBP/USD higher by almost 0.5% at 1.3275

Fixed Income

- Bund futures trade 163.00 up 14 ticks, coming off the earlier highs as equity markets rebound from earlier weakness as German coalition talks fall apart. Continued upside sees 163.40 then 163.63. A reversal targets 162.50 then 162.38.

- Monday's liquidity report showed Friday's excess liquidity rose €1B to €1.849T. Use of the marginal lending facility declined to €214M from €235M prior.

- Corporate issuance saw ~$29B issued for the week via 50 traches. November volume now tops $84B, while 2017 volume approaches $1.3T.
In Europe €31.4B came to market, led by multi tranche deals from Vodafone and BT. 50 issuers came to market via 59 tranches.

Looking Ahead

- (SA) Saudi Arabia Sept Oil production: No est v 9.951M prior - JODI

- 05:25 (BR) Brazil Central Bank Weekly Economists Survey

- 05:30 (BR) Brazil Sept Economic Activity Index (Monthly GDP): M/M: +0.4%e v -0.4% prior; Y/Y: 1.4%e v 1.6% prior

- 05:30 (BE) Belgium canceled planned Bond Auction

- 05:30 (NL) Netherlands Debt Agency (DSTA) to sell €2.0-4.0B in 3-month and 6-month Bills

- 06:00 (PT) Portugal Reports Monthly Economic Survey

- 06:00 (IL) Israel to sell 2021, 2027 and 2045 bonds (4 tranches)

- 06:00 (RO) Romania to sell 5.95% 2021 Bonds

- 06:30 (CL) Chile Q3 GDP Q/Q: 1.5%e v 0.7% prior; Y/Y: 2.2%e v 0.9% prior

- 06:30 (CL) Chile Q3 Current Account: -$1.0Be v -$1.6B prior

- 06:45 (AT) ECB's Nowotny (Austria) speaks at Central Bank Conference in Vienna

- 06:45 (US) Daily Libor Fixing

- 07:15 (DE) ECB’s Lautenschlaeger (Germany) in Frankfurt

- 07:30 (AT) Central European Central Banks governors participate on Panel in Vienna

- 08:00 (PL) Poland Oct Sold Industrial Output M/M: 3.1%e v 6.0% prior; Y/Y: 9.9%e v 4.3% prior, Construction Output Y/Y: 23.9%e v 15.5% prior

- 08:00 (PL) Poland Oct PPI M/M: 0.2%e v 0.4% prior; Y/Y: 2.9%e v 3.1% prior

- 08:00 (PL) Poland Oct Retail Sales M/M: +3.5%e v -0.3% prior; Y/Y: 8.5%e v 8.6% prior, Real Retail Sales Y/Y: 7.5%e v 7.5% prior

- 08:00 (RU) Russia Oct Unemployment Rate: 5.1%e v 5.0% prior

- 08:00 (RU) Russia Oct PPI M/M: 0.8%e v 2.4% prior; Y/Y: 6.8%e v 6.8% prior

- 08:00 (RU) Russia Oct Real Retail Sales M/M: +1.2%e v -0.7% prior; Y/Y: 3.9%e v 3.1% prior

- 08:00 (DE) German President Steinmeier statement on govt coalition talks

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

- 08:05 (UK) Baltic Dry Bulk Index

- 08:50 (FR) France Debt Agency (AFT) to sell combined €5.0-6.2B in 3-month, 6-month and 12-month Bills

- 09:00 (EU) ECB chief Draghi in Brussels

- 09:00 (IN) India announces details of upcoming bond sale (held on Fridays)

- 09:15 (PT) ECB’s Constancio (Portugal) in Frankfurt

- 09:30 (EU) ECB announces Covered-Bond Purchases

- 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

- 10:00 (US) Oct Leading Index: 0.7%e v -0.2% prior

- 11:00 (EU) ECB chief Draghi in capacity as European Systemic Risk Board (ESRB) chair

- 11:30 (US) Treasuries to sell 3-Month and 6-Month Bills

- 16:00 (US) Weekly Crop Progress Report