To download the report, please click here If you would like to subscribe to receive the research sheets directly in your inbox, you can now do so under the Research Suite section of the portal. To subscribe simply check the box next to “Email these reports” under the desired category.
US MARKET WRAP 14th October 2019: US/China/Brexit optimism pared
* SNAPSHOT: Equities flat, Treasuries futs up, Dollar flat, Crude down.
* REAR VIEW: US/China trade deal framing differences; China September imports and exports miss exps; Brexit optimism fades ahead of key week.
* UPCOMING: Data: Chinese CPI, UK Employment, German ZEW, US NY Fed Manufacturing. Events: RBA Minutes & Fed Discount Minutes. Speakers: Fed’s Bullard, Bostic, George & Daly and BoE’s Carney & Vlieghe. Note: US Coupon Settlement. Auctions: UK and Germany. Earnings: Blackrock, JP Morgan, Wells Fargo, Goldman Sachs, Citigroup, J&J
* MARKET WRAP: Conditions were thin in the North American trade, with many players away on US Columbus Day and Canadian Thanksgiving. However, the positivity seen on Friday has been faded, as desks re-evaluate the optimism over US/China trade talks and challenges around the course for Brexit deal emerge. With that said, the usually hawkish Global Times editor has tried to explain away some of the differences in language used by the US/China over the weekend, while many Brexit watchers were never truly convinced that UK PM Johnson’s plan would be able to fly in its current form. And then on the margin, geopolitics around Turkey/Syria have been at the forefront of traders’ minds. It has left us with an equity complex which is largely flat, T-Note futures higher (settling 11 ticks higher at 130-07, though off the pre-market highs seen after reports that China wanted more discussions before signing the phase one trade deal). The DXY is horizontal, keeping EUR and JPY largely lacklustre too. In terms of the outliers, GBP is lower as Brexit optimism fades from the frothy levels seen at the end of last week; AUD and NZD were said to be defensive on questions about the phase one deal; BRL eased amid dovish calls in the latest BCB economist poll; ZAR was softer as we await the 30th October D-day for Eskom, when the South African budget is due and will reveal the extent of aid earmarked for the utility company.
* US/CHINA TRADE: Once again, the framing of the ‘deal’ reached at the tail-end of last week has come into question; the US has hailed it as ‘Phase One’ of a trade deal, while the Chinese are framing it as ‘substantial progress’ (state news did not even refer to a deal, stating that both sides “agreed to make the efforts toward a final agreement”). On Monday, Treasury Secretary Mnuchin framed it as a “fundamental agreement in principle”. The differences in the framing was cited as one of the reasons why traders were cautious on Monday, amid thinner liquidity conditions due to the Columbus Holiday in the US, and Thanksgiving in Canada. Particularly since Bloomberg, citing sources, reported that China wanted more discussions before signing the ‘Phase One’ deal with US President Trump. China Global Times editor explained that “the initial statement of the Chinese side is moderate,” and that this was “China’s habit,” and that it did not mean China’s real attitude is not positive. However, the uncertainty has rekindled traders’ memories of previous rounds of trade negotiations, where much of the positivity is walked back on in weeks that have followed. CNBC reporter said that China felt phase one was not balanced, so wanted the US to take December tariffs off of the table before committing to the deal.
* CHINA SEPTEMBER TRADE DATA: Disappointing data where China’s trade surplus widened on the back of both imports and exports declining in September (exports -3.2% Y/Y vs consensus -2.8%; imports -8.5% Y/Y vs consensus -6.2%); the trade surplus with the US narrowed, though widened with other Asian nations, with some desks noting the tentative signs of improvement to the continent (but ex South Korea). Analysts said the data revealed the impact of trade wars as well as China’s domestic slowing. The Phase One of the trade deal could help to reduce the US/China trade gap.
* FED: Fed’s Kaplan (non-voter, dovish) urged patience and an open mind with regards to future policy moves; Kaplan toed the Fed line that T-Bill purchases were not QE, but a mere technical adjustment. Meanwhile, Fed’s Kashkari defended central bank independence in an Axios interview.
* SYRIA/TURKEY: The US looks set to sanction Turkish individuals as soon as Monday amid Turkish President Erdogan declaring Turkish forces would not back down from their offensive against the Kurds in Northeast Syria. Following the US withdrawal from the region the Kurdish SDF has now gained the support of Assad’s Syrian Army – Russia has also said it has planned to “do something”. Over in Washington there has been bipartisan opposition to President Trump’s decision to withdraw US support, with politicians citing concern of a revival of terror groups such as ISIS and a need for tighter sanctions on Istanbul.
* WTI (X9) SETTLED USD 1.11 LOWER AT USD 53.59/BBL; BRENT (Z9) SETTLED USD 1.16 LOWER AT 59.35/BBL: The energy markets began the week on the back foot as participants became more wary on the “Phase one” trade deal announced on Friday. The increasing evidence of a less than certain “agreement” has bit into demand growth sentiment, reviving the challenging macro backdrop for oil participants. Productive OPEC supply updates did little to sway the price decline, but Russian Energy Minister Novak did reiterate Russia’s full commitment to the OPEC+ deal, adding that there were no discussions to alter the deal. The North Sea Buzzard oilfield (150k BPD) was reported to have resumed production following from prior reports there would be no timeline for resumption, providing more headwinds as the North Sea Forties crude stream regained its largest supply source. The latest Genscape forecast for Cushing stocks see the hub building 0.72mln bbls.
* BREXIT: Ahead of this week’s EU summit, Brexit talk progress was limited over the weekend, with EU negotiator Barnier stating that “a big gap” remains over customs arrangements, with other EU sources suggesting a deal this week was unlikely. However, EU ambassadors were informed that the UK would make concessions on the plan for the Northern Irish border. UK PM Johnson’s current plan is that N.Ireland will leave the EU customs union, and will therefore be treated the same as the rest of the UK, and to avoid a ‘hard border’, the UK would agree to enforce EU customs/tariffs rules on goods moving from the UK to N.Ireland, with a rebate system to compensate businesses; the EU side reportedly still needs convincing on how this would work in practice. The kicker is that sufficient progress has clearly not been made over the weekend, and for a deal to be signed-off by EU officials by the conclusion of the 17/18 October summit seems a high hurdle with a deal unlikely to be reached this week, EU sources suggested the summit is more likely to focus on an extension to January 31st, 2020 or later whilst there could also be a second special European Council before October-end; it is possible that talks will continue on Friday, after the EU summit has ended, and right up to UK Parliament’s special sitting on Saturday, when lawmakers will decide whether requirements are in place to trigger the ‘Benn Bill’ (if no deal has been reached before 19th October, the government must ask EU for an A50 extension through January 2020). Desks highlight that even if PM Johnson strikes a deal, it would still need to get through parliament, where there have been some questions around the arithmetic, given that pro-Brexiteers and DUP members may be hostile to some of the concessions the government could potentially make.
* ECB: ECB hawk Holzmann described the ECB’s loosening policy as ‘wrong’ and called for a temporary lowering of the inflation target to 1.5%. However, former ECB chief Trichet penned an op-ed defending the ECB’s actions, and called for a three-pronged fiscal response (fiscal action in countries with room; structural reform by all EZ nations; dynamic wage growth in full-employment nations), warning that reliance on the ECB could not continue forever. ECB VP de Guindos said he does not forecast the Eurozone entering recession, but does expect very low growth for a longer period.
* BOE: BoE’s Ramsden said he did not have a rate direction bias, but argued that there was less spare capacity within the economy than he previously thought, which made the case for less accommodative monetary policy. BoE’s Cunliffe says the economic outlook is weaker than we anticipated a year ago, reiterating that rate could move in either direction following a no-deal Brexit.
* CLOSING LEVELS: S&P 500 -0.1% at 2966, NASDAQ-100 0% at 7842, Dow Jones -0.1% at 26787
* SECTORS: Consumer Discretionary -0.1%, Consumer Staples -0.4%, Energy -0.1%, Financials 0.1%, Health Care 0%, Industrials -0.2%, Information Technology -0.1%, Materials -0.7%, Telecommunication Services -0.2%, Utilities -0.7%
* STOCK SPECIFICS: Freeport-McMoRan (FCX) dropped on the open as copper prices took a hit from poor import/export data in China. In chipmakers, Xilinx (XLNX) and Western Digital (WDC) opened higher after upgrades at Nomura Instinet and Loop Capital, respectively. Nike (NKE) traded at the top of Dow with gratitude to an upgrade at BofAML. HP Enterprise (HPE) and Arconic (ARNC) both traded higher after upgrades at Evercore and Cowen, respectively. Beyond Meat (BYND) tumbled on the open amid a Market Perform initiation at Wells Fargo. IPG Photonics (IPGP) took a hit after Needham downgraded the electronic good manufacturer to Hold from Buy. Parsley Energy (PE) dives lower amid its defensive all-stock acquisition of Jagged Peak (JAG). Activision Blizzard (ATVI) weighed on tech as the videogame developer is estimated to take chunky losses in Revenue from its player boycott, Cowen analyst suggests. Tapestry (TPR) weighed on retailers amid a downgrade at UBS. AMD (AMD) caught tailwinds from a source report that Intel (INTC) could skip 10nm chips for desktop CPUs and instead offer 7nm desktop CPUs in 2022. Hilton Grand Vacations (HGV) surged higher on reports that Apollo (APO) had bid close to USD 40/shr for it.