Market Talk – October 17, 2019

ASIA:

The US and China seem to have different understandings regarding phase 1 of the trade deal. US President Trump was proud to suggest that China will be purchasing 50 billion USD worth of agricultural products. However, the Chinese Commerce Ministry did not mention a figure, but stated they will purchase according to the Chinese market demands. The last few years, China purchased around 20 billion USD worth of agricultural products, with 2018 and 2019 dropping to less than 10 billion USD. China again today reiterated that the US must lift all tariffs prior to any major trade deal.

Facebook head Mark Zuckerberg criticized China today for their censorship of the Hong Kong protestors. He went on to describe how he has tried to negotiate terms with the Chinese government to bring Facebook to the Chinese people but was never allowed to do so. “While our services like WhatsApp are used by protesters and activists everywhere due to strong encryption and privacy protections, on TikTok, the China-based app growing quickly around the world, mentions of these same protests are censored, even here in the US,” Zuckerberg said. “Is that the internet we want?”

China approved Tesla to start producing vehicles in the country. Tesla is currently building a super factory worth 2 billion USD in shanghai.

India’s central bank, Reserve Bank of India, released data that shows credit growth at Indian banks has dropped to its lowest level in nearly two years. Slowing domestic consumption is weighing on demand. The RBI data includes all national banks, state-run banks, as well as big private banks. This adds to the challenges Narendra Modi is facing as he begins his second term as prime minister with India’s economy at its weakest level in six years. This slowdown in credit growth is a result of both reduced demand and supply. Lending growth by banks nearly halved to 8.8% at the end of September from the start of the year. While retail lending has driven growth, banks are taking a more cautious approach on some consumer loans. The head of the consumer banking segment of a private bank stated that in certain retail loans, customers are delaying the payments by a few days over the due date and this does not bode well when corporate lending had plunged.

A report last month by India Ratings predicts “further moderation” in retail lending in 2020 “given the consumption slowdown across segments including housing and auto.” The report also states that even the unsecured loans, which include credit cards, education loans, and other personal loans have seen a moderation in growth. India’s lending problems have been compounded by a drying up of liquidity in the shadow banking sector last year after the collapse of infrastructure lending group IL&FS. While some major non-banking financial companies (NBFCs) have been going slow on lending, others stopped completely. However, banks have not used this opportunity to win market share from NBFCs, which accounted for 30% of auto loans and more than 40% of home loans until the end of last year. The weak growth in lending comes at a time when banks have been cutting interest rates and making it cheaper to borrow.

So far in 2019, the RBI has reduced the repo rate by 135 basis points. Even though banks have not matched this, the pace of cuts has picked up in the last few months. A high credit-deposit ratio has been one of the key reasons why banks have struggled to cut interest rates. But with credit growth falling faster than deposit growth, banks may have a bit more room to transmit rate cuts. A credit-deposit ratio above 75% indicates pressure on banks’ resources as they set aside funds to maintain a cash reserve ratio of 4% and a statutory liquidity ratio of 18.5%. In an attempt to push banks to pass rate cuts on to their customers, the RBI has required them to link all loans to an external benchmark such as the repo rate since the start of this month. While this is expected to push rates down, economists are not sure this will help spur credit demand.

Considering all this data, credit growth is expected to remain sub 10%.

The major Asian stock markets had a mixed day today:

• Shanghai decreased 1.38 points or -0.05% to 2,977.33
• Kospi decreased 4.89 points or -0.23% to 2,077.94
• ASX 200 decreased 51.80 points or -0.77% to 6,684.70
• NIKKEI 225 decreased 21.06 points or -0.09% to 22,451.86
• Hang Seng increased 184.21 points or 0.69% to 26,848.49
• SENSEX increased 453.07 points or 1.17% to 39,052.06

The major Asian currency markets had a mixed day today:

• AUDUSD increased 0.00705 or 1.04% to 0.68265
• NZDUSD increased 0.0061 or 0.97% to 0.6352
• USDJPY decreased 0.2340 or 0.22% to 108.5160
• USDCNY decreased 0.0164 or 0.23% to 7.0817

Precious Metals:

• Gold increased 6.48 USD/t oz. or 0.44% to 1,493.27
• Silver increased 0.234 USD/t. oz or 1.35%% to 17.6033

Some economic news from last night:

Australia:

• Employment Change (Sep) decreased from 34.7K to 14.7K
• Full Employment Change (Sep) increased from -15.5K to 26.2K
• NAB Quarterly Business Confidence decreased from 5 to -2
• Participation Rate (Sep) decreased from 66.2% to 66.1%
• Unemployment Rate (Sep) decreased from 5.3% to 5.2%

Singapore:

• Non-Oil Exports (YoY) (Sep) increased from -8.90% to -8.10%
• Non-Oil Exports (MoM) (Sep) decreased from 6.70% to -3.30%
• Trade Balance increased from 3,790B to 3,830B

EUROPE/EMEA:

The UK and the EU have finally reached a possible deal today. However, UK PM Boris Johnson still has to persuade parliament and the DUP in Northern Ireland to agree to the terms. The EU kicked off their summit today, where there seemed to be a divergence between what the head Juncker was saying against the rest of the bloc leaders. Jean-Claude Junker seems to approve of the deal, tweeting, “We have one! It’s a fair and balanced agreement for the EU and the UK and it is testament to our commitment to find solutions.” And also during the summit he was optimistic about putting the deal into motion prior to the end of the month. However, President of the European Council Tusk said, “Now the ball is in the court of the UK. I have no idea what will be the result of the debate in the House of Commons on Saturday. It isn’t for me to comment on political developments in the UK. But if there is a request for an extension, I will consult member states to see how they react.” Pushing the possibility of further delays and an extension being required. All eyes will be on the discussions with Boris Johnson and the DUP over the next few days, as he tries to soften their stance on the matter.

Spanish protests in the region of Catalan are now entering the fourth day after the ex-leader of an independence group to break away the Catalan region from Spain was issued with an arrest warrant. The current Catalan leader issued a statement that a new vote on independence from Spain should take place within two years from now.

US Vice President Mike Pence has told media that Turkey has agreed to a cease fire in northeast Syria, with the Kurdish Democratic Forces dismantling their fortifications and pulling troops from the Turkish border. Vice President Pence reinstated that the US will continue operations in Syria, but not of an military nature.

The IMF published a report stating the internal affairs of Iran are in severe distress after the US sanctions. Earlier this month, Iranian President Rouhani called for western powers to remove themselves from the gulf, stating that they are causing imbalance in the region, and for the region to be governed by regional nations. Iranian Chief of Staff today stated regarding the nuclear deal, “If Europe does not fulfill its commitments (to help Iran take benefit from the deal), Iran will take the step in due time.” This may indicate the country is ready to further enrich uranium.

The major Europe stock markets had a mixed day today:

• CAC 40 decreased 23.83 points or -0.42% to 5,673.07
• FTSE 100 increased 14.37 points, or 0.20% to 7,182.32
• DAX 30 decreased 15.16 points or -0.12% to 12,654.95

The major Europe currency markets had a mixed day today:

• EURUSD increased 0.00582 or 0.53% to 1.11282
• GBPUSD increased 0.0023 or 0.18% to 1.28530
• USDCHF decreased 0.0078 or 0.78% to 0.9870

Some economic news from Europe today:

UK:

• Core Retail Sales (MoM) (Sep) increased from -0.3% to 0.2%
• Core Retail Sales (YoY) (Sep) increased from 2.2% to 3.0%
• Retail Sales (MoM) (Sep) increased from -0.3% to 0.0%
• Retail Sales (YoY) (Sep) increased from 2.6% to 3.1%

Italy:

• Italian Trade Balance (Aug) decreased from 7,631B to 2,585B
• Italian Trade Balance EU (Aug) decreased from 3.58B to 0.26B

Swiss:

• Trade Balance (Sep) increased from 1,720B to 4,020B

Eurozone:

• Construction Output (MoM) (Aug) decreased from -0.18% to -0.46%

US/AMERICAS:

The Federal Reserve’s Beige Book report signals that the US economy is expanding, albeit at a “modest pace.” Household spending is “solid” with notable increases in light vehicle sales and a modest increase in non-auto retail sales. The Fed reported that the auto strike had a “limited” effect on the economy.  Retailers and manufacturers across the US reported an increase in input costs, especially on tariffed items. Despite the Trump administration claiming the tariffs would not impact US consumers, the Fed noted that these increased costs were in fact passed on to consumers. The report also noted a rise in employment despite a decline in available workers. Small businesses are reportedly matching larger corporation’s pay and using benefits and bonuses to retain employees.

Turkey has agreed to a ceasefire to allow Kurdish troops to withdraw from the Syrian “safe zone” with the help of the US. Vice President Mike Pence and Secretary of State Mike Pompeo flew to Turkey on Wednesday to end the war with negotiations rather than bullets. President Trump said “tough love,” or sanctions and tariffs, facilitated the ceasefire and “saved millions of lives.” According to the BBC, over 72 civilians were killed and another 300,000 displaced over the eight-day attack.

French luxury brand Louis Vuitton is opening a manufacturing plant on Rochambeau Ranch in Johnson County, Texas. Backed by the Trump administration’s initiative to bring manufacturing jobs to America, the new base will create 1,000 jobs over the next five years. While American cattle will not be used for leather goods, products made at the plant will feature “Made in America” markings. Parent company LVMH is headquartered in Paris with an estimated worth of $46.83 billion euros.

Roberto Campos Neto, Brazil’s central bank chief, wants to reinvent the economy by attracting private money to Brazil. In an interview with Financial Times, Neto admitted that spending public funds and “disrespecting” the debt ceiling has and will not work. One of the main obstacles for Brazil will be building credibility to warrant investment in an emerging market. “Unfortunately for us, global growth is not going favorably and people are showing signs of risk aversion,” Neto said, further adding, “So even though rates are low and that should be conducive for people putting money in emerging markets, when you look at flows it has been very erratic. Because there are trade tensions, there is political polarization, there is Brexit.” The central bank chief added that he plans to treat foreign capital as local capital by changing regulations and introducing new incentives.

US Market Closings:

• Dow advanced 23.90 points or 0.09% to 27,025.88
• S&P 500 advanced 8.26 points or 0.28% to 2,997.95
• Nasdaq advanced 32.67 points or 0.40% to 8,156.85
• Russell 2000 advanced 16.79 points or 1.10% to 1,541.84

Canada Market Closings:

• TSX Composite declined -0.88 of a point or -0.01% to 16,426.30
• TSX 60 declined 1.23 points or -0.13% to 982.75

Brazil Market Closing:

Bovespa declined 407.03 points or -0.39% to 105,015.77

ENERGY:

Crude oil recovered slightly from yesterday’s surprise inventory build. The EIA report showed a 9.3 million barrel increase in crude oil inventories for the week October 11^th. This is now the third week in a row where there has been a build in inventories.

The oil markets had a mixed day today:

• Crude Oil decreased 0.16 USD/BBL or -0.30% to 53.1635
• Brent decreased 0.22 USD/BBL or -0.37% to 59.2697
• Natural gas increased 0.01 USD/MMBtu or 0.43% to 2.3142
• Gasoline decreased 0.0169 USD/GAL or -1.04% to 1.6047
• Heating oil decreased 0.0153 USD/GAL or -0.79% to 1.9276
• Top commodity gainers: Ethanol (1.34%),Wheat (1.95%),Lumber(1.79%), and Silver (1.35 %)
• Top commodity losers: Steel(-1.42 %), Bitumen(-2.04%), Lean Hogs (-4.00%), and Sugar (-1.13%)

The above data was collected around 13:15 EST on Thursday.

BONDS:

Japan -0.20%(+0bp), US 2’s 1.59% (+0bps), US 10’s 1.75%(+1bps), US 30’s 2.24%(+1bps), Bunds -0.39% (+4bp), France -0.27% (+3bp), Italy 1.00% (-4bp), Turkey 14.37% (+57bp), Greece 1.40% (-36bp), Portugal 0.19% (-3bp), Spain 0.24% (-1bp) and UK Gilts 0.70% (-1bp).

• US 4-Week Bill Auction remain the same at 1.720%
• US 8-Week Bill Auction decreased from 1.710% to 1.665%
• French 3-Year BTAN Auction increased from -0.66% to -0.63%
• French 5-Year BTAN Auction increased from -0.50% to -0.43%
• Spanish 3-Year Bonos Auction increased from -0.477% to -0.447%
• Spanish 5-Year Bonos Auction increased from -0.331% to -0.221%
• Spanish 10-Year Obligacion Auction increased from 0.115% to 0.253%