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Turbulent IMF talks impact Asian Equities - EMEA Brief 15 Oct

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  • IMF Managing Director Christine Lagarde commented that U.S. stock valuations have been “extremely high”, possibly implying a correction. On a similar line, U.S. Treasury Secretary Steven Mnuchin insisted that the stock sell-off wasn’t “surprising”, while insisting that U.S. fundamentals remain strong. Lagarde also advised to be ready for more market volatility
  • During IMF U.S.-China trade tension was cited as a major reason for cutting its outlook for global growth.
  • Intense Brexit talks this weekend ended in a deadlock. Even after an unscheduled meeting between Raab and Barnier, the UK and the EU could miss this week’s key landmark as there will be no further attempt to resolve the issue before EU leaders gather in Brussels on Wednesday. Report suggests that there is a number of key Tory officials ready to quit May’s cabinet, should UK not leave the customs union.
  • Equities in Asia did not follow up on the Friday traction. The drop which was led by China comes after warnings about global fragility at the annual IMF gathering. Chinese stocks were hovering around 4 years low, whilst indices in Japan, Australia and HK were also down.
  • Gold is pushing higher. The SPDR Gold Shares ETF had a positive weekly chart with “reversion to the mean” at $117.66. The equities uncertainty, the ongoing trade war, the upcoming mid-term elections in the US and the potential for an additional rate hike in December, all account for the gains in the safe haven.
  • WTI Crude rose 1.1% to $72.15 a barrel. Despite long-term worries for demand, geopolitical tensions over disappearance of Saudi journalist stoked worries about supply
  • The Pound weakened overnight against the dollar. Brexit gridlock could be the main reason
  • Amidst trade tensions and turbulent IMF talks, the CNY/USD rose 0.2%. However, China unlikely to let the currency weaken past the psychological level of 7 per dollar. In fact, the People’s Bank of China announced last week a cut to the RRR for the fourth time this year.
  • The Long Dollar ETF is positive with the ETF above its "reversion to the mean" at $24.96

Asian overnight: Another day, another sea of red across Asia Pacific markets, with Japanese indices leading the declines. A strong end to the week for US markets did little to encourage traders overnight, with gains in the Yen dragging the Nikkei and Topix. During IMF talks, BOJ governor Kuroda comments that when the Bank of Japan is ready to signal the start of an exit from monetary stimulus, the shift will be seen in interest rates. Meanwhile, inflation in the country remains at 1%. China central bank governor Yi Gang sees plenty of room for adjustment in interest rates and Reserve Requirement Ratio (RRR).

UK, US and Europe: Last week saw the hardest shakeout since February’s correction with around $2.6 trillion of investor wealth loss and no clear firing gun, apart from the trade tensions between US and China. The MSCI World Index continues to nosedive below its 200-day moving average. The big question remains: is a major correction on its way, or that this is just a great “buy the dip” opportunity?

Political uncertainty glooms in Europe. Merkel’s Bavarian allies lost absolute majority in a regional election. Meanwhile the Alternative for Germany (AfD) party reached 11% and won its first seats in the state parliament. In Scandinavia, Sweden enters its second month of political turbulence following September’s inconclusive election. The four-party opposition Alliance abandoned his attempt to form a government, while yesterday the “Nordic nation and moderate Party” leader Ulf Kristersson informed that he saw no viable way to form a working coalition with his center-right opposition colleagues and the Social Democrats. Italy is expected to generate even more uncertainty ahead of the presentation of the budget plan in parliament next Saturday. During IMF talks in Bali, ECB Governing Council member Francois Villeroy de Galhau commented that the ECB’s policy path “does not depend on the fiscal uncertainties that can appear in member states”.

US treasuries rose amid cautious tone at the IMF talks. On the other hand, as the US mid-term elections on November 6 draw nearer, the steeping in the yield curve may provoke more fury from Mr. Trump about interest rates. US Treasury Bonds and Notes can be found on the IG trading platform.

Economic calendar - key events and forecast (times in BST)

Econ Cal.png

Source: Daily FX Economic Calendar

1.30pm - Retail Sales ex Autos: forecasts for  0.3%, in line with the previous release 

1.30pm -  Retail Sales control group (total industry sales): consensus at 0.4%, up from previous release of 0.1%

10.45pm - New Zealand CPI : forecasts at 0.7%, up from previous release of 0.4%

Corporate News, Upgrades and Downgrades

  • Superdry said that warm weather in the summer and autumn, plus greater foreign exchange costs, would hurt full-year performance. Overall mid-single digit global revenue growth is expected. 
  • ConvaTec has cut full-year earnings guidance, due to a cut in requirements from its biggest customer. Adjusted earnings are expected to be 23-45% over the year, compared to a previous 24-25% guidance. 
  • Greencore will sell its US business to Hearthside Food for £817 million in cash.  

GN upgraded to buy at HSBC
Lundin Petroleum upgraded to neutral at Citi
Siemens Healthineers upgraded to buy at HSBC
Thule upgraded to hold at SEB Equities


RWE downgraded to add at AlphaValue

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