Bulletin Headline Summary From RanSquawk
The "most important week of the year" started off with a session that has been a study in contrasts, with risk-off trades emerging early on in Asian trading, as Asian markets and US futures slipped pressured by the higher Yen in the aftermath of this weekend's G-7 debacle which resulted in a communique that for the first time ever, was not signed by the US; concerns about a potential trade war, however, quickly morphed into optimism as investors shifted their attention to the historic summit between U.S. and North Korea as well as the meetings by three of the world’s three most important central banks, with the EUR spiking ahead of what may be the ECB's announcement that it will end QE in early 2019, while Sterling returns to center stage with tomorrow's critical Brexit vote.
The net result has been an offset of extremes, with US equity futures flat, but don't expect this to last: as Deutsche Bank's Jim reid writes, "today is actually the calm before the storm" and we’ll at least be able to monitor the fall out from the tense and quite remarkable G7 meeting over the weekend or G6 vs US meeting as it could be called.
Helping boost sentiment, Italy's new finance minister, Tria, gave a strong endorsement of the euro in comments over the weekend, prompting UBS to suggest that Italy's disagreements with the EU seem more likely to focus on immigration than on economics. Italian bonds and stocks surged while helping the Euro rise to session higher highs, after Tria told the Corriere della Sera newspaper over the weekend that there was “no discussion” of any proposal to leave the common currency and that the government would also block any market conditions that would “push toward an exit" (he would naturally say that having seen the recent rout in Italian bonds).
“This is the one of the first references on not letting the fiscal plan getting out of hand, and that the government will not let the BTP-bund spread get to the same wide level as back in 2011-2012,” Danske Bank's Arne Lohmann Rasmussen told clients. “We expect to see some stabilization in the BTP-bund spread.” And sure enough, Italian 2Y yields tumbled following renewed hope that the status quo will return to Italy.
Of course, it's only a matter of time before the Italian sentiment changes: after all for the ruling populist coalition to reach its goals, it will have no choice but to bust Italy's budget, but until then hope has returned. Among his other points in the Corriere interview, Tria said that the government will seek an EU accord that would allow the exclusion of infrastructure investment costs from the budget deficit; that a review of legislation on co-operative and small banks isn’t a priority; and that he can’t provide targets for growth and deficit before September.
As Bloomberg notes, not all are convinced that Tria’s comments warranted such a large push higher, given the challenges the new government’s fiscal program will pose to the country’s finances as debt stands at around 130% of GDP as Morgan Stanley noted recently.
Santander GCB rates strategist Luca Jellinek posited that much of the move may have been due to short positions being squeezed out. “There were a lot of shorts in Italy,” he said in emailed comments. This rally is “way too much.”
For now, however, Europe will certainly take it to avoid facing the reality of what global trade may look like in a post-Toronto G7 world, where Germany is most at risk. As a result of the Italian optimism, Europe's Stoxx 600 Index jumped 0.5%, rising for the first time in five days as contracts for the S&P 500 edged upward and Treasuries fell with core European bonds.
Earlier in Asia, shares in Japan (Nikkei +0.5%), Hong Kong (+0.3%) and South Korea (Kospi +0.8%) all advanced modestly on hopes for a successful outcome from the Trump-Kim summit, while China stocks underperformed. Australia’s markets were shut for a holiday.
S&P 500 Index futures were unchanged on Monday morning, after hitting the highest level in three months with a seventh consecutive advance.
In global FX trading, the dollar remains stuck in a narrow range and will probably not make any notable moves until Wednesday's FOMC meeting...
... while the euro advanced against the dollar, trimming Friday’s losses as haven demand eased. The yen dropped most among Group-of-10 peers followed by the Canadian dollar, which fell in the wake of the G-7 meeting, which ended with deepening tensions over U.S. tariffs and saw a dispute erupt between Trump and Prime Minister Justin Trudeau. The pound dropped to a session low after data showed U.K. manufacturing output fell the most in 5 1/2 years in April and construction posted a smaller-than-expected gain, casting fresh doubt over the health of the economy. Norway’s krone slipped for the first time in three days after inflation slowed in May, denting expectations for a central bank hike in September. After a week of unexpected blow ups, there have been no new firework in emerging market FX so far.
US Treasuries ground marginally lower while the curve was unchanged; German 10-year bund yields climbed 2bps to 0.47 percent, while the yield on Britain’s 10-year gilt rose 2bps asis points to 1.388 percent, the highest in almost three weeks.
In commodities, oil prices slipped, currently down about 0.3%, pressured by rising US drilling activity, as well as increasing Russian output to 11.1mln BPD in June and Saudi Arabia reportedly increasing oil production by 100k in June ahead of incoming sanctions on Iran. In the metals scope, Gold is currently negative on the day (-0.15%) as markets await news from the Tump-Kim summit. Copper is negative for the second straight session as supply concerns start to ease. Steel futures are steady and trading essentially flat after gains in recent sessions as Chinese demand begins to ease off.
While today is quiet, what is coming is the week from hell, and the highlights are the Fed (Wed), ECB (Thurs) and BoJ (Fri) meetings, the summit between President Trump and North Korean Leader Kim Jong Un tomorrow, an important Brexit Parliamentary vote (Tues) that could shape Brexit and the UK government’s future leadership, US CPI and retail sales (Weds), Putin and Saudi crown prince Mohammed bin Salman meeting at the opening game of the World Cup (Fri) to possibly talk oil production and on the same day it’s the deadline for the US to publish the final list of Chinese products subject to $50 billion in tariffs.
Top Headline News from Bloomberg
Asia equity markets began the week somewhat cautious ahead of the upcoming key risk events including the summit between US and North Korea tomorrow, as well as the FOMC and ECB policy meetings later this week. Furthermore, a market closure in Australia and the G7 fall out in which Trump refused to endorse the communique and criticized Canadian PM Trudeau as being dishonest and weak, also added to the tentative tone and saw US equity futures briefly pressured at the open. However, US equity futures have since recovered, while both Nikkei 225 (+0.6%) and KOSPI (+0.6%) were marginally positive as focus turned towards the upcoming historical Trump-Kim summit. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (-0.3%) were mixed with underperformance in mainland China after inaction by the PBoC led to a liquidity drain and as participants digested mixed inflation data. Finally, 10yr JGBs are flat amid the tentative tone in the region and a lack of Rinban announcement by the BoJ.
Top Asian News
European bourses are largely positive (Euro stoxx 50 +0.7%) ahead of US President Trump’s meeting with Kim Jong Un in Singapore. FTSE is the outperforming bourse on heavy GBP losses following terrible data. FTSE MIB (+1.8%) is being buoyed by Italian bank stocks (FTSE Italia bank index +3.9%) that are benefitting from comments by the Italian Finance Minister Tria who stated that the new government is ‘clear and unanimous’ with its plan to keep the nation inside the EUR. The performance in Italian Banks has followed through to the Financial sector, which is the current outperformer. The energy sector is currently underperforming as a result of falling oil prices. Rolls Royce are down 1% amid reports of further job cuts and more checks for their Trent engines. Daimler are also down about a percent after the KBA found 5 “illegal switch off devices” in their car engines.
Top European News
In FX, the Dollar index, DXY, is pretty mixed in the aftermath of the weekend G-7 gathering that ended in discord and President Trump disassociating the US from the official communique amidst accusations of dishonesty and deceit between himself and Canadian PM Trudeau. The DXY is on a modestly softer footing as a result, but rangebound and off m-t-d lows around 93.200 within 93.360-540 parameters ahead of CPI data and the FOMC. JPY/CAD: Marked underperformers, with the Jpy seeing stops vs the Usd tripped and another test of resistance around 110.00, but the pair pulling back before the 200 DMA (110.18) amidst reports of supply in Jpy crosses at big figure levels (ie 130.00 vs the Eur) via market contacts. Meanwhile, the Loonie re-tested 1.3000 lows vs its US counterpart in wake of the aforementioned G7 spat as Trudeau called US tariff proposals insulting and Trump retorted by refusing to back the joint statement and claimed his Canadian host had stabbed the US in the back. The pair has retreated since towards 1.2955, but is still 0.4% or so higher alongside Usd/Mxn around 20.3500 even though Mexico’s Economy Minister Guajardo still has high hopes of a NAFTA deal. GBP: Dire UK data in the form of IP, manufacturing/construction output and trade has dragged Cable back down below 1.3400 after the pair stopped just a few ticks shy of its 30 DMA at 1.3444, while Eur/Gbp has rebounded towards 0.8825. EUR: The top G10 performer and back around 1.1800 vs the Greenback ahead of respective Fed and ECB policy meetings this week, with another FOMC hike virtually priced in and expectations turning more hawkish for the latter after recent sourced reports and official comments.
In commodities, oil prices are slipping, with the fossil fuel currently down 0.3%, pressured by rising US drilling activity, increasing Russian output to 11.1mln BPD in June and Saudi Arabia reportedly increasing oil production by 100k in June ahead of incoming sanctions on Iran. In the metals scope, Gold is currently negative on the day (-0.15%) as markets await news from the Tump-Kim summit. Copper is negative for the second straight session as supply concerns start to ease. Steel futures are steady and trading essentially flat after gains in recent sessions as Chinese demand begins to ease off.
Looking at the day ahead, it is a fairly quiet start to the week with the only releases of significance coming from Europe with the May Bank of France industrial sentiment print, and April industrial and manufacturing production, and trade data in the UK, all of which disappointed. Brexit headlines may become a factor with UK's David Davis set to meet with EU's Michal Barnier to discuss the state of talks. It's worth noting that German Finance Minister Olaf Scholz is also set to discuss EU reform in a panel interview.
US Event Calendar:
DB's Jim Reid concludes the overnight wrap
Before we get to what is almost certainly the most busy week of the year so far for news-flow, as a little light relief this weekend we made the tough decision to restrict Peppa Pig from the TV at home. A few weeks ago I was laughing that the Chinese authorities had banned the show from certain areas due to Peppa’s apparent subversive behaviour. I’m slowly beginning to sympathise with the Chinese decision though. As Maisie has watched more and more Peppa we’ve noticed she’s started to become naughtier. She says “boring” all the time, “yuk” when vegetables come out but the last straw came yesterday when she said that “Daddy is fat”. Peppa does all those things and I had to say to Maisie that a) it’s rude to call people fat and b) I think I’m actually in pretty good shape at the moment thanks very much.
Well I hope all of your batteries are bursting with charge as it’s a week where the hits will come at you faster than insults out of Peppa Pig’s mouth. As well as being my birthday week and the start of the World Cup we have the following landmark events.
Today is actually the calm before the storm but we’ll at least be able to monitor the fall out from the tense and quite remarkable G7 meeting over the weekend or G6 vs US meeting as it could be called. The full week ahead is at the end today but the highlights are the Fed (Wed), ECB (Thurs) and BoJ (Fri) meetings, the summit between President Trump and North Korean Leader Kim Jong Un tomorrow, an important Brexit Parliamentary vote (Tues) that could shape Brexit and the UK government’s future leadership, US CPI and retail sales (Weds), Putin and Saudi crown prince Mohammed bin Salman meeting at the opening game of the World Cup (Fri) to possibly talk oil production and on the same day it’s the deadline for the US to publish the final list of Chinese products subject to $50 billion in tariffs.
The ECB will probably be the most interesting of the central bank meetings given the coordinated signals sent by their various speakers last week that the meeting is a live one for debating the end of QE. Our economists continue to expect QE to end in December 2018 following a Q4 taper but by a narrow margin think the announcement will be in July. It's worth noting that this week's meeting will also contain new economic projections from ECB officials so that'll be worth watching.
Virtually everyone believes the Fed will raise rates 25bps this week and again we’ll see updated economic projections. Will the median dot move from 3 to 4 hikes for 2018? Our economists think the dots stay at 3 for now but they still expect 4 hikes this year while the market is assigning a 43% probability (per Bloomberg) - the highest all year. This will all come a day before the all important US CPI. Before this, by the time you read this tomorrow the first meeting between Trump and Kim Jong Un will have taken place (9am local, 2am BST, 9pm EST). It’s anyone’s guess what will come of that. The bid offer is Nobel Peace prize to nuclear bunker preparation. Interestingly Mr Trump said on Saturday that he’ll know “within the first minute” if Kim is serious about giving up his weapons. So by 9.01am local time we may know if we have to buy tinned food and defendable bunkers. Later on the same day we’ll see whether peace has broken out in the ruling UK Conservative party where rebels could create havoc for the government’s Brexit bill and Mrs May’s leadership.
So a busy week and so far in Asia the main story is the G7 summit. The summit ended in a war of words as Trump refused to allow US officials to endorse a planned joint communique after Canadian leader Trudeau comments in a press conference at the close of the event basically suggesting US tariffs were insulting. Mr Trump tweeted that the Canadian PM was “very dishonest & weak” and White House advisor Larry Kudlow backed him up by saying on TV yesterday that Trudeau “really kind of stabbed us in the back”. Late last night German Press also reported Chancellor Merkel as saying that the EU wont be “taken for a ride” by the US.
The G7 has been going for around 45 years and never before have you had this kind of fractious relationship between members.
Overnight, the biggest fallout in markets from that meeting is in FX where the Canadian Dollar (-0.29%) and Mexican Peso (-0.20%) are amongst the bigger movers this morning. In fairness however those moves are still relatively muted and equity markets in Asia certainly don’t appear to be showing any signs of concern. Indeed the Nikkei (+0.54%), Hang Seng (+0.30%) and Kospi (+0.54%) have all posted solid gains to start the week with only bourses in China (Shanghai Comp -0.26%) slightly lower. That’s unlikely to reflect the May inflation figures which were out on Saturday in China though with CPI coming in bang on the money at +1.8% yoy (unchanged from April) after falling food prices were offset by higher oil, and PPI rising a bit more than expected to +4.1% yoy (vs. +3.9% expected; +3.4% previously). Away from all this its worth noting that Italy’s Finance Minister Giovanni Tria was reported in Italian Press (Corriere della Sera) as saying that “there is no discussion of any proposal to leave the euro” and that “the government is determined to block in every way possible market conditions that would push toward an exit”. The single currency is about +0.20% versus the US Dollar post those comments coming out.
Back to Friday, which in the end was a largely mixed day for risk assets. It initially started off fairly sluggish and that continued through the entire European session as a combination of the volatility across EM currencies, some soft macro data in Europe, a story initially reported in the Nikkei News suggesting that Apple had warned suppliers that parts for the iPhone in the second half of 2018 could be down 20% (although which was later somewhat downplayed), and a bit of nerves ahead of the G7 all appeared to play a factor in one way or another. However, it was also EM currencies that appeared to help lead risk assets to a bit of a bounceback late into the evening with the Brazilian Real (+5.09% for the biggest one-day gain since 2015) at the head of that after the central bank of Brazil announced that it intends to support the currency by flooding the market with FX swaps.
In the end, the S&P 500 closed +0.31% meaning it rose in 4 out of the 5 days last week for a weekly gain of +1.62% - the biggest in 4 weeks. The Dow (+0.30%) closed up a similar amount while the Nasdaq (+0.14%) lagged slightly but still closed within a whisker of its all-time high again. In Europe markets struggled from the get go but did at least pare heavier losses at the open. The Stoxx 600 finished -0.21% which means it ended -0.46% for the week – the third consecutive weekly fall. The DAX also lost -0.35% while the periphery was hit harder with the IBEX and FTSE MIB finishing -0.84% and -1.89% respectively. The latter was also down -3.41% for the week which is the fifth consecutive weekly decline – the longest run since January/February last year.
At the other side of the risk spectrum sovereign bonds were fairly well bid. Going into ECB week, Bunds rallied 3.4bps on Friday although were as much as 8.3bps lower intraday at one stage, falling back below 0.400%. They closed at 0.443% which means they are still up 26bps or so from the intraday Italy-impacted lows in May. OATs were 1.0bp lower on Friday and Gilts 1.1bps. BTPs struggled again though with the 10y rising another 7.8bps. Yields were up 45.5bps last week which is actually the biggest one-week move since November 2011 when BTP yields rose over 60bps in a week.
Speaking of big moves, EM currencies had their fair share of them last week for various reasons. By the close of Friday though there was a fairly even spread of big winners and losers. Indeed over the 5 days the Turkish Lira (+3.92%), Polish Zloty (+1.55%) and Brazilian Real (+1.54%) were the 3 biggest gainers while the South African Rand (-2.90%), Mexican Peso (-1.73%) and Argentine Peso (-1.43%) were the 3 biggest losers. There are a lot of country-specific stories in EM at the moment (Brazil being the latest such example) at a time when the Fed is in full blown tightening mode and while that hasn’t quite spilled over into an all-out EM crisis is does feel like the seeds have gently been sown with EM central banks now playing a more pivotal role than they have in recent memory to stop all out crisis from happening. It’s certainly one to carefully watch in the background.
Before we wrap up, let’s review the data that was released on Friday. The print which certainly attracted the most attention was the German industrial production report for April which came it at a much softer than expected -1.0% mom (vs. +0.3% expected). This came following softer factory orders data the day prior which suggests a softer read through for Q2 growth so far. The same data was also softer in France (-0.5% mom vs. +0.3% expected) while in the US wholesale inventories rose a little more than expected (+0.1% mom vs. 0.0% expected). What to look out for this week?
It is a fairly quiet start to the week with the only releases of significance coming from Europe with the May Bank of France industrial sentiment print, and April industrial and manufacturing production, and trade data in the UK. Brexit headlines may become a factor with UK's David Davis set to meet with EU's Michal Barnier to discuss the state of talks. It's worth noting that German Finance Minister Olaf Scholz is also set to discuss EU reform in a panel interview.