Italian Populist Govt Beginning To Take Shape

Notes/Observations

• Italy populist govt spurs spending concerns, Italian yields continue to rise
• US-China trade war on hold for now
• Central bank divergent views continued to help USD surge -Whit Monday (Pentecost Monday) keeps European participation to a minimum (German, Austria Greece, Hungary, Iceland, Netherlands, Switzerland closed)

Asia:

• China agreed to purchase more US goods in effort to avoid trade war, but refused to commit to US demand to narrow trade gap by $200B
• Japan Apr Trade Balance ¥626B v ¥440Be; Exports registered its 17th straight rise (y/y: 7.8% v 8.7%e); Imports y/y: 5.9% v 9.8%e

Europe:

• UK Foreign Sec Johnson called on MPs to give PM May more time and space to deliver on her Brexit promises
• UK May Household Finance Index: 44.7 v 43.4 prior (highest level since Dec 2016)
• UK May Rightmove House Prices m/m: 0.8% v 0.4% prior; y/y: 1.1% v 1.6% prior
• India, EU send WTO list of U.S. imports potentially subject to additional tariffs in response to U.S. steel, aluminum tariffs

Americas:

• Treasury Sec Mnuchin: US has deal with China to cut trade deficit, will hold off on tariffs. “We have made very meaningful progress, and we agreed on a framework” (Note: Tariffs were on Chinese steel and aluminum, as well as $150B worth of other Chinese goods). President Trump was more interested in striking a good deal with Canada and Mexico than quickly finishing NAFTA talks in order to get a vote from Congress this year
• US Trade Rep Lighthizer: US might still resort to tariffs and other tools, including investment restrictions and export regulations unless China made real structural change to its economy
• Venezuela’s Election Board: Incumbent Maduro won the elections (as expected, for a second term), the turnout was said to be 46.1% (US govt has said it would not recognize results)

Economic Data:

• (NG) Nigeria Q1 GDP Y/Y: 2.0% v 2.6%e
• (TW) Taiwan Apr Export Orders Y/Y: 9.8% v 7.9%e
• (PL) Poland Apr Sold Industrial Output M/M: -6.8% v -7.2%e; Y/Y: 9.3% v 8.5%e; Construction Output Y/Y: 19.7% v 24.8%e
• (PL) Poland Apr PPI M/M: 0.3% v 0.3%e; Y/Y: 1.1% v 0.9%e
• (TW) Taiwan Q1 Current Account: $20.1B v $26.6B prior
• (GR) Greece Mar Current Account -€1.0B v -€1.3B prior
• (HK) Hong Kong Apr CPI Composite Y/Y: 1.9% v 2.2%e

Fixed Income Issuance:

• None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 closed, FTSE +0.8% at 7,843, DAX closed, CAC-40 +0.7% at 5,651; IBEX-35 +0.2% at 10,135, FTSE MIB -0.6 at 23m319, SMI closed, S&P 500 Futures +0.5%]
• Market Focal Points/Key Themes: European markets opened mixed and moved higher as the session progressed; trading thin with little news; general optimism over easing trade war fears; several indices closed for holidays including Germany, Denmark, Austria, Switzerland, Norway, Hungary and Iceland; political considerations weigh on Italian equities; Euro weakness supports exporters in particular; in the Americas Canada and Chile closed for holidays; upcoming earnings in US session include Huami and Cheetah Mobile; focus on upcoming Fed meeting minutes to be released on Wednesday, as well as resumption of Brexit negotiations

Equities

• Consumer discretionary: AS Roma ASR.IT +6.0% (game win), Ryanair RYA.UK +1.7% (results)
• Healthcare: Astrazeneca AZN.UK +1.8% (FDA approval), Galapagos GLPG.BE +3.3 (study publication)
• Technology: Bigben Interactive BIG.FR -3.7% (analyst action)
• Speakers
• ECB’s Nowotny (Austria): Euro Area inflation would not rise dramatically, region not overheating
• Italy’s Five Star and League said to have agreed on a prime minister; set to propose a cabinet to President Mattarella as early today. Florence University law professor Giuseppe Conte emerged as a possible premier. 5-star leader Di Maio noted that the cabinet lineup, if approved by the president, would include a joint minister of economic development and labor to be headed by Five Star (post could go to Di Maio himself); League leader Salvini said to be proposed as interior minister
• Russia Central Bank Yudaeva: CPI to gradually return back to the 4% target level; gradually shifting to a neutral policy setting. CPI seen between 3-4% by end 2018 while household inflation level remained elevated
• China Foreign Ministry spokesperson Lu Kang: No guarantee that trade frictions would reemerge at some point down the road
• Japan PM Abe reiterated view that BOJ policy management was appropriate. Govt and BOJ have reaffirmed its resolve to maintain the joint statement from 2013 on beating deflation
• IEA: Venezuela one of the biggest risks in oil markets in the coming months; could see a freefall in output

Currencies

• US dollar continued to experience a powerful surge aided by on diverging central bank views (mainly due to reflection of poor developments abroad). USD Index tested the 94 level for 5-month highs
• EUR/USD at fresh 2018 lows mainly due to the Italian political drama as a new populist govt takes shape. Market participants have reacted dramatically in recent days as the Italian 10-year bond yield rises to probe the 2.30 level before settling down.
• USD/JPY stayed above the 111 handle as rising US yields kept tailwinds behind the greenback.
• Every emerging market currency seemed offered against the USD as the Turkish Lira hit another record low, Indonesia Rupiah at its weakest level since 2015 and the Indian Rupee at a 16-month low

Fixed Income

• Bund Futures trade 35 ticks higher at 159.02 continuing to rebound in relatively quiet trade as many European markets are shut in observance of Whit Monday. Continued upside targets 159.25 then 159.42 with a reversal eyeing 158.55.
• Gilt futures trade at 121.65 up 26 ticks tracking the rebound in Bunds with support continuing to stand at 120.85 then 120.25. Upside resistance at 121.89 then 122.16.
• Monday’s liquidity report showed Friday’s excess liquidity fell from €1.891T to €1.873T. Use of the marginal lending facility increased from €46M to €128M.
• Corporate issuance saw the week close out with over $32B in issuance.

Looking Ahead

• 06:00 (IL) Israel to sell Bonds
• 06:00 (RO) Romania to sell Bonds – 06:45 (US) Daily Libor Fixing
• 07:25 (BR) Brazil Central Bank Weekly Economists Survey
• 08:00 (ES) Spain Debt Agency (Tesoro) announces of upcoming issuance
• 08:00 (IN) India announces details of upcoming bond sale (held on Fridays)
• 08:05 (UK) Baltic Dry Bulk Index
• 08:30 (US) Apr Chicago Fed National Activity Index: 0.48e v 0.10 prior
• 08:55 (FR) France Debt Agency (AFT) to sell combined €4.2-5.4B in 3-month, 6-month and 12-month bills
• 09:30 (EU) ECB announces Covered-Bond Purchases
• 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender
• 11:30 (IT) Italy President Mattarella meets with 5-Star leader Di Maio
• 11:30 (US) Treasury to sell 3-Month and 6-Month Bills
• 12:00 (IT) Italy President Mattarella meets with League leader Salvini
• 12:15 (US) Fed’s Bostic (voter, dove) in Atlanta
• 14:05 (US) Fed’s Harker (non-voter, moderate) in NY
• 16:00 (US) Weekly Crop Progress Report
• 17:30 (US) Fed’s Kashkari (non-voter, dove) in MI