Wed, 22 Aug 2018 16:59 IST
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Deutsche Bank Early Morning Reid – August 14, 2018

The week started off on a fairly dull note with the market mostly treading water on very low volumes. Indeed S&P 500 volumes were just 34% below of its 30 day moving average with the index (-0.13%) closing lower for the first time in 7 days. It also seems fitting to see the VIX fall to a post-crisis 5-year low of 13.7 yesterday. Given the lack of interesting data/news flow, not helping the risk tone somewhat was the story in the Handelsblatt that the German Constitutional Court had received a further appeal seeking to delay the ESM ratification. A group of academics led by Professor Markus Kerber (a noted critic of the euro) filed a complaint asking that the Constitutional Court to await the opinion of the European Court of Justice in Luxembourg before issuing its own ruling. According to the FT this could potentially delay the decision date on the ESM which is currently scheduled for the September 12th. The story was also seemingly a driver behind the late session dip in European equities although the EUR/USD still managed to close the day higher.

Moving to the overnight session Asian markets are moderately higher despite the negative US lead. The Nikkei and the Hang Seng are up around two tenths of a percent while Chinese equities continue to lag. The Shanghai Composite (-0.36%) is down for the third consecutive day not helped by reports that that the central government may impose new property controls as soon as this month. Earnings concerns and further weakness in iron ore prices are also weighing on Chinese sentiment. Spot sea borne iron ore prices fell to their lowest level since late December 2009 ($112.9/mt) on news that Chinese steel mills are cutting production in response to poor demand. Copper (-0.3%) and Brent (-0.2%) are both weaker with the former down for its third consecutive day. In other overnight
developments, the BoJ’s minutes suggested that board members were keeping all options on the table and that the central bank stands ready to act if risks from Europe materialise.

Recapping yesterday’s European stories, Greece’s Q2 GDP contracted 6.2% yoy in Q2 which also marks the 14th negative print in the past 15 quarters. That said the number was ahead of expectations (-7% yoy) and better than prior month’s - 6.5% print. Staying with Greece, the government will auction about EUR3.1bn of 3-month bills this morning (10am London) with proceeds likely to be used to roll over a EUR3.2bn bond maturity held by the ECB later this month. On that note, Italy had to pay a slightly higher cost for a 12month bills yesterday. EUR8bn of 364-day bills was priced at a yield of 2.76%, up from 2.69% last month although the bid to cover of 1.69x yesterday was slightly higher than the 1.55x in July.

Away from Italy Finnish Prime Minister Katainen told Der Spiegel that his government rejects proposals to give a banking license to the ESM and criticised plans for secondary market bond purchases by the ECB. This is not a new rhetoric from Finland though.

Also according to Der Spiegel, Germany’s shipping industry faces a wave of bankruptcies over coming months as funding dries up and slowing economic growth leads to contraction in container volumes. Over 100 German ship funds have already shut down and a further 800 funds are under threat, according to the article. Britain’s oldest shipowner, Stephenson Clark, dating back to 1730, also
went into liquidation last week. Interestingly, Greek shipping companies are buying up vessels in the secondary market, using cash raised by selling vessels at the top of the previous cycle.

Looking at the day ahead, the data flow picks up with Euroland, German and French Q2 GDP out today. The market is looking for -0.2%, +0.2% and -0.1% qoq growth respectively. We also get Eurozone, French and Spanish CPI as well as the latest ZEW surveys. We also get
the CPI and RPI data from the UK. In the US, July retail sales will be the key data point. The market is looking for +0.3% at the headline which would be the first positive month-onmonth change since March. US business inventories and PPI are the other notable releases
today. Let’s hope today will be a more interesting day for markets!

Colin Tan, CFA
Research Analyst

Jim Reid
Strategist

Deutsche Bank