Italian Populist Seal Agreement To Challenge The EU Establishment

Notes/Observations

• China Foreign Ministry plays down reports of a conciliatory tone on trade
• Italian Populist seal agreement to challenge the EU establishment

Asia:

• China trade delegation offers package to reduce US trade deficit by $200B annually. China said to offer increased imports of US products. The package had been speculated to include the removal of certain tariffs that China has already imposed on ~$4.0B worth of US farm products (including pork and sorghum)
• China Commerce Ministry (MOFCOM): to end dumping probe related to US Sorghum; cites ‘public interest’. Investigation showed anti-dumping and anti-subsidy measures on US sorghum would affect the living costs of consumers, which was not in line with public interest.
• Japan Apr National CPI data below expectations with lowest core reading being the lowest since Sept 2017 (CPI YoY: 0.6% v 0.7%e; CPI Ex Fresh Food (Core) YoY: 0.7% v 0.8%e
• Noth Korea state media stated that the country would make more efforts to defuse military tensions
• North Korea leader Kim Jong Un said to have asked US Sec of State Pompeo to reduce strategic weapons or reduce the number of US troops in South Korea if peace continued

Europe:

• ECB’s Nowotny (Austria): some governing council members (including himself) agree that ECB should not wait too long to normalize monetary policy
• EU Leaders reportedly brushed off PM May’s idea for customs plan guarantees. EU believed that was too early to give any assurances due to the disorientating messages the EU was getting from London . PM May said to have used the EU Leader Summit to seek assurances that the bloc will accept UK proposals to prevent a hard Irish border
• Canadian rating agency DBRS: recent political developments in Italy have been disappointing. 5-star, League economic proposals unlikely to be self-financing and could threaten reduction in debt supporting current credit rating

Americas:

• US Trade Rep Lightizer: NAFTA countries are no where near close to a deal; will continue to engage in negotiations
• Mexico Central Bank (Banxico) left its Overnight Rate unchanged at 7.50% (as expected)

Energy:

• Saudi and UAE Oil Min joint statement saw ample supply of oil; had concerns about recent oil market volatility. Planned a meeting with Russia Energy Min Novak next week

Economic Data:

• (DE) Germany Apr PPI M/M: 0.5% v 0.3%e; Y/Y: 2.0% v 1.8%e
• (DE) Germany Apr Wholesale Price Index M/M: 0.5% v 0.0% prior; Y/Y: 1.4% v 1.2% prior
• (CZ) Czech Mar Export Price Index Y/Y: -4.3% v -4.7% prior; Import Price Index Y/Y: -5.9% v -6.5% prior
• (CZ) Czech Apr PPI Industrial M/M: 0.2% v 0.3%e; Y/Y: 0.0% v 0.0%e
• (CN) Weekly Shanghai copper inventories (SHFE): 268.5K v 279.5K tons prior
• (SE) Sweden Apr Budget Balance (SEK): 2.8B v 6.4B prior
• (EU) Euro Zone Mar Current Account (Seasonally Adj): €32.0B v €36.8B prior; Current Account NSA (unadj): €40.6B v €24.2B prior
• (PL) Poland Apr Employment M/M: 0.1% v 0.1%e; Y/Y: 3.7% v 3.7%e
• (PL) Poland Apr Average Gross Wages M/M: -0.9% v -1.6%e; Y/Y: 7.8% v 7.2%e
• (IT) Italy Mar Current Account: €3.4B v €0.9B prior
• (EU) Euro Zone Mar Trade Balance (Seasonally Adj): €21.2B v €21.0Be; Trade Balance NSA (unadj): €26.9B v €18.9B prior

Fixed Income Issuance:

• None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.3% at 394.5, FTSE -0.2% at 7770.4, DAX -0.1% at 13094, CAC-40 -0.3% at 5605, IBEX-35 -0.5% at 10163, FTSE MIB -1.1% at 23548, SMI -0.3% at 8960, S&P 500 Futures +0.1%]

Market Focal Points/Key Themes:

• European Indices trade lower across the board following recent gains and slight weakness in US markets overnight.
• Richemont trades sharply lower following a miss in earnings, with Swatch also falling in sympathy. French name Vivendi trades lower after earnings and an update on universal music; Ubisoft trades higher after beating estimates, Vallourec and Natixis also in focus following results. In the healthcare space
• Astrazeneca trades over 2% lower after missing on the top and bottom line, but did affirm their outlook.
• In the M&A space Lloyds sold its Irish residential mortgage portfolio to Barclays for £4B.
• Looking ahead notable earners include Deere & Co and Campbell Soup.

Movers

• Consumer Discretionary Richemont [CFR.CH] -7% (Earnings), Swtach [UHR.CH] -1.7% (In sympathy with Richemont), Vivendi [VIV.FR] -0.9% (Earnings), Ubisoft [UBI.FR] +5.4% (Earnings)
• Industrials Vallourec [VK.FR] -3.5% (Earnings)
• Financials Natixis [KN.FR] +3.1% (Earnings)
• Healthcare Astrazeneca [AZN.UK] -2.7% (Earnings)

Speakers

• ECB’s Lane (Ireland): Hard Brexit not very likely but still have to prepare for it
• Portugal Central Bank Gov Costa: Banks need to continue reducing non-performing loans (NPLs)
• Italy 5-Star Movement leader Di Maio confirmed agreement on govt contract with league
• The Italy govt Program contents said to include: review of EU fiscal and bail-in rules. Program said not to include the call for QE debt to be excluded from debt calculations but some investments must be excluded from deficit; dropped reference to Euro exit procedure. No mention of request for ECB to write off €250B in debt. The program sought limited deficit spending and a guaranteed minimum income for poorer Italians. Called for State shareholder to redefine Monte Dei Paschi Di Siena’s mission and sought an end to sanctions on Russia
• Finland President Ninisto confirmed Olli Rehn as central bank gov (ECB representative)
• EU Commission said to have launched measures to protect EU companies in Iran **Reminder: On May 17th EU Leaders decided to preserve the Iran nuclear accord despite US withdrawal
• Turkey President Chief Adviser Ertem: Central bank has infinite instrumental independence and right to use all instruments at its disposal
• Fed’s Mester (FOMC voter, hawk): Economy near Fed goals. Should not unwind post-crisis rules that helped to strengthen the banking sector until resiliency could be tested. Rate hikes a possible defense against financial stability risks
• China Foreign Ministry: Trade consultations were constructive, refuted reports that China offered to reduce its trade surplus with the US by $200B. Hoped to resolve trade concerns with the US

Currencies

• The USD was slightly softer in quiet European trading but still poised for its 5th week of gains
• EUR/USD holding above the 1.18 level but the Italian political uncertainty was providing additional impetus for a lower EUR. Italian Populist sealed its agreement to challenge the EU establishment.
  Dealers noted that the recent widening in the BTP-bund spread had caught the ECB’s attention and could pressure the ECB to keep providing accommodative policy support for now to support the weaker economies within the EMU.
• The 10-year Italy/German Gov’t bond spread was wider by over 5bps to approach 160bps (4-month high). The 10-year BTP yield higher by approx. 30bps during the week to its highest level since Oct abve 2.15% (worst week since Nov 2015)
• The GBP/USD was agai probing below the 1.35 level after reports circulated that EU Leaders brushed off PM May’s idea for customs plan guarantees.
• The Steepening US yield curve continued to benefit the pair as it tested the 111 handle during Asia.

Fixed Income

• Bund Futures trade 10 ticks higher at 157.92 rebounding modestly from the mid-week lows. Upside targets 159.75, while a return lower targets the 157.25 level.
• Gilt futures trade at 121.14 higher by 14 ticks but still near the lows of the week. Support continues stands at 120.85 then 120.25, with upside resistance at 123.35 then 123.85.
• Friday’s liquidity report showed Thursday’s excess liquidity stayed fell from €1.909T to €1.891T. Use of the marginal lending facility decreased from €58M to €46M.
• Corporate issuance saw 3 issuers come to market for $5.2B

Looking Ahead

• 05:30 (IN)India to sell combined INR120B in 2020, 2026, 2031, 2033 and 2051 bonds
• 05:30 (ZA) South Africa to sell ZAR600M in I/L 2025, 2033 and 2046 bonds
• 06:00 (PT) Portugal Apr PPI M/M: No est v -0.8% prior; Y/Y: No est v +0.8% prior
• 06:00 (UK) DMO to sell combined £3.0B in 1-month, 6-month and 12-month Bills (£0.5B, £1.0B and £1.5B respectively)
• 06:30 (IS) Iceland switch auction
• 06:45 (US) Daily Libor Fixing
• 07:00 (BR) Brazil May IGP-M Inflation (2nd Preview): 1.1%e v 0.4% prior
• 07:30 (TR) Turkey May Central Bank TCMB Survey of Expectations
• 07:30 (IN) India Weekly Forex Reserves
• 08:00 (IN) India announces upcoming bill issuance (held on Wed)
• 08:15 (UK) Baltic Dry Bulk Index
• 08:30 (CA) Canada Apr CPI M/M: 0.3%e v 0.3% prior; Y/Y: 2.3%e v 2.3% prior, CPI Core- Common Y/Y: 1.9%e v 1.9% prior, CPI Core- Median Y/Y: 2.1%e v 2.1% prior, CPI Core- Trim Y/Y: 2.1%e v 2.0% prior, Consumer Price Index: 133.3e v 132.9 prior
• 08:30 (CA) Canada Mar Retail Sales M/M: 0.3%e v 0.4 % prior; Retail Sales Ex Auto M/M: 0.5%e v 0.0% prior
• 08:30 (CL) Chile Central Bank Meeting Minutes
• 08:30 (CL) Chile Q1 GDP Q/Q: 1.0%e v 0.6% prior; Y/Y: 4.0%e v 3.3% prior
• 08:30 (CL) Chile Q1 Current Account: -$0.1Be v -$0.4B prior
• 09:00 (BE) Belgium May Consumer Confidence: No est v 2 prior
• 09:15 (US) Fed’s Kaplan (dove, non-voter) moderates Q&A
• 09:15 (US) Fed Brainard (voter, dove) on Community reinvestment act
• 11:00 (EU) Potential sovereign rating after the close ( Denmark Sovereign Debt to Be Rated by Moody’s; Netherlands and Switzerland Sovereign Debt to be rated by S&P
• 13:00 (US) Weekly Baker Hughes Rig Count data