The European market (Stoxx-600) closed around 349.42 Thursday, edged down -0.17% on the renewed concern of Eurozone growth and lingering US-China trade tensions. But Italy helped on the budget deal optimism. The market was also under stress on energies as oil tumbled earlier by over 1% amid OPEC+ cut credibility and on the lingering concern that oil production cuts by OPEC+ will be insufficient to avert a global oil surplus.
The risk-on sentiment was already under stress as the US market slips from the session high Wednesday after the US Commerce Secretary Ross poured some cold water on the earlier “Made in China-2025” optimism. Ross said “China has been downplaying 'Made in China 2025' plan to capture more market share in high tech industries in the US and trade agreement with China will include verification procedures, enforcement mechanisms. The BMW is to benefit from China lowering tariffs on the US auto imports”.
But the earlier China trade truce concern also eased to some extent after the US Soybean Council reported that China bought 1.5 MMT to 2.0 MMT of US soybeans, its first purchase since both countries began tit-for-tat tariffs. There was also another report that China may be planning to buy more US soybeans and an official decision in that regard may be out as soon as Thursday (today).
Again the risk-on sentient was affected early Thursday Asian session after another report that, American Media Inc. (AMI), the country’s biggest tabloid publisher, which played an important role in a scheme to keep the women silent in the months before the 2016 US Presidential election, so that Trump’s electoral prospects would not be affected, is now cooperating on the federal inquiry into Trump’s hush-money payments. Under the arrangement, federal prosecutors agreed not to charge AMI in return for the company’s cooperation.
In fact, there is a report that Trump confides to friends he's concerned about impeachment despite public declarations that he's unconcerned. Trump has told people close to him he's alarmed about the prospect of impeachment after Cohen-AMI pleads to cooperate in the hush money saga. Trump's fear about the impeachment possibility has escalated amid federal investigations involving his associates and Democratic control of the House.
The European market as-well-as EUR was also under stress amid ongoing European political turmoil (Brexit, Italian/French budget and yellow vest protest, threatening France’ Macron) coupled with some dovish comments by Draghi about the weak prospect of Eurozone economic growth (GDP) and inflation in 2019.
GBP as-well-as the UK market was also under stress on Brexit uncertainty after Theresa May survived her leadership challenge for another year late Wednesday in lieu of a promise that she will not contest for the next PM post. A surviving Theresa May could mean no more revocation of Article-50 (no-Brexit), but more uncertainty as the current Brexit Plan may not be passed in the UK Parliament even on 21st Jan unless the same is substantially improved by the EU that also looks very unlikely.
But European/UK stocks also found support on the renewed hopes of a soft orderly Brexit after UK Prime Minister Theresa May again travels to Brussels to beg for fresh “political and legal” assurances over the Irish backstop that remains the biggest obstacle to her Brexit deal getting through the British Parliament.
European stocks also found some support as Italian banks rallied and Italian Bund yields as-well-as Italy/German spread fell as Italy’s populist government seeks a budget deal with the EC by revising its budget deficit lower to 2.04% from earlier 2.40% and then another proposal of 2.20%. This follows a “successful” meeting between Italy’s PM Conte and the EC President Juncker.
The Italian PM Conte clarified: “We are not betraying the trust of Italians and we respect the commitments made with the measures which have the most impact. The growth will be above our expectations and the structural deficit will fall. Economy Minister Tria will travel to Brussels today to guide the remaining parts of the budget talks with EU. The revised budget proposal is in Europe’s interest”.
The EU’s Moscovici also “praised” Italy and said: “Italy has made a significant effort on its budget. The meeting with the Italian economy minister Tria was very constructive. The work is continuing to quickly reach a compromise on Italy budget and there are still some technical works to be done to reach the budget compromise with Italy. The EC does not want to open a disciplinary procedure against Italy on a budget”.
Thus effectively, the Italian budget suspense is not over yet as the EC may be trying for lower budget deficit target for 2019 at 2.00% or below 2.00% against Italy’s latest proposal of 2.04%. Meanwhile, Tria said there is a “common will to reach a budget deal with the EC”.
The EC/EU is already under pressure from the UK on Brexit, from France on “yellow vest protests” and an even higher budget deficit than Italy and thus it’s bound to compromise on all the issues.
Italy 40
On Thursday, Italy’s FTSE MIB-40 surged +0.54% and closed around 19048.83 (+103.03) after making a session low-high of 18955.57-19210.42 in a day of volatile trading.
Germany 30
Germany’s export-heavy and China & Brexit sensitive DAX-30 edged down -0.04% and closed around 10924.70 after making a session low-high of 10887.26-10988.77. Overall, the German market was dragged by the concern of economic growth as IFO slashed the 2019 GDP forecast to +1.9% from an earlier projection of +1.5% on lingering auto emission norms worries. The market was also dragged by Metro on guidance warning due to struggling business in Russia. A hard Brexit is also negative for Germany as it’s a huge exporter to the UK.
EURUSD is currently trading around 1.1362, edged down -0.05% on hopes & hypes of a soft Brexit deal, dovish ECB/Draghi and subdued forecast of German GDP by the IFO. But it was also supported by Italian budget deal optimism, while dragged by France’s growing political unrest and fiscal indiscipline.
As highly expected, the ECB holds all its interest rates unchanged. That is, the main refinancing rate, marginal lending facility, and deposit facility rates are held at 0.00%, 0.25% and -0.40% respectively. The ECB also reiterated its forward guidance that interest rates will “remain at their present levels at least through the summer of 2019”. Also, the asset purchase program (APP/QE) will end this month (Dec) as scheduled, while the reinvestment (backdoor QE) will continue.
ECB statement: Monetary Policy Decisions
“At today’s meeting, the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”.
“Regarding non-standard monetary policy measures, the net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, the Governing Council is enhancing its forward guidance on reinvestment. Accordingly, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation”.
Basically, the ECB has lowered the 2019 growth and inflation forecast, while continuing confidence with increasing caution. In the post-meeting presser, ECB President Draghi said the assessment of risks was a focal point in the discussion during the meeting. And he’d summarize the discussions with “continuing confidence with increasing caution” and also said “inflation coming in weaker than expected. The risks are broadly balanced but the balance of risks is moving to the downside amid persistence uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”.
The ECB lowered both 2018 and 2019 GDP growth forecast. GDP Growth is now projected to be at 1.9% in 2018 (prior 2.0%), 1.7% in 2019 (1.8% prior). On HICP inflation, it’s now projected to be at 1.8% in 2018 (1.7% prior), 1.6% in 2019 (1.7% prior).
The ECB noted that “headline inflation is likely to fall over the coming months on the basis of current futures prices for oil. Underlying inflation remains generally muted. Though, domestic cost pressures are continuing to strengthen and broaden”.
Boeing (NYSE:BA)
Boeing, a China trade sensitive stock is under stress on renewed concern of a China trade war after a report that Trump was told by the US DOJ to stay out of Huawei CFO Case as the arrest is a Justice Department matter and the White House should stay out of it for now. Thus there are no immediate plans to intervene in the matter by the White House (Trump). Advisers told President Trump the arrest and potential prosecution of Meng was essentially out of his hands.
As per the report, if Trump intervenes in the Huawei CFO case even for the national interest of a trade deal with China, it may diminish the chance of an extradition and conviction as a judge may interpret political reasons for the arrest and free her. In the US or in any other democratic country, the executive and judicial branches operate at arms’ length. The report also suggested that Trump’s advisers told him his options are limited in case of Huawei CFO Arrest, which is purely a justice department matter and the White House should stay out of it for now.
Boeing is currently trading around 324.77, slumped -0.53% and so far it made a session low-high of 324.28-328.62.
WTI Oil
In commodities, oil jumped +2.75% and made a high of 52.75 on a report about a drawdown in US Cushing inventories. Earlier, oil tumbled by over 1% to a low of 50.36 amid OPEC+ cut credibility and on the lingering concern that oil production cuts by OPEC+ will be insufficient to avert a global oil surplus.
As per the report from market intelligence firm Genscape, the US crude inventories at Cushing, Oklahoma, the delivery point for US crude futures, fell by nearly 822K barrels in the week through Dec 11.
Oil was also helped by the EIA report: “OPEC's output agreement with Russia and Canada's decision to mandate production cuts could create an oil market supply deficit by the second quarter of next year if the top producers stick to their deal”.