High Noon for Catalan Lawmakers

Tuesday October 10: Five things the markets are talking about

In Spain, Catalan lawmakers will meet today to consider a declaration of independence that risks a tight-fisted backlash from PM Mariano Rajoy in Madrid.

Market attention will focus on what words will used by Catalan President Puigdemont, who is due to address the parliament in Barcelona at noon EDT.

Note: Catalan region President Puigdemont is to hold a news press conference at 08:00 EDT (12:00 GMT)

For the present, the EUR (€1.1800) remains supported in a sign of confidence that for now the risk of Catalonian independence is just a Spanish problem.

To date, the ‘single’ unit has reacted very little to the political events, but it could become rather vulnerable if risks of Catalonia separating become more imminent.

Nevertheless, market consensus is seeking a ‘symbolic statement’ rather than a declaration of independence as signs of disagreement are starting to emerge within the regional government itself, with more moderate members fearing the consequences of a further step towards independence, given the lack of support from the E.U, and moves by various corporations and financial institutions leaving the region itself.

However, if Catalonia declares independence and Spanish government triggers Article 155 of the constitution, the end result could be higher market volatility – pro-independence groups are expected to paralyze activity in major Catalan cities.

Stateside, the ‘big’ dollar is waiting for tomorrow’s FOMC minutes, which may provide more details on the path of interest rates and balance sheet tapering.

1. Stocks mixed results

In Japan, the Nikkei share average moved closer to a 21-year high overnight after a three-day weekend as expectations for continued strength in the U.S. economy supported sentiment. The index rallied +0.6%, while the broader Topix gained +0.47%.

Down-under, the S&P/ASX 200 was little changed while South Korea’s Kospi staged a catch-up rally after a weeklong holiday gaining +1.64% overnight.

In Hong Kong, stocks rallied, bolstered by telecom and property firms. The Hang Seng index rose +0.6%, while the China Enterprises Index gained +0.3%.

In China, stocks erased an early fall, helped by consumer and healthcare firms. The blue-chip CSI300 index, which at one point was down -0.7%, rose +0.2%, while the Shanghai Composite Index added +0.3%.

Note: China data in the coming weeks is expected to show solid growth continued into September, though many analysts maintain there will be some loss of momentum in coming months in response to higher borrowing costs and a cooling housing market.

In Europe, regional bourses trade lower across the board with notable weakness in the FTSE and Spanish IBEX. Focus remains on Spain with Catalan President Puidgemont’s speech to the regional parliament at noon EDT today.

U.S stocks are expected to open little changed.

Indices: Stoxx600 -0.1% at 390.0, FTSE +0.1% at 7513, DAX -0.2% at 12947, CAC-40 -0.1% at 5362, IBEX-35 -0.6% at 10179, FTSE MIB -0.7% at 22309, SMI +0.1% at 9267, S&P 500 Futures flat

2. Oil prices rally as OPEC says market is rebalancing, gold shines

Oil prices have edged up overnight as OPEC said there were clear signs the market was rebalancing and as U.S production remained offline following Hurricane Nate.

Brent crude futures are up +12c, or +0.2% at +$55.91 a barrel, while U.S West Texas Intermediate (WTI) crude futures are trading at +$49.65 per barrel, up +7c, or +0.1% from their last close.

The OPEC-led production cuts started in January and are set to expire at the end of March 2018. Prices are supported as OPEC said oil markets were “rebalancing fast” after years of oversupply.

Stateside, +85% of U.S Gulf of Mexico oil production, or +1.49m bpd, remains offline following Hurricane Nate, according to the U.S Department of the Interior’s Bureau of Safety and Environmental Enforcement.

Note: U.S API and EIA crude data are delayed to Wednesday and Thursday, respectively, because of Monday’s U.S holiday.

Ahead of the U.S open, gold has rallied to a one-week high, but U.S rate hike prospects are curbing those gains. Geopolitical tensions and a softer U.S dollar has pushed the ‘yellow’ metal up +0.3% at +$1,287.31 an ounce.

3. Sovereign yields little changed

Catalan President Puidgemont’s speech to the regional parliament today could prove crucial for the bond markets, as it may give the “all-clear” that a declaration of independence is not imminent. But this may not be enough to trigger losses in haven bunds, and boost yields.

Holders of eurozone government bonds or debt will receive around €100B of maturity payments until the end of the month, therefore investors should remain keen to buy product on dips. Germany’s 10-year Bund yield fell -1bps to +0.44%, the lowest in two-weeks.

Elsewhere, the yield on 10-year Treasuries dipped -1 bps to +2.35%, while U.K’s 10-year Gilt yield gained +1 bps to +1.365%.

4. Dollar under pressure

This morning’s EUR (€1.1800) rally is a sign of confidence that for now the risk of Catalonian independence is just a Spanish problem. EUR gains are small, but still EUR/CHF (€1.1526) has managed to print a two-week high ahead of the U.S open.

In the U.K, sterling (£1.3200) continues to recover from last week’s drop after U.K’s PM May has won public support from Brexit hardliners in her cabinet after outlining contingency plans for leaving the E.U without a deal.

5. U.K’s trade deficit widens

Data this morning showed that the U.K.’s trade deficit widened in August, which suggests that trade was still a drag on growth in Q3 despite a weak pound.

The deficit in goods trade widened to -£14.2B, compared with a revised -£12.8B in July. This is the widest deficit on record.

Digging deeper, the data including services saw the deficit for August at -£5.6B compared with -£4.2B in the previous month. Import volumes also rose +4.2% on the month, with gains in chemicals and machinery, while exports rallied only +0.7%.

The data highlights the U.K’s hopes for rebalancing of their economy towards ‘exports and investment’ and away from ‘consumption’ continues to remain somewhat tenuous.

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