Risk Aversion Flows Dominate Price Action

Notes/Observations

• Trade war rhetoric heats up aiding risk aversion flows
• ECB officials reiterate it could be patient in any 1st potential rate hike

Asia:

• China Commerce Ministry (MOFCOM): US threats on $200B tariffs list disobeys negotiation and consensus reached previously between the two countries: to take qualitative and quantitative measures if US publishes additional tariffs list. If US published additional imports tariff list, China will have to adopt comprehensive measures to fight back firmly

Europe:

• UK PM May defeated in House of Lords over plans to give lawmakers “meaningful vote” over final Brexit agreement (as expected). Vote was 354-235. Bill moves back to House of Commons for vote on Wed, Jun 20th
• European Commission reportedly won’t agree to any back channel UK-EU talks to avert aviation crisis in the event of no deal Brexit. Diplomats from the EU’s 27 other countries are now seriously considering whether a statement following a summit next week should say that “no deal” is a real proposition

Americas:

• US President Trump: Has asked USTR to identify $200B in China goods for additional tariffs at a rate of 10%. Stated that if China increases tariffs yet again, US would respond with tariffs on another $200B in Chinese goods.

Economic Data:

• (SE) Sweden May Unemployment Rate: 6.5% v 6.6%e; Unemployment Rate (Seasonally Adj): 6.1% v 6.3%e
• (EU) Euro Zone Apr Current Account (Seasonally adj): €28.4B v €32.8B prior; Current Account NSA (unadj): €26.2B v €41.36B prior
• (PL) Poland May Sold Industrial Output M/M: 1.6% v 0.0%e; Y/Y: 5.4% v 3.6%e, Construction Output Y/Y: 20.8% v 17.8%e
• (PL) Poland May PPI M/M: 1.1% v 1.0%e; Y/Y: 2.8% v 2.7%e
• (IT) Italy Apr Current Account: €B v €3.4B prior
• (HK) Hong Kong May Unemployment Rate: 2.8% v 2.8%e (matches lowest level since 1998)
• 05:00 (EU) Euro Zone Apr Construction Output M/M: % v -0.3% prior; Y/Y: % v +0.8% prior

Fixed Income Issuance:

• (ES) Spain Debt Agency (Tesoro) sold total €2.42B vs. €2.0-3.0B indicated range in 3-month and 9-month bills

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.9% at 32.6, FTSE -0.6% at 7587, DAX -1.5% at 12646, CAC-40 -1.2% at 5387, IBEX-35 -1.1% at 9658, FTSE MIB -0.8% at 21922, SMI -0.8% at 8452, S&P 500 Futures -1.2%]
• Market Focal Points/Key Themes: European Indices trade sharply lower across the board following on from steep losses in Asia overnight and weaker US futures on continuing trade concerns as the Shanghai composite declined almost 4% for its lowest close since 2016. On the corporate front, a third profit warning from UK retailer Debenhams, and a profit warning from McCarthy and Stone sees shares sharply lower. Ashtead Group, Telecom plus also trade lower following results, with Ferguson outperfoming after strong earnings. Inmarsat trades higher on a potential higher bid, while Roche trades slightly higher after acquiring Foundation Medicine for $137/shr. In other news PSA group trades lower after its CFO stepped down to join Sanofi.

Movers

• Consumer Discretionary McCarthy and Stone [MCS.UK] -15% (Proift warning), Debenhams [DEB.UK] -7% (Profit warning), Ferguson [FERG.UK] +2.2% (Earnings), Ashtead Group [AHT.UK] -5% (Earnings)
• Industrials DS Smith [SMDS.UK] -3% (Rights issue), Volkswagen [VOW3.DE] -2.6% (Momentum), PSA Group [UG.FR] -1.6% (CFO leaves) -Materials K+S [SDF.DE]-2.4% (Canada production halts to weigh on Q2)
• Telecoms Inmarsat [ISAT.UK] 2.4% (Potential higher bid), Telecom Plus [TEP.UK] -4% (Earnings)

Speakers

• ECB President Draghi reiterated Council view that inflation was gradually returning toward target and that significant monetary accommodation was still needed. ECB to be patient in determining the timing of the 1st potential rate hike and than would take a gradual approach after the 1st rate hike. Economy developing underlying strength; growing evidence that broad-based growth was beginning to generate positive pricing dynamics
• ECB’s Lane (Ireland): Central bank has a wide range of tools; interest rates was only one aspect. Inflation was low around the world. Global economy prospects were currently balanced but trade dimensions a risk factor. Trade issues were relatively contained but need to keep a close eye on issues
• ECB’s Liikanen stated that the General Council could hold rates steady even longer than summer 2019 if necessary
• Italy Govt might push back balanced budget target by one year until 2021. Govt foresaw renegotiation of budget flexibility with EU
• EU Chief Brexit Negotiator Barnier stated that it must have effective information exchange with UK. EU needed more realism about what was possible. Reiterated view that much work needed to be done ahead of the Jun EU Leader Summit. Hoped that Brexit talks concluded in October
• Sweden Debt Office updated its Borrowing Forecasts and mage no change to its issuance plans. To sell SEK32B in nominal bonds and SEK9B in I/L bonds in 2018 and to sell SEK30 in nominal bonds and SEK9B in I/L bonds in 2019. Reducing issuance would hurt liquidity but was open to discuss liquidity measures
• German IFO institute cut its 2018 and 2019 GDP growth forecasts. Cut itss 2018 German growth from 2.6% to 1.8% and 2019 German growth from 2.1% to 1.8%
• Turkey Econ Min Zeybekci: Emergency rule should not be renewed again. Reiterated view that TRY currency (Lira) weakness is due to speculation ahead of the Jun elections
• Japan Cabinet Office (Gov’t) Monthly Economic Report for June: Maintained its overall assessment that economy was recovering at a moderate pace
• China FX Regulator SAFE reiterated view that cross-border flows remained basically stable. Domestic Economy stabilized in May
• China Foreign Ministry reiterated view to take effective measures to safeguard globalization and urged the US to come back to rationality
• China PBOC Working paper: Necessary conditions for monetary policy transformation have been satisfied. Should vigorously promote price-based monetary policy with deepening of supply-side reform. Maintaining relatively high RRR was necessary as a developing nation for the long-term. China should appropriately lower the RRR (ease RRR burdens on financial institutions)
• Iran’s OPEC Rep Kazempour Ardebili: OPEC output increase would swell oil stockpiles again

Currencies

• Trade war rhetoric heats up aiding risk aversion flows with the usual safe-haven flows of USD, JPY and CHF all benefitting.
• EUR/USD hit a 3-week low below 1.1550 as the session progressed from safe-haven flows and reiteration from ECB officials that it could be patient in any 1st potential rate hike
• USD/JPY approached the 109.50 area
• EUR/CHF cross moved below the 1.15 level.
• The AUD and other commodity-related pairs were lower as China demand-driven commodity futures including iron ore, copper, zinc and aluminum registered sharp declines, as the US considered imposing tariffs on an additional US$200B of Chinese exports. AUD/USD at 0.7365 just ahead of the NY morning.

Fixed Income

• Bund Futures trade 65 ticks higher at 161.76 as Bund yields fall back below 0.40%. Upside targets 162.25 followed by 162.75, while a return lower targets the 158.75 level.
• Gilt futures trade at 123.09 higher by 54 ticks as US Treasuries rally. Support continues stands at 121.75 then 120.25, with upside resistance at 123.85 then 124.25.
• Tuesday’s liquidity report showed Monday’s excess liquidity fell from €1.862T to €1.849T. Use of the marginal lending facility rose from €95M to €116M.
• Corporate issuance saw Bayer announce a $15B debt offering in eight parts for the Monsanto acquisition

Looking Ahead

• (CO) Colombia May Consumer Confidence: 3.8e v 1.5 prior
• (UR) Ukraine Q1 Final GDP Q/Q: No est v 0.9% prelim; Y/Y: 3.1%e v 3.1% prelim
• 05.30 (UK) Weekly John Lewis LFL sales data – 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills
• 05:30 (EU) ECB 7-day Main Financing Tender (MRO) allotment
• 05:30 (DE) Germany to sell €4.0B in 0% Jun 2020 Schatz
• 05:30 (ZA) South Africa announces to sell combined ZAR2.4B in 2030, 2031 and 2044 bonds
• 06:00 (PT) Portugal May PPI M/M: No est v 0.1% prior; Y/Y: No est v 1.2% prior
• 06:00 (TR) Turkey to sell 2019, 2024 and 2028 bonds
• 06:30 (EU) ESM to sell €2.0B in 6-month Bills
• 06:45 (US) Daily Libor Fixing
• 07:00 (BR) Brazil Jun IGP-M Inflation (2nd Preview): 1.7%e v 1.2% prior
• 07:00 (IE) ECB’s Lane (Ireland) and Fed Bullard (dove, non-voter) speak in Sintra, Portugal
• 07:45 (US) Weekly Goldman Economist Chain Store Sales
• 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to leave Base Rate unchanged at 0.90%
• 08:00 (RU) Russia announces weekly OFZ bond auction (held on Wed)
• 08:05 (UK) Baltic Dry Bulk Index
• 08:30 (US) May Housing Starts: 1.311Me v 1.287M prior; Building Permits: 1.350Me v 1.352M prior
• 08:55 (US) Weekly Redbook Sales
• 09:00 (BE) Belgium Apr Trade Balance: No est v €0.3B prior
• 09:00 (EU) Weekly ECB Forex Reserves (RU) Russia May PPI M/M: 1.3%e v 1.2% prior; Y/Y: 9.6%e
• 09:00 (EU) ECB’s Nouy (SSM chief) in EU Parliament in Brussels
• 09:00 (HU) Hungary Central Bank (MNB) Gov Matolcsy post rate decision statement
• 11:30 (US) Treasury to sell 4-Week and 52-Week Bills
• 15:00 (AR) Argentina Q1 GDP Q/Q: No est v 1.0% prior; Y/Y: 3.5%e v 3.9% prior
• 16:30 (US) Weekly API Oil Inventories