Site Loader

Description: cid:image001.jpg@01C9A16A.8E365320

 

cid:image006.png@01D0F773.9F224F70

 

 

Talking Points

Fixed Income

  • According to sources familiar with the matter the near-deal reached between the US and China in May is being used as a benchmark in deciding just how far tariffs will be rolled back if a phase 1 deal is secured. The White House is still reportedly debating internally what the exact percentage will be, while China continues to demand that all tariffs imposed after may be removed and that prior tariffs introduced be rolled back gradually. The US, however, will likely try and keep some of the initial tariffs in place as insurance that the Chinese will live up to their end of the agreement, if one is signed.
  • Meanwhile, the US Senate unanimously passed a bill yesterday that is aimed at supporting Hong Kong protesters while also warning China against the use of violence in trying to suppress the demonstrations. The bill will no doubt cause some friction between the two countries as they still try and negotiate a trade deal. With the protests continuing and ramping up, the US will be pressured to intervene which will not go down well with the Chinese authorities, who have already pushed back against the bill.
  • The minutes of the Fed?s October meeting will be released today and will provide some fresh insight into the Fed?s reasoning behind the 25bp cut delivered in October, that was accompanied by a less dovish stance than in the past. It seems as though the Fed expects US economic growth to hold up for a while longer, with Chairman Powell saying last week that the economy remains healthy and that current levels of monetary policy are appropriate. Powell did, however, once again note that there are risks to the outlook for the economy, which will keep the Fed ready to act, if necessary, to sustain the current expansion. As such, the Fed?s minutes will likely signal that it is going to remain data-dependent in the coming months and set policy accordingly.
  • US Treasuries remained bid yesterday, climbing fairly sharply after the US morning session began and holding onto their gains throughout the remainder of the day. Some negative reports on the US-China trade front, and oil sell-off, and the passing of the Hong Kong bill all helped drive the gains, which were led by the long end and saw the 10v2 spread compress for the fifth straight session. The 10v2 narrowed to around 18bp by the end of the day yesterday and has continued this trend in early morning trade today, with futures suggesting that the spread will drop to 17.25 at the cash open today.
  • The benchmark 10yr yield, meanwhile, broke below the 100DMA support level at 1.782% yesterday and is likely to open today?s session by testing the 50DMA at 1.751%. A break below here could see the current momentum continue which could push yields as low as 1.692%, especially s technical momentum indicators such as the stochastic have yet to reach oversold
  • It was another robust day in terms of corporate credit issuance yesterday, despite the pace easing off from Monday?s hot start to the week. Five issuers came to the IG primary market yesterday to raise $4.05bn, with demand metrics holding up on the day
  • Last night’s live debate between Boris Johnson and Jeremy Corbyn did not go according to plan for Johnson if the latest YouGov poll results are anything to go by. They showed that the outcome was neck and neck and that the boost that Johnson was hoping for was absent. Although the broader polls show that the Tories have a comfortable lead, it is becoming questionable whether Johnson will secure the majority needed in order to push through his Brexit deal in its current form.
  • Concerns are growing that if all the election promises are delivered on, that it would only lead to a further accumulation of debt on top of Britain’s already heavy debt burden. Such is the nature of populist politics and the fallacy of allowing governments to borrow money on an ongoing basis, under the “mandate” of the electorate. While the UK has gotten away with fiscal profligacy for years on account of the search for yield and QE, the burden is steadily building.
  • As UST yields have moderated on the ongoing tensions with China, so DM yields more generally have caught a bid tone. Interestingly, that has not applied to the same degree with sterling bonds that have enjoyed some support, but have not recovered to the degree that USTs or JGBs have done.
  • It may be because the BoE has been relatively more conservative, or it may be that there are fiscal concerns that are building amid growing election promises that will only serve to boost the debt pile of the UK economy to levels that will detract from its credit rating. Moody’s has already warned that such a downgrade is in the offing on account of the budget deficit.
  • Australia will be looking to fast-track some infrastructural spending in a bid to help bolster economic growth. The government has earmarked A$3.8bn PM Morrison announced earlier today, this after economic growth in Australia softened to its weakest levels in a decade as consumption and home building came under pressure.
  • China has requested that the US considers rolling back on more tariffs that were implemented through the trade war as part of the phase one agreement. China believes that such a show of good faith would go a long way to thawing relations and prove to be a catalyst for more constructive negotiations through the months ahead. Whether Trump would accede to such a request is however doubtful, given that he believes that the progress achieved so far has been the result of the leverage placed on China and the negative response function from the economy which has forced China to compromise.
  • JGBs have recovered strongly through this morning’s trading session. Stock markets are looking less positive than they did and concerns are once again growing on the prospects for a trade deal between the US and China. Add to that the disappointing trade data released this morning and the appreciation that the trade war has had a significant effect on Japan’s economy and one can appreciate how growth expectations have moderated as a result. There has been a general shift towards safe-haven assets and JGBs have benefited as a result. The flattening in the yield curve simply gives credence to the weak growth narrative above.
  • As the draft of the proposals to reform the euro zone?s bailout fund are nearing finalisation, Italian political officials and heads of certain institutions are debating whether to block its passage. The proposal would involve turning the ESM bailout fund into a European Monetary Fund that would make support for countries in financial crisis conditional on them restructuring their debt. The Italians are concerned that the introduction of this could lead to a loss of fiscal sovereignty and force austerity measures for countries in financial distress. On the flip side however, if this acts as a deterrent to fiscal maladministration then it would be tantamount to imposing a fiscal rule on governments that would not want to have these fiscal restrictions imposed on them and it ultimately might discourage the default use of debt to satisfy populist politics. Although not strictly a EZ problem, the rising indebtedness of governments is becoming an increasingly worrisome trend that will necessarily translate into weaker growth for generations to come.
  • German bund yields are threatening to dip lower once more, with the gravitational pull of USTs and JGBs likely to prove too much to ignore. Although there is some resistance that has been found towards -36bp on the 10yr benchmark, a further erosion of sentiment will be all it takes to nudge those yields through the resistance level and dip back towards the next barrier around -40bp.
  • This will likely exacerbate the recent trend where the peripheral bonds have underperformed core bond markets. Higher risk markets have more generally underperformed and that is set to continue for a while longer. Some focus will however turn to the German PPI data today scheduled for release.

 

 

 

EUR Influences Talking Points Market Movements ? Outlook
No Data As the draft of the proposals to reform the euro zone?s bailout fund is nearing finalisation, Italian political officials and heads of certain institutions are debating attempting to block its passage. The proposal would involve turning the ESM bailout fund into a European Monetary Fund that would make support for countries in financial crisis conditional on them restructuring their debt. The Italians are concerned that the introduction of this could lead to a loss of sovereignty and forced austerity measures for countries in financial distress. The EUR continued to edge higher against the USD yesterday, however, it does appear as if the momentum is slowing, with the EUR-USD pair offered this morning. For any further significant gains to be made, we would need to see a break above the 100DMA at 1.1091 occur.
GBP Influences Talking Points Market Movements ? Outlook
No Data Sabine Weyand, the EU’s Director-General for Trade, said yesterday that there was only time to negotiate a “bare-bones” trade deal with the UK next year, as the transition period will give negotiators less than 12 months of talks. The alternative to this, according to Weyand, was a no-deal Brexit at the end of the transition period. These comments contradict those of UK PM Johnson, who continues to assure the UK public that a full deal can be achieved before the end of next year. They also highlight the scale of the efforts needed next year to reach any sort of deal, suggesting that the UK economy will remain in limbo for some time to come. The GBP-USD dropped back down towards the 1.2900 level yesterday following the comments surrounding the expected trade deal. This offered tone remains this morning, with the GBP bulls likely under pressure following the latest poll numbers after the Johnson-Corbyn debate. As such, we could see a break below the 1.29000 mark occur in the coming session, which could open the door for a further drop back towards 1.28000.
USD Influences Talking Points
FOMC meeting minutes Oct 30

 

MBA Mortgage Application Nov 15 (prior, 9.6%)

The minutes of the Fed?s October meeting will provide some fresh insight into the Fed?s reasoning behind the 25bp cut delivered in October, that was accompanied by a less dovish stance than in the past. It seems as though the Fed expects US economic growth to hold up for a while longer, with Chairman Powell saying last week that the economy remains healthy and that current levels of monetary policy are appropriate. Powell did, however, once again note that there are risks to the outlook for the economy, which will keep the Fed ready to act, if necessary, to sustain the current expansion. As such, the Fed?s minutes will likely signal that it is going to remain data-dependent in the coming months and set policy accordingly.

Post Author: admin

Leave a Reply

Your email address will not be published. Required fields are marked *