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Morning Briefing October 11th 2019

The week ends with a quiet data schedule. In Europe the main release to look out for is the publication of final German inflation are 0700BST, while the release of import and export price indices at 1330BST is the highlight in the US.

Final German inflation in September is forecast to register in line with the flash result showing annual HICP slowing to 0.9%, its lowest since November 2016. Monthly inflation declined by 0.1% following July’s 0.4% gain. Meanwhile, core inflation decelerated to 1.4%, which is the lowest level since May. August’s downtick was driven by a sharp fall in energy prices (-1.1%), while a solid increase by 1.8% in service inflation prevented further deterioration. Forward-looking survey evidence is in line with the flash estimate. Both Germany’s service and manufacturing PMI notes an easing in input and output price inflation in September.

US import prices fell by 0.5% on the month in August and are forecast to come in flat in September. August’s decline was driven by a fall in fuel prices, while prices for non-fuel goods were unchanged. On the other hand, export prices dropped by 0.6% in August following a 0.2% monthly gain in July. In September, markets pencilled in a marginal decrease by 0.1% m/m. The main driver of August’s drop of export prices, were prices for agricultural goods which fell by 2.5% while non-agricultural goods cooled by 0.4%.

Friday’s event schedule holds several interesting speakers in the cards, including ECB’s de Guindos, Boston Fed’s Rosengren, Dallas Fed’s Kaplan and Minneapolis Fed’s Kashkari.

Global Economic Trading Calendar

Markets

BOND SUMMARY: Not much to report for core FI, with markets seemingly a little side lined ahead of the impending meeting between U.S. President Trump & Chinese Vice Premier Liu He, scheduled for 14:45 Eastern (19:45 London) on Friday. There was some light pressure on the space as Trump noted that “China has been very nice” & that “we’re going to see if we can make a deal with China.” T-Notes -0-04 at 130-18+, struggling to extend beyond Thursday’s lows, with modest twist steepening seen on the curve. Flow wise, there was a 7.0K screen buyer of the TYX9 131.75 calls, as well as a 10.0K TYX9 131.50 covered call block buyer, perhaps seeking protection against the risk of a trade talk breakdown. Eurodollar futures 1.0-1.5 ticks lower thru the reds, with a ~4.2K seller of the EDU0 straddle seen. JGB futures sit 44 ticks lower. Cash trade saw the 5-20 Year sector underperform, at the margins. Potential that yesterday’s solid 30-Year auction has resulted in hedging flow and pressure on the futures complex today. Aussie Bonds also lower, with some pointing to an overnight XMZ9 block trade as a catalyst. YM -9.0, XM -12.5. Bills 3-10 ticks lower thru the reds.

STOCKS: The major regional Asia-Pac equity indices have followed their U.S. counterparts higher in the wake of the latest round of optimism surrounding the ongoing Sino-U.S. trade talks. U.S. equity index futures also edged higher in Asia. Energy names fared relatively well in Asia hours, given the bounce in crude prices, while the Australian materials sector also outperformed. Worth flagging that mainland Chinese equities underperformed. Nikkei 225 +1.0%, Hang Seng +1.4%, CSI 300 unch., ASX 200 +0.7%. S&P 500 futures +6, DJIA futures +58, NASDAQ 100 futures +21.

OIL: WTI and Brent benefitted from the uptick in risk appetite on Thursday, with some spill over seen in the Asia-Pac session, leaving the benchmarks ~$0.20 above their respective settlement levels at writing. There were also some supportive factors at work on the supply side on Thursday, with OPEC SecGen Barkindo noting that the OPEC+ group will have strong decisions to make at the group’s December summit, as he stressed that all options are on the table re: production cuts moving forwards. Elsewhere, the chief of the Russian Direct Investment Fund suggested that Russian President Putin and Saudi officials will discuss a deeper OPEC+ production cut. Thursday also saw the release of that latest OPEC monthly oil report, with the cartel trimming its 2019 world oil demand forecast by 0.04mn BPD, as it left its 2020 projection unchanged. OPEC crude production fell by 1.318mn BPD in Sep vs. Aug (based on secondary sources), with the well documented Saudi outages being a major contributary factor.

GOLD: The yellow metal deals little changed on the day at $1,495/oz. Thursday’s session was choppy, owing to the trade war backdrop, but the close below $1,500/oz will have encouraged bears, although they need to take out the Oct 8 low at $1,487/oz to really start to alter the technical picture. The ongoing Sino-U.S. trade talks will be key for price action ahead of the weekend.

FOREX: Participants are on the lookout for the outcome of the 13th round of U.S.-China trade negotiations. The White House has confirmed that President Trump will personally meet with Vice Premier Liu at 14:45ET. Risk sentiment remained positive as Trump told the audience of a campaign rally that “China has been very nice” and “we’re going to see if we can make a deal.” Safe havens were offered on the back of hopes for a positive conclusion to the trade talks, while the Antipodeans gained. A degree of USD/JPY demand was seen into the Tokyo fix. Ahead of the meeting between chief Brexit reps from the the UK & EU, GBP ticked away from highs touched during yesterday’s rally. In Asian FX, the yuan gained on trade war optimism & a stronger than expected PBoC fix. USD/CNH drifted south of CNH7.1000 as a result. Risk-on mood allowed KRW to outperform regional FX despite soft South Korean trade data, while THB softened after BoT Gov said that Thailand will relax capital outflow controls.

Technical Analysis

BUND TECHS: (Z9) BEARISH PRESSURE RETURNS

Z9 Bund sold off sharply yesterday clearing the former support at 173.31/29, Oct 1 and 20 lows. The break of this support confirms the end of the recovery that has been in place since Sep 13. Furthermore, it also indicates the move higher was a correction leaving the key support at 172.18 exposed, Oct 13 low. Bearish pressure is likely to dominate near-term. A break of 172.18 would open 171.46, a Fibonacci projection. 173.31 marks initial resistance.

EUROSTOXX50: BEARISH THREAT THWARTED

EUROSTOXX50 rebounded yesterday. The move negates the recent bearish focus, specifically negating the bearish engulfing pattern on Oct 8. With price action also above former resistance at 3480.28, attention turns to the Oct 2 high of 3516.88. This is an important short-term resistance where a break is required to open the 3588.68, Oct 1 high and bull trigger. Note, a rejection ahead of 3516.88 would again signal a possible return to the downside.

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