Fundamental Analysis

Market Update - European Session: Disappointing UK Wage Data Undermines Hawkish BOE Sentiment

Typography

Notes/Observations

UK July wage data hints that recent pick-up in CPI is yet to be sustainable; personal consumption might remain subdued and thus keep BOE’s hands tied for some time ahead

Overnight

Asia:

Japan PM Abe: No dialogue with North Korea without denuclearization. To work together with the international community to apply maximum pressure, so that North Korea commits to perfect, verifiable and irreversible denuclearization. Completely trust Bank of Japan (BOJ) Gov Kuroda; want to continue accelerating Abenomics with gov and BOJ together

RBA's Harper: Domestic economic growth is too weak to justify a rate hike; economy operating below its potential. AUD currency gains being driven by weaker USD;

Europe:

EU and UK said to have decided on one-week postponement of next round of Brexit talk. The 4th round of talks now expected to begin on Sept 25th. The delay will give negotiators flexibility to make progress in September round. Some cited that political matters forced the delay in UK as PM May planned a major Brexit speech later in Sept

PM May's Conservatives wins vote to ensure govt has majority at committee stage and is granted more control in lawmaking process. House of Commons votes 320-301 in favor of govt motion

Americas:

President Trump: New UN North Korea sanctions are another very small step; sanctions are 'nothing compared to what ultimately will have to happen'

President Trump warned China to get tough on North Korea and reduce trade and financial transactions or it will target Chinese banks

Energy:

Weekly API Oil Inventories: Crude: +6.2M v +2.8M prior

Economic data

(DE) Germany Aug Final CPI M/M: 0.1% v 0.1%e; Y/Y: 1.8% v 1.8%e

(DE) Germany Aug Final CPI EU Harmonized M/M: 0.2% v 0.2%e; Y/Y: 1.8% v 1.8%e

(DE) Germany Aug Wholesale Prices M/M: +0.3 v -0.1% prior; Y/Y: 3.2% v 2.2% prior

(ES) Spain Aug Final CPI M/M: 0.2% v 0.2%e; Y/Y: 1.6% v 1.6%e

(ES) Spain Aug Final CPI EU Harmonized M/M: 0.2% v 0.2%e ; Y/Y: 2.0% v 2.0%e

(ES) Spain Aug CPI Core M/M: +0.2% v -0.7% prior; Y/Y: 1.2% v 1.4% prior

(EU) Euro Zone Q2 Employment Q/Q: 0.4% v 0.5% prior; Y/Y: 1.6% v 1.6% prior

(CH) Swiss Aug Producer & Import Prices M/M: 0.3% v 0.2%e; Y/Y: 0.6% v 0.4%e

(SE) Sweden Q2 Final GDP Q/Q: 1.3% v 1.7%e; Y/Y: 3.1% v 4.0%e

(UK) July Average Weekly Earnings 3M/Y: % v 2.3%e; Weekly Earnings Ex Bonus 3M/Y: % v 2.2%e

(UK) Aug Jobless Claims Change: -2.8K v -2.9K prior; Claimant Count Rate: 2.3% v 2.3% prior

(UK) July ILO Unemployment Rate: 4.3% v 4.4%e (lowest level since 1975)

Fixed Income Issuance:

(IN) India sold total INR160B vs. INR160B indicated in 3-month and 12-month Bills

(DK) Denmark sold total DKK1.22B in 3-month and 6-month bills

(EU) ECB allotted $35M in 7-day USD Liquidity Tender at fixed 1.66% vs 85M prior

(SE) Sweden sold SEK10B vs. SEK10B indicated in 6-month Bills; Avg Yield: -0.7044% v -0.7339% prior; bid-to-cover: 1.40x v 1.66x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -0.3% at 380.1, FTSE -0.5% at 7361, DAX flat at 12520, CAC-40 -0.1% at 5206, IBEX-35 flat at 10331, FTSE MIB +0.1% at 22258, SMI -0.3% at 9031, S&P 500 Futures -0.1%]

Market Focal Points/Key Themes:

European indices trade mixed this morning with the majority of Indices little changed with the exception of the FTSE 100 which trades 0.5% lower, weighed by a stronger Sterling.

Strong results from Sequana sees shares trade sharply higher, while Dunelm trades higher after an encouraging start to the year. Covestro shares are higher after Bayer further diluted its stake, on the other hand Richemont Shares trade lower despite posting better then expected 5 Month Revenue numbers.
In the US shares of Apple will be in focus after releasing the new Iphone 8 and X.

Looking ahead, the main US earnings for the day is Cracker Barrel.

Equities

Consumer discretionary [Halford [HFD.UK] +1% (Names new CEO). Dunelm [DNLM.UK] +8% (Earnings), Richemont [CFR.CH] -1.4% (5M Sales)]

Industrials: [Sequna [SEQ.FR] +9% (Earnings), Skanska [SAKB.SE] -1.1% (CEO Steps down), Norske Skog [NSG.NO] -56% (Citi accelerates repayment of secured senior notes)]

Healthcare: [Covestro [1COV.DE] +2.7%, Bayer [BAYN.DE] -0.6% (Bayer cuts stake in covestro to 31.5% from 40.9% prior), Quantum Pharma [QP.UK] +20% (Acquired by Clinigen)]

Real Estate: [Galliford Try {GFRD.UK] +1.8% (Earnings)]

Speakers

EU’s Juncker State of the Union address noted that the European economy and confidence were rebounding. Euro Area must have a European Monetary Fund and its own Finance Minister. ESM should gradually become the European IMF; commission to make proposals in December

Germany Fin Min Schaeuble reiterated view that ECB’s extraordinary monetary policy not sustainable over long term; time to start exit from easy policy. He did ECB chief Draghi and basically confident in ECB’s policy course

Denmark Central Bank Q3 review raised its GDP growth forecast for 2017 thru 2019 period. Raised 2017 GDP growth from 1.6% to 2.3; 2018 GDP growth from 1.6% to 1.8% and 2019 GDP growth from 1.6% to 1.7%. It noted that fiscal policy should not stimulate demand further, but rather contribute to ensuring that growth does not overstretch capacity

IEA Monthly Oil Report noted that global oil surplus was beginning to shrink due to stronger-than-expected European and U.S. demand growth, as well as production declines in OPEC and non-OPEC countries. Raised 2017 global oil demand growth forecast from 1.5M bpd to 1.6M bpd. OPEC August oil production at 32.67M bpd vs. 32.84M bpd prior which was the 1st decline in 5 months.

Kuwait Oil Min Almarzooq reiterated that producers should comply with output cuts. Committee to consider all options including more production cuts. OPEC could hold a March meeting on production cut extension. Nigeria to join production cuts once oil output hits 1.8M bpd (**Note: In-line with Saudi comments)

Venezuela Oil Min Del Pino: Opec and Non-OPEC not close to any deal on cuts. Venezuela current production at 2.0M bpd. US actions on country to impact oil investment

Currencies

GBP/USD continued to build upon gains ahead of Thursday’s BOE rate decision. The pair was at a fresh 1-year high above the 1.3325 level. The recent CPI data has brought forward expectations for a Bank of England interest-rate increase. BOE Statement in Aug did note that Policy could be tightened by somewhat greater extent than market expectations if economy met forecasts (QIR saw the 1st rate hike in Q3 2018. The release of UK July wage data hinted that recent pick-up in CPI is yet to be sustainable and caused the GBP currency to move off its best level of the session. The wage data foreshadowed that personal consumption might remain subdued and thus keep BOE’s hands tied for some time ahead

EUR/SEK pair was higher after Sweden 2Q GDP was revised down from preliminary reading.EUR/SEK at 9.5420 just ahead of the NY morning.

Fixed Income

Bund futures trade at 161.81 down 11 ticks and still near the 2-month lows. Continued downside targets 161.42 while upside resistance stands initially at 163.27.

Gilt futures trade at 127.42 up 23 ticks extending their gains as wage data misses. Continued downside eyeing 127.25, then 126.88. Upside targets 128.90 then 129.24.

Wednesday’s liquidity report showed Tuesday’s excess liquidity rose to €1.769T from €1.766T and use of the marginal lending facility fell to €118M from €275M.

Corporate issuance saw $8.9B come to market via 10 issuers headlined Metropolitan Life $1.75B 3-part FA backed note offering and Union Pacific $1B in a 2part senior unsecured note offering

Looking Ahead

(IT) Italy Debt Agency (Tesoro) to sell €6.5-8.0B in 2020, 2024 and 2036 BTP Bonds

05:30 (DE) Germany to sell €3.0B in 0.5% Aug 2027 Bunds

05:30 (UK) DMO to sell £2.5B in 1.25% July 2027 Gilts

05:30 (PT) Portugal Debt Agency (IGCB) to sell €1.0B in 4.125% Apr 2027 OT bonds

(CZ) Czech Republic to sell 2027 and 2036 bonds

06:00 (IL) Israel Aug Trade Balance: No est v -$1.6B prior

06:00 (ZA) South Africa Q3 BER Business Confidence: No est v 29.0 prior

06:00 (RU) Russia to sell combined RUB40B in OFZ 2024 and 2027 bonds

06:30 (IS) Iceland to sell Bills

06:45 (US) Daily Libor Fixing

07:00 (US) MBA Mortgage Applications w/e Sept 8th: No est v +3.3% prior

07:00 (ZA) South Africa July Retail Sales M/M: 0.0%e v 0.2% prior; Y/Y: 2.5%e v 2.9% prior

07:30 (CL) Chile Central Bank's Traders Survey

08:00 (PL) Poland July Current Account: -€0.8Be v -€0.9B prior; Trade Balance: -€0.5Be v -€0.2B prior; Exports: €15.3Be v €16.6B prior; Imports: 15.9Be v €16.9B prior

08:00 (BR) Brazil July IBGE Services Sector Volume Y/Y: -2.4%e v -3.0% prior

08:05 (UK) Baltic Dry Bulk Index

08:30 (US) Aug PPI Final Demand M/M: +0.3%e v -0.1% prior; Y/Y: 2.5%e v 1.9% prior

08:30 (US) Aug PPI Ex Food and Energy M/M: +0.2%e v -0.1% prior; Y/Y: 2.1%e v 1.8% prior

08:30 (US) Aug PPI Ex Food, Energy, Trade M/M: 0.1%e v 0.0% prior; Y/Y: No est v 1.9% prior

08:30 (CA) Canada Aug Teranet/National Bank HPI M/M: No est v 2.0% prior; Y/Y: No est v 14.2% prior, House Price Index: No est v 220.75 prior

09:50 (UK) BOE to buy £1.125B in in APF Gilt purchase operation (over 7-15 years)

10:30 (US) Weekly DOE Crude Oil Inventories

10:30 (SE) Sweden Central Bank (Riksbank) Dep Gov Ohlsson

12:00 (CA) Canada to sell 30-Year Real Return Bonds

13:00 (US) Treasury to sell $12B in 30-Year Bonds Reopening

13:00 (BE) ECB’s Preat (Belgium , chief Economist) in Frankfurt

14:00 (US) Aug Monthly Budget Statement: -$130.5Be v -$42.9B prior

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