Risk Aversion Flows Dominate Price Action

Notes/Observations

• Risk aversion sentiment picks up over uncertainty of US-North Korea Summit, Italian politics
• Major Eurozone PMI data raises concerns over the extent of the recent slowdown in the recovery (France, Germany and Euro Zone reading missed expectations); Will soft data change the route of ECB QE exit???
• UK May CPI softer than expected and at a 1-year low at 2,4% and edging closer to BOE target

Asia:

• Japan May Preliminary PMI Manufacturing fell to a 9-month low (52.5 v 53.8 prior)
• RBNZ Assistant Gov McDermott: Would consider buying foreign govt bonds in a crisis; Prepared to use QE in a crisis (Note: currently no prospect of unconventional policy)
• China Apr Final Trade surplus revised lower ($28.4B v $28.8B prelim)

Europe:

• Italy’s Northern League spokesperson: Salvini and Di Maio held constructive talks
• Northern League leader Salvini sought economist Paolo Savona as Econ Min (*Note: Savona is a university professor who has supported Italy having the option to leave the euro if necessary) and would not accept Di Maio as PM
• Five Star lawmaker: Conte was still candidate for PM
• Chancellor of Exchequer Hammond (Fin Min) confirmed there were still two Brexit customs proposals on the table

Americas:

• President Trump said to aim for 10% cut in European steel and aluminum exports to the US
• President Trump: not pleased with how trade talks went with China; talks were a start but am not satisfied. No deal with China on ZTE
• President Trump: substantial chance summit with North Korea’s Kim would not work out in June; summit would be great if it happens; if not, that’s OK, to
• US House approved a sweeping overhaul of bank regulations that would ease the burden on small regional lenders (as expected)

Energy:

• Weekly API Oil Inventories: Crude: -1.3M v +4.9M prior

Economic Data:

• (NO) Norway Q2 Consumer Confidence: 19.6 v 22.5e
• (NL) Netherlands May Consumer Confidence: 23 v 25 prior
• (NL) Netherlands Mar Consumer Spending Y/Y: 3.2 v 2.8% prior
• (SG) Singapore Apr CPI M/M: -0.5% v -0.1%e; Y/Y: 0.1% v 0.4%e; CPI Core Y/Y: 1.3% v 1.4%
• (FR) France Q1 ILO Unemployment Rate: 9.2% v 8.8%e; Mainland Unemployment Rate: 8.9% v 8.5%e; Mainland Unemployment Change: +83K v -207K prior
• (JP) Japan Apr Final Machine Tool Orders Y/Y: 22.0% v 22.0% prelim
• (FI) Finland Apr Unemployment Rate: 8.6% v 8.8% prior
• (DK) Denmark May Consumer Confidence Indicator: 9.3 v 7.0e
• (FR) France May Preliminary Manufacturing PMI: 55.1 v 53.7e (20th month of expansion), Service PMI: 54.3 v 57.2e, Composite PMI: 54.5 v 56.8e
• (HU) Hungary Mar Average Gross Wages Y/Y: 11.3% v 11.7%e
• (TR) Turkey May Consumer Confidence: 69.9 v 71.9 prior
• (DE) Germany May Preliminary Manufacturing PMI: 56.8 v 57.9e (41st month of expansion), Services PMI: 52.1 v 53.0e, Composite PMI: 53.1 v 54.6e
• (EU) Euro Zone May Preliminary Manufacturing PMI: 55.5 v 56.1e (58th month of expansion), Services PMI: 53.9 v 54.7e, Composite PMI: 54.1 v 55.1e
• (TW) Taiwan Apr Industrial Production Y/Y: 8.5% v 6.3%e
• (ZA) South Africa Apr CPI M/M: 0.8% v 0.9%e; Y/Y: 4.5% v 4.7%e
• (ZA) South Africa Apr CPI Core M/M: 0.6% v 0.7%e; Y/Y: 4.5% v 4.5%e
• (PL) Poland Apr Retail Sales M/M: -5.3% v -2.4%e; Y/Y: 4.6% v 7.9%e; Real Retail Sales Y/Y: 4.0% v 7.5%e
• (UK) Apr CPI M/M: 0.4% v 0.5%e; Y/Y: 2.4% v 2.5%e; CPI Core Y/Y: 2.1% v 2.2%e; CPIH Y/Y: 2.2% v 2.2%e
• (UK) Apr RPI M/M: 0.5% v 0.5%e; Y/Y: 3.4% v 3.4%e, RPI-X (ex-mortgage interest payment) Y/Y: 3.4% v 3.3%e
• (UK) Apr PPI Input M/M: 0.4% v 1.0%e; Y/Y: 5.3% v 5.8%e
• (UK) Apr PPI Output M/M: 0.3% v 0.3%e; Y/Y: 2.7% v 2.3%e
• (UK) Apr PPI Output Core M/M: 0.1% v 0.3%e; Y/Y: 2.4% v 2.1%e
• (UK) Mar ONS House Price Index Y/Y: 4.2% v 4.4%e

Fixed Income Issuance:

• (IN) India sold total INR150B vs. INR150B indicated in 3-month, 6-month and 12-month bills

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx50 % at 3,538, FTSE -0.6% at 7,826, DAX -1.5% at 12,975, CAC-40 -1.3% at 5,566; IBEX-35 -1.6% at 9,973, FTSE MIB -1.9% at 22,778, SMI -1.1% at 8,842 , S&P 500 Futures -0.6%]
• Market Focal Points/Key Themes: European markets opened lower and continued trend over geopolitical concerns; continuing problems in appointing Italian head of government weigh on equities; weaker than expected macro data supported risk-off sentiment; fall in commodity prices dragged on materials stocks; energy stocks underperforming; at beginning of session there were reports that Barclays and Standard Chartered where considering merger, but this was denied before open; earnings expected in the upcoming session include Lowes, Target and Ralph Lauren

Equities

• Consumer discretionary: Marks & Spencer MKS.UK +3.7% (results)
• Consumer staples: Dairy Crest DCG.UK -7.4% (results, placing), Ontex Group ONTEX.BE -4.0% (outlook)
• Financials: Barclays BARC.UK -0.2%, Standard Chartered STAN.UK +2.1%(rumored interest in, later denial of merger interest), Euronext ENX.FR -4.7% (analyst action)
• Healthcare: Cosmo Pharma COPN.CH -14.2% (FDA letter)
• Industrials: Babcock BAB.UK +4.0% (results), Derichebourg DBG.FR -10.3% (results), Fiera Milano FM.IT +4.4% (3-year plan), GAZ GAZA.RU +2.0%(Certain US citizens can keep business with company)
• Materials: Vedanta Resources VED.UK -5.3% (results)

Speakers

• France Budget Min Darmanin: Govt will cut public spending
• UK Brexit Min Walker reiterated gpvt view that two proposals on customs arrangement remained on the table, both had challenges
• SNB Maechler says sovereign money could cause decline in CHF currency (Franc)
• Sweden Central Bank (Riksbank) Financial Stability Report noted that the high household indebtedness was making the Swedish financial system vulnerable
• RBA Gov Lowe: Stable China is in Australia’s best interest. Single biggest risk to China lied in the financial sector. China authorities was moving in the right direction on debt
• Japan Cabinet Office (Gov’t) Monthly Economic Report for May maintained its overall assessment that economy was recovering at a moderate pace

Currencies

• Risk aversion was the theme in FX with flows seeking the JPY and CHF currencies. Core European bond yields were sharply lower while the peripheral rose and safe-haven flows.
• Uncertainty over the potential US-North Kora meeting and concerns over the new Italian govt were cited as the main factors. The European economic data also brought up fresh concerns over the extent of the recent slowdown in the region’s economic recovery.
• EUR/USD hit fresh 6-month lows as the 1.17 handle was briefly breeched.
• EUR/CHF cross continued to move away from its key level of 1.2000 (former SNB floor). The cross probed the lower end of the 1.16 area after testing the former floor only a few weeks ago.

USD/JPY tested below the 110 level

• GBP/USD hit fresh 6-month lows at 1.3350 area after UK May CPI came in softer than expected and at a 1-year low at 2.4%. The data was viewed as a barometer for the timing of the next BOE rate hike. However with CPI edging closer to BOE target then central bank could hold off on any imminent hike to gauge the situation.
• Emerging market currencies continued weaken against the USD. The Turkish Lira saw its largest daily decline since the summer 2015 coup attempt on President Erdogan as the currency weakened over 4% at one point to test 4.93 area. Indonesia Central Bank conducting duel intervention in FX and bond markets to combat Rupiah currency weakness

Fixed Income

• Bund Futures trade 55 ticks higher at 159.62 on softer German and French PMI data. Upside targets 159.75 followed by 160.50, while a return lower targets the 158.25 level.
• Gilt futures trade at 122.04 higher by 52 ticks following softer than expected CPI data. Support continues stands at 120.85 then 120.25, with upside resistance at 123.35 then 123.85.
• Wednesday’s liquidity report showed Tuesday’s excess liquidity stayed fell from €1.873T to €1.837T. Use of the marginal lending facility decreased from €133M to €128M.
• Corporate issuance remained strong with SAS considering to come to market with a SEK1B bond

Looking Ahead

• 05:30 (DE) Germany to Sell €5.0B in 0% Mar 2020 Schatz
• 06:00 (UK) May CBI Retailing Reported Sales: +5e v -2 prior; Total Distribution: No est v 6 prior
• 06:00 (CZ) Czech Republic to sell 2021, 2026 and 2029 Bonds
• 06:00 (RU) Russia to sell combined RUB30.1B in OFZ bonds
• 06:45 (US) Daily Libor Fixing
• 07:00 (US) MBA Mortgage Applications w/e May 18th: No est v -2.7% prior
• 07:00 (BR) Brazil May FGV Consumer Confidence: No est v 89.4 prior
• 07:00 ECB convergence report
• 08:00 (BR) Brazil May IBGE Inflation IPCA-15 M/M: 0.3%e v 0.2% prior; Y/Y: 2.8%e v 2.8% prior
• 08:05 (UK) Baltic Dry Bulk Index
• 08:30 (CL) Chile Central Bank Traders Survey
• 09:00 (MX) Mexico Q1 Final GDP Q/Q: 0.8%e v 1.1% prelim; Y/Y: 1.4%e v 1.2% prelim; Nominal GDP Y/Y: 6.8%e v 6.6% prior
• 09:00 (MX) Mexico Mar IGAE Economic Activity Index (Monthly GDP) Y/Y: -0.4%e v +2.4% prior
• 09:45 (US) May Preliminary Markit Manufacturing PMI: 56.5e v 56.5 prior, Services PMI: 55.0e v 54.6 prior, Composite PMI: No est v 54.9 prior
• 10:00 (US) Apr New Home Sales: 679Ke v 694K prior
• 10:00 (EU) Euro Zone May Advance Consumer Confidence: 0.5e v 0.4 prior
• 10:30 (US) Weekly DOE Crude Oil Inventories
• 11:30 (US) Treasury to sell 52-Week Bills
• 11:30 (US) Treasury to sell 2-Year Floating Rate Notes Reopening
• 13:00 (US) Treasury to sell 5-Year Notes
• 14:00 (US) FOMC Minutes from May 2nd Meeting
• 14:15 (US) Fed’s Kashkari (dove, non-voter)
• 15:00 (AR) Argentina Apr Trade Balance: -$0.2Be v -$0.6B prior