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[PODCAST] EU Open Rundown 24.05.18

  • FOMC Minutes stated that most felt it would soon be appropriate to raise rates again if outlook remained intact. Minutes contained little that changes the current ‘gradual hikes’ script
  • Asian equity markets traded subdued after US President Trump ordered the Commerce Department to consider a probe on auto imports
  • Looking ahead, highlights include German GDP, UK retail sales, ECB minutes and a slew of central bank speakers

FOMC

FOMC Minutes stated that most felt it would soon be appropriate to raise rates again if outlook remained intact and many also saw little evidence of labour market overheating with wage pressures still moderate.

The minutes also stated there was a range of views on how many rate hikes are required and that few noted the FFR could reach neutral level before too long if rate hikes continued.

Furthermore, it was suggested that a modest overshoot of inflation could be helpful and signalled the Fed would tolerate inflation temporarily overshooting 2%. (Newswires)

The reaction across US asset classes was initially modest as the comments didn’t shed too much light on how many further rate hikes there will be in 2018, with a range of views evident. However, USD was gradually sold after the release, Treasuries caught a bid, and equity futures climbed as sentiment reflected that the minutes contained little that changes the current ‘gradual hikes’ script. The result was that money markets’ pricing of the Fed’s rate hike trajectory also eased slightly; while the probability of a June hike still remains in the 90s and the probability of two additional hikes this year slipped to under 90%, while the probability of four hikes declined by around 10ppts to about 41%.

ASIA

Asian equity markets traded subdued with Trump’s trade policies returning to the forefront of attention after the US President ordered the Commerce Department to consider a probe on auto imports for national security purposes under Section 232, while reports also noted that tariffs of as much as 25% are being considered and is likely an attempt to prod NAFTA counterparts for a better deal. In addition, increasing uncertainty whether the US-North Korea summit will take place added to dampened tone, which in turn has collectively overshadowed a slightly-dovish perceived FOMC minutes. Nikkei 225 (-1.3%) was the underperformer as currency strength sapped exporter sentiment and with automakers reeling from the prospects of the hefty import duties, while ASX 200 (-0.2%) was led lower by financials amid the ongoing banking royal commission grilling on the sector, although broader losses in the index were stemmed by strength in consumer stocks. Elsewhere, Shanghai Comp. (Unch.) and Hang Seng (Unch.) traded indecisive following a net neutral liquidity operation by the PBoC and mixed signals on trade talks from President Trump who stated discussions are moving along nicely, but then suggested a change in the structure may be needed. Finally, 10yr JGBs were flat despite the underperformance seen in Japanese stocks, as prices took a breather from the prior day’s gains and with weaker demand seen in today’s enhanced-liquidity auction for 10yr-30yr JGBs.

China Mofcom said it will encourage companies to import more from US and that it welcomes US sending officials to China, although it reiterated that China has not promised to reduce trade deficit by a certain amount and will unswervingly protect its interests. (Newswires)

PBoC injected CNY 20bln via 7-day and CNY 20bln via 14-day reverse repos for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.3816 (Prev. 6.3773)

Bank of Korea kept the 7-Day Repo Rate unchanged at 1.50% as expected, via unanimous decision. BoK stated that domestic growth is on foreseen path and that exports will sustain expansion, but also noted job growth slowed and that growth of household debt has exceeded the pace seen in past years. (Newswires)

UK/EU

UK PM May is to ask EU for a new Brexit transition to last until 2023 to avoid a hard border (Times)

UK Brexit negotiators did not present the Irish Backstop plan in this week’s Brexit negotiations, according to sources. (Newswires) In separate news, HMRC stated that UK business could take a GBP 20bln hit from the post-Brexit customs model advocated by Brexiteers in the Cabinet including Johnson, Gove and Fox. (Guardian)

Italian President Mattarella gave the PM mandate to candidate Conte who will begin talks with party leaders on Thursday, while there were also comments from Conte that his government will be one of change and added they are to be aware of the need to confirm European and international obligations. (Newswires/ANSA)

FX

In FX markets, the DXY gradually slipped below the 94.00 level in the wake of the FOMC minutes which was perceived as a tad dovish. Elsewhere, GBP/USD was marginally supported following reports PM May is to ask the EU for a new Brexit transition to last until 2023 to avoid a hard border, while JPY continued to outperform on safe-haven demand with USD/JPY extending its retreat below the 110.00 handle. TRY remained firmer overnight with USD/TRY below 4.6000 after the Turkish Central Bank finally stepped in to support the currency and hiked the lending rate by 300bps in an extraordinary meeting.

New Zealand Trade Balance (Apr) M/M 263.0M vs. Exp. 198.0M (Prev. -86.0M, Rev. -156.0M). (Newswires)
New Zealand Exports (Apr) 5.05B vs. Exp. 4.85B (Prev. 4.85B, Rev. 4.79B)
New Zealand Imports (Apr) 4.79B vs. Exp. 4.65B (Prev. 4.94B, Rev. 4.95B)

Turkish Central Bank held an extraordinary meeting to evaluate recent developments in which it raised the Late Liquidity Window (the lending rate) by 300bps to 16.50%, while it added that it will use strong monetary tightening to support price stability. (Newswires)

COMMODITIES

Commodities were relatively uneventful overnight as markets focused on a slew of macro risk factor including the FOMC and Trump’s protectionist policies. Nonetheless, WTI crude languished below the USD 72.00/bbl alongside the lacklustre risk tone and following the prior day’s surprise DoE crude inventory build. Elsewhere, gold saw marginal gains amid a weaker greenback post-FOMC minutes.

GEOPOLITICS

US President Trump said he will know by next week if the summit with North Korea on June 12th will go ahead. In related news, North Korea said it condemns comments from US Vice-President Pence that North Korea may end up like Libya, while a Foreign Ministry official stated they will suggest to North Korea’s leadership to reconsider summit and that summit is entirely up to Washington. (Nikkei/KCNA)

North Korea is likely to demolish its nuclear test site later today. (Yonhap)

US Secretary of State Pompeo is said to be seeking a meeting with allies including Europe in early or mid-June to resolve nuclear deal issues. (Newswires)

Iran’s Supreme Leader set 7 conditions for European countries if they want Tehran to remain in the nuclear deal and said Europe must promise it will not seek negotiations over Iran’s missile programme and regional activities. Furthermore, the Supreme Leader also called on atomic energy officials to be prepared to resume suspended nuclear activities if necessary. (Newswires)

US Ambassador to Israel said the White House Middle East peace plan could be unveiled within next few months. (Newswires)

US expelled 2 Venezuelan diplomats in which they were ordered to leave in 48 hours. (Newswires)

US

The Treasury complex was bid as US traders got to their desks as risk sentiment slumped after Asia-Pac trade though picked up after the Turkish Central Bank surprisingly hiked rates. After the FOMC minutes, Treasuries rallied once again with futures hitting session highs as the Fed hiking trajectory eased slightly for 2018. The front and belly of the curve lead the moves with 5yr and 10yr yields higher by c.6bps. 5s30s and 10s3s widened by c.3bps whilst 2s5s and 2s10s narrowed by c.2bps. US auction of 5-year debt was on the screws, with the stop-out rate the highest since 2008. Internals were also fair, with cover coming in above recent averages. However, the internal takedown was below the prior and recent averages, and that left dealers with their highest takedown since December 2017. US 10yr T-Notes futures settled 10 ticks higher at 118-28.

US President Trump instructed the Commerce Department to consider Section 232 trade investigation on auto imports for national security purposes, while reports also noted that the Trump administration is considering a plan that would impose new tariffs of as much as 25% on imported vehicles. (Newswires/WSJ)

US President Trump said Mexico and Canada have been very difficult in NAFTA negotiations. In related news, Canadian Foreign Minister Freeland stated that NAFTA engagement continues at a very intense level and that significant progress was made on autos, while Mexico NAFTA negotiator said a skinny NAFTA deal is not an option and that they are not interested in a partial agreement. (Newswires)

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