The Morning Brief

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Italy exit polls pointed to a hung parliament with anti-establishment 5-Star Movement as the largest single party and the Centre-Right seen as the leading coalition
•    German Chancellor Angela Merkel is set to form her fourth government after the SPD voted in favour of another grand coalition
•    EUR/USD took centre stage although the pair was as indecisive as the stalemate in Sunday’s election, with the political landscape likely to be unclear for weeks amid coalition talks
•    Looking ahead, highlights include EZ, UK, US services PMIs, ISM non-mfg PMI, Fed’s Quarles and Evans

ASIA

Asian equity markets began a risk-packed week with a downbeat tone as region digested Italian elections, China economic announcements and continued trade war concerns. This ongoing political uncertainty and rise of the Euro sceptics dampened the risk tone with ASX 200 (-0.6%) and Nikkei 225 (-1.0%) negative throughout the session, while Japanese steel names and automakers remained pressured on lingering tariff/trade war concerns. Elsewhere, Hang Seng (-1.2%) underperformed and Shanghai Comp. (-0.1%) initially bucked the trend as participants contemplated over China’s economic work report in which the official GDP growth target was maintained at 6.5% as widely expected, before disappointing Chinese Caixin Services and Composite PMI data eventually weighed on the mainland. Finally, 10yr JGBs were higher and reclaimed the 151.00 level, amid a rebound in Tnotes and a flight-to-quality due to the subdued risk tone.

Chinese Premier Li delivered the Economic Work Report at the NPC in which he announced that China maintained GDP growth target at about 6.5% this year but dropped reference to ‘higher if possible’. Premier Li further stated that China will keep prudent monetary policy neutral and maintain proactive fiscal policy, while China will also take further measures to lower tax burden for companies. (Newswires)

Chinese Caixin Services PMI (Feb) 54.2 vs. Exp. 54.3 (Prev. 54.7). (Newswires)
Chinese Caixin Composite PMI (Feb) 53.3 (Prev. 53.7)

PBoC skipped open market operations. (Newswires)
PBoC set CNY mid-point at 6.3431 (Prev. 6.3334)

UK/EU

Italy exit polls pointed to a hung parliament with anti-establishment 5-Star Movement as the largest single party and the Centre-Right seen as the leading coalition, with far-right junior coalition partner Northern League having possibly outperformed Berlusconi’s Forza Italia. Furthermore, projections based on actual votes for the lower house suggested 5-Star is to win 216-236 seats, Centre-Right on 248-268 seats and Centre-Left on 107-127 seats (316 needed for a majority). Meanwhile, projections based on actual votes for the Senate suggested 5-Star is to win 102-122 seats, League with 52-62 seats, Forza Italia with 46-56 seats and PD with 42-54 seats. (158 needed for majority). (Newswires)

German Chancellor Angela Merkel is set to form her fourth government after the SPD voted in favour of another grand coalition. (BBC) Merkel is set to be sworn in for her fourth term on 14th March. Note, the SPD is yet to formally appoint their new ministers but, as previously announced, Olaf Scholz, looks set to be the new finance minister

EU is reportedly set to uncover differences with the UK in draft Brexit guidelines with the proposals to be vague to force UK to explain what it is seeking, according to reports. (Guardian) Elsewhere, EU negotiators will this week offer a Canada-style trade deal putting pressure on Theresa May’s Brexit ‘red lines’. (Telegraph) Further reports suggest, the European Commission is preparing to take a hard line over plans to “roll over” 50 EU free trade agreements during the Brexit transition period, in a threat to British exports. (Telegraph)

S&P affirmed Sweden ratings at AAA/A-1+; Outlook Stable and raised Lithuania to A from A-; Outlook at Stable. (Newswires)

FX

EUR/USD took centre stage although the pair was as indecisive as the stalemate in Sunday’s election, with the political landscape likely to be unclear for weeks amid coalition talks. This saw EUR/USD choppy as participants second-guessed the implications of the early projections, which also wiped out the initial upside from news over the weekend that German Chancellor Merkel is set to form a 4th government after the SPD voted in favour of a coalition with Merkel’s conservatives. Elsewhere, the greenback somewhat benefitted from EUR-woes and as commodity-linked currencies were dampened after the disappointing Chinese data, while JPY outperformed on safe-haven flows.

COMMODITIES

Commodities were quiet with WTI crude futures mildly higher overnight on mild reprieve from last week’s near-4% losses amid Libyan oil supply disruptions. Elsewhere, gold saw gradual gains amid safe-haven flows amid an indecisive Italian election result and weak Chinese data, which also kept copper subdued.

Libya’s Sharara oil field (largest in the nation) has halted pumping crude amid domestic protests. (Newswires) As a guide, the oil field was producing 300,000bpd of oil.

US Baker Hughes Total Rig Count (2nd Mar) 981 (Prev. 978). (Newswires

UAE Oil Minister Al Mazrouei said there is no discussion yet about extending production cut deal to next year, while he added there is still supply overhang in oil market. (Newswires)

China is to lower steel capacity by 30mln tons this year. (Newswires)

US

White House officials stated that President Trump plans to apply steel and aluminium tariffs globally and will not exempt allies such as Canada and Europe. In related news, EU's Juncker said on Friday the EU will respond to US steel action which may involve tariffs on motorcycles, while there were also source reports that EU duties of about USD 3.5bln are to be considered if the US goes ahead with its tariff plan. (Newswires)

Canada is said to examine what retaliatory sanctions is can immediately impose on the US, according to source reports on Friday, while Mexico’s NAFTA negotiator thinks Canada and Mexico should be exempt from the US steel & aluminium tariffs, and also commented that neither Mexico, Canada nor the US are in the position to leave NAFTA talks. (Newswires) Note, US trade decretory Ross has come out and stated that any retaliatory measures by the EU or Canada will have little impact on the domestic economy.

China Reportedly seeks high level meetings with US in an effort to diffuse trade tensions and has asked for a list of US demands.