Fundamental Analysis

Market Update - European Session: Brexit Negotiations Begin



Brexit negotiations begin under a complicated UK political landscape



Japan May Trade Balance registers its first deficit in 4 months (-¥203B v + ¥43Be); components mixed (exports missed expectations while imports beat)

IMF annual economic article IV consultation: Japan should avoid withdrawing fiscal policy stimulus and to keep monetary policy accommodative through 2018 to accelerate growth and achieve higher inflation

Japan PM Abe intends to refresh his cabinet in Aug/Sept amid approval rating decline but expected to keep Fin Min Aso and top spokesman Suga

RBA Gov Lowe: Economy was capable of stronger growth and Australia would fall behind without sharp focus on reforms

China annualized property price growth continued to slow; Prices rise in 56 out of cities vs. 58 prior


Brexit Min Davis statement heading into Brussels talks: We are leaving the European Union, and delivering on that historic referendum result; approaching talks in a constructive way, knows there will be difficult points

Senior Conservative party lawmakers said to have threatened a leadership challenge to PM May if she softens her stance on Brexit terms; PM May has 10 days to save her premiership after she was put on notice to "shape up" and show she is fit to lead. Amber Rudd (interior Min) likely candidate to replace May; David Davis tipped to become next conservative leader by Boris Johnson's allies

President Macron's "En Marche" party (with centrist ally) said to take 361 out of the 577 seats in the National Assembly following 2nd round of parliamentary elections (**Insight: France's National Assembly has 577 seats (289 seats needed for majority). Le Pen said her National Front party to win at least 6-7 seats; Le Pen said to win in the northern Henin-Beaumont district with ~59% of the vote.

BOE's Financial Policy Committee (FPC) said to discuss ending Term Funding Scheme at a meeting this week. Move could pave the way for a rise in interest rates as soon as August

Canadian ratings agency DBRS affirmed UK sovereign rating at AAA with Stable trend


Fed's Kaplan (moderate, voter): will be patient about making another rate hike

White House: President Trump to appoint James Clinger as chief of Federal Deposit Insurance Corporation (FDIC)

Trump personal lawyer: Trump not under investigation in probe into alleged Russian meddling in 2016 US Presidential race


Saudi Oil Min Al-Falih: Market fundamentals are going in the right direction, the market just needs time to rebalance

Economic Data

No major data seen in session

Fixed Income Issuance:

(NO) Norway sold NOK4.0B vs. NOK4.0B indicated in 6-month Bills; Avg Yield: 0.39% v 0.40% prior; Bid-to-cover: 2.44x v 3.01x prior



Indices [Stoxx 600 +0.75% at 391.5, FTSE +0.6% at 7510, DAX +1.0% at 12875, CAC-40 +1.0% at 5316, IBEX-35 +0.9% at 10859, FTSE MIB +0.2% at 20989, SMI +0.3% at 8994, S&P 500 Futures +0.3%]

Market Focal Points/Key Themes European Indies trade sharply higher this morning with the French CAC slightly outperforming after a comprehensive victory for French President Emmanuel Macrons party in the parliamentary elections, with shares of Airbus and Schneider Electric leading gains. In corporate new shares of Lemminkainen trades sharply higher after announcing an all share combination with YIT Corp, while shares of Philips trade over 5% higher after reports from the UK press that Third point were looking to build a stake. Ocado shares are outperforming in the UK following WholeFoods acquisition by Amazon, with potential takeover cited.


Consumer discretionary [Europcar [EUCAR.FR] +3.0% (To acquire Goldcar for EV €550M), Ocado [OCDO.UK] +9% (Analyst upgrade, M&A speculation)

Materials: [CropEnergies [CE2.DE] +3.7% (Prelim Q1, Raised outlook)]

Industrials: [Lemminkainen [LEM1S.FI] +40%, YiT Corp [YTY1V.FI] +4.5% (Lemminkainen to merge into YIT in all stock transaction), Rolls Royce [RR.UK] +1.4%, Airbus [AIR.FR] +1.7% (Paris airshow comments)

Healthcare: [Philps [PHIA.NL] +6% (Shares targeted by activist investor), Quantum Genomics [ALQGC.FR] -13% (Details positive results from its Phase IIa trial of QGC001 for the treatment of arterial hypertension)]


ECB's Smets (Belgium): ECB to decide on QE before the end of 2017. Needed to see inflation expectations re-anchored and would look very closely at wage growth. Start of Brexit negotiations is a sad day; process will hurt the UK more than the Euro Area

EU Barnier commented as formal negotiations began that must first address uncertainties caused by the Brexit process. Hoped to agree on a time-table and agree on priorities at today's talks

UK Brexit Min Davis: Interested in a good deal for all citizens

UK Foreign Min Johnson: Realistic prospect that our friends and partners would want to do this Brexit deal. There was much more goodwill from our European friends and partners than you might pick up from the debate in the UK

Euro Working Group (EWG) chief Wieser: Greece could return to the markets between autumn this year and spring 2018 subject to proper handling and good

Slovakia Finance Ministry updated its economic outlook which maintained 2017 GDP at 3.3% and raised 2018 GDP growth forecast from 4.0% to 4.2% and 2019 growth forecast from 3.9% to 4.4%

Turkey said to be considering hedging requirement for private companies that have more than $15M in FX debt

Czech Central Bank Vice Gov Tomsik: CZK currency (Koruna) appreciation reduced the need for rate hikes. Stronger CZK currency might deliver a bigger part of tightening and possible delay a rate hike from Q3 to Q4 period

Japan PM Abe: To continue to place the economy as the top priority


GBP was firmer against the major pairs as BoE turned increasingly hawkish in recent days and less willing to look through rising inflation. BOE's Financial Policy Committee (FPC) said to discuss ending Term Funding Scheme at a meeting this week. Move could pave the way for a rise in interest rates as soon as August. GBP/USD probing the 1.28 level just as Brexit negotiations began.

USD/JPY was higher and holding above the 111 level. The price action a part of follow-through from last week's Fed statement and apartly also attributed to some political uncertainty in Japan. Reports that PM Abe intended to refresh his cabinet in Aug/Sept amid approval rating decline but was expected to keep Fin Min Aso and top spokesman Suga. Analyst noted that the current 49% approval rating in the Nikkei poll was not the Cabinet's lowest rating since Abe was elected. (Note: rating fell to about 40% in the summer of 2015 and above the 40% seen as the baseline for stable governance)

Fixed Income

Bund futures trade at 164.70 down 5 ticks and in a relatively tight range so far in the session. Resistance lies near the 164.60 level, followed by 165.52. A break of the 163.89 support level could see lows target 162.05 followed by 160.30.

Gilt futures trade at 129.13 down 7 ticks after weekend press reported the BOE is considering ending the term funding scheme. Price is continuing its declines from middle of last week. If price remains under pressure and drops below the noted 129.14 level and initial support lies 128.27 level, with key support at the 127.96 support level. An acceleration lower could test the 127.43 region. Resistance lies at the 129.80 level followed by 132.65.

Monday's liquidity report showed Friday's excess liquidity fell to €1.653T a decline of €9B from €1.662T prior. Use of the marginal lending facility dropped to €339M from €226M prior.

Corporate issuance saw $14B issued last week, below of last week's forecast of $20B. For the week ahead, analysts eye issuance to come in around $20B.

Political/In the Papers:

US military on Sunday shot down a Syrian Air Force fighter jet over the weekend

Iran fired missiles on Sunday into eastern Syria, aiming at the bases of militant groups it holds responsible for attacks in Tehran

Spain Socialist leader Sanchez launch a new bid to build an alliance with other opposition forces to challenge the conservative minority government

Looking Ahead

(UR) Ukraine Q1 Final Q/Q: No est v -0.3% prelim; Y/Y: 2.0%e v 2.4% prior

(IL) Israel Jun CPI 12-month Forecast: No est v 0.7% prior

(SA) Saudi Arabia May Oil production - Jodi

05:30 (BE) Belgium Debt Agency (BDA) to sell €2.7-3.2B in 2024, 2027 and 2047 OLO bonds

05:30 (NL) Netherlands Debt Agency (DSTA) to sell €2.0-4.0B in 3-Month and 6-Month Bills

06:45 (US) Daily Libor Fixing - 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)

07:00 (BR) Brazil Jun IGP-M Inflation (2nd Preview): -0.6%e v -0.5% prior

07:25 (BR) Brazil Central Bank Weekly Economists Survey

08:00 (PL) Poland May Employment M/M: 0.1%e v 0.2% prior; Y/Y: 4.6%e v 4.6% prior, Average Gross Wages M/M: -2.6%e v -1.9% prior; Y/Y: 4.9%e v 4.1% prior

08:00 (US) Fed's Dudley (dove, FOMC voter)

08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming auctions (Bills on Tues)

08:15 (UK) Baltic Dry Bulk Index

08:50 (FR) France Debt Agency (AFT) to sell combined €5.0-6.2B in 3-month, 6-month and 12-month BTF Bills

09:30 (DE) German Chancellor Merkel in G20 discussion in Hamburg

09:30 (EU) ECB announces Covered-Bond Purchases

09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

11:30 (US) Treasury to sell 3-Month and 6-Month Bills

12:00 (UK) EU's Barnier with UK Brexit Min Davis

16:00 (US) Weekly Crop Progress Report

19:00 (US) Fed's Evans speaks in New York

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