The Weekly Update

Another busy week for markets saw the US House of Representatives launch an impeachment inquiry against US president Trump and UK PM Boris Johnson’s Parliament shutdown deemed unlawful. The 10-year US Treasury closed 4bps lower last week, at 1.68% and the DXY rallied 0.60%, hitting year highs on Thursday. Meanwhile, sterling’s rollercoaster ended the week 1.49% lower against the greenback.

While Saudi Arabia raced to restore full oil production, the US ramped up its defence capabilities in the Kingdom as US-Saudi-Iran tensions rose; one to watch this week. Oil has dipped further this morning, following the 3.69% fall in Brent last week; this came off the back of Saudi’s rapid oil facility restoration and reports of a Saudi-Yemen partial ceasefire. Staying with the Middle East, we saw a revival in the new issue market, with the likes of Abu Dhabi government’s USD 10bn three-tranche deal; which was 2.4x oversubscribed. We did not look to add exposure, however, as the AA bonds we currently hold offer comparable expected returns and credit cushion.

US data broadly surprised to the upside, with stronger Chicago Fed National Activity and PMI readings in August. The third GDP reading was in-line with expectations at 2% qoq. The Fed’s favoured inflation reading (PCE Core deflator) came in-line with expectations of 1.8% mom. Elsewhere, September eurozone manufacturing PMIs disappointed, as did the preliminary PMI readings for Germany; concerns of a recession in Europe’s wealthiest nation have ramped up. This morning's data showed that Japan’s retail sales beat expectations in August, however, industrial production prints disappointed. Meanwhile, China’s manufacturing and Caixin PMI prints beat market expectations in September due to upbeat domestic demand and frontloading ahead of this week’s Golden Week and the 70th Anniversary of PRC celebrations. The non-manufacturing reading missed market expectations but remains in expansionary territory.

We heard last week that China will look to buy “considerable” US pork and soybeans with Trump saying a deal is closer than expected, at the beginning of the week. Just when we thought trade tensions between the world’s two largest economies would simmer, the US President announced potentially delisting Chinese companies such as Alibaba and Baidu from US stock exchanges, also announcing possible penal measures against Chinese companies operating in the US. The S&P Index therefore took a bit of a nose-drive on Friday, closing ~1% over the week; lead by US-Listed China shares.

As expected, trade tensions appear to be impacting China’s economy, according to the country’s Beige Book. This follows Premier Li Keqiang’s note earlier this month that it will not be as easy for China to grow at a rate above 6% for much longer. It therefore has come as a surprise to many that China did not slice benchmark rates or its RRR following the Fed’s rate cut, however the PBoC explained last week that it would prefer to remain prudent and deploy the necessary firepower as and when it is required. We still view China’s growth at ~6% as still very respectable. The offshore renminbi traded marginally lower against the strong dollar last week.

Looking ahead, UK politics and Brexit developments will remain a key area of concern especially following increasing EU pessimism on a new deal being reached. US-China trade concerns will also take precedence this week, despite Chinese markets being closed for celebrations. President Xi Jinping's speech to mark 70 years of communist rule will be followed by many on Tuesday.

In terms of data, we will later have the UK’s Q2’19 final GDP reading, US Chicago PMI and Dallas Fed manufacturing activity prints. Germany’s CPI and euro-area unemployment will also be of interest to many later today. Markit PMI readings will be released on Tuesday for the likes of the US, Euro-area and the UK, amongst others. Wednesday’s US ADP employment report could be interesting ahead of the US employment data dump on Friday. The market consensus is for: 128K jobs added in September, hourly earnings at 0.3%mom and 3.2%yoy and for unemployment to stick at 3.7%. Ahead of that however, US jobless claims, durable goods and factory orders will be of interest, as will Euro-area and UK service PMI readings, on Thursday.

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