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[PODCAST] EU Open Rundown 29.05.18

  • Asia traded mostly subdued as region lacked impetus following the market closures in US and UK. Political uncertainty in Italy and Spain added to the cautious tone
  • In FX markets, the risk averse tone spurred flows into the safe-havens with JPY the main beneficiary which pushed USD/JPY briefly below the 109.00 handle
  • Looking ahead, highlights include ECB’s Mersch and Lautenschlaeger

RECAP OF STORIES FROM OVER THE WEEKEND AND MONDAY FOR UK TRADERS AWAY FROM MARKET

Italy PM-designate Conte reportedly gave up on efforts of forming a government after Italian President Mattarella rejected Eurosceptic Paolo Savona for the Economy Minister position because the appointment would have “alarmed markets and investors, Italians and foreigners”. In the wake of this news President Mattarella summoned former-IMF senior director Cottarelli to meet in a move viewed by some as laying the groundwork for a technocratic government. Forza Italia said they would not support this government, and 5SM and League set their sights on the now highly likely new elections (touted from September 9th). Both 5SM and League saying they will evaluate their coalition in these new elections. (Newswires)

Italian President Mattarella gave mandate to form a government to ex-IMF official Cottarelli, while PM-designate Cottarelli accepted the mandate to form a government as expected and sees elections at the start of next year. In related news, League leader Salvini said he hopes there will be a government in October for the approval of the budget law and to avoid a VAT increase and M5S leader Di Maio wants elections as soon as possible, while Forza Italia’s Berlusconi said his party will reject the Cottarelli government. (Newswires)

Spanish Parliament started the process for a no confidence vote against PM Rajoy, while it set the date for debate and vote of confidence on PM Rajoy’s government for May 31st and June 1st. (Newswires)

EU Brexit Negotiator Barnier said on Friday his scenario is to reach a realistic Brexit deal and that his worst-case scenario is not a no deal. (Newswires) On Saturday, Barnier warned the UK to stop playing ‘hide and seek’ and come to a realistic solution for their exit from the EU. (FT)
UK is reported to be lacking a plan in the event of a ‘no-deal’ Brexit, thus making it virtually impossible for May to walk out of negotiations with the EU, according to sources. (FT)

US President Trump tweeted that a US team arrived in North Korea to make arrangement for summit between Trump and Kim Jong Un. (Twitter)

South Korea President Moon met with North Korea leader Kim in an unannounced meeting over the weekend in which the latter affirmed commitment for denuclearisation. (WSJ)

ASIA

Asia traded mostly subdued as region lacked impetus following the market closures in US and UK, while recent weakness in oil prices and political uncertainty surrounding Italy and Spain have added to the cautious tone. As such, Nikkei 225 (-0.9%) was the worst performer as Japanese exporters suffered from flows into the JPY, while Japan Display shares led the declines in Tokyo with losses of over 20% seen in early trade after reports that Apple is to switch to OLED screens on all iPhone models from next year, which in turn underpinned South Korea’s LG Display. ASX 200 (+0.2%) was lifted by strength in its largest weighted financials sector and as energy names shrugged off the recent aggressive pull-back in crude prices. Shanghai Comp. (-0.6%) failed to maintain the early support from a firm PBoC liquidity operation and eventually slipped amid the broad risk-averse tone, while Hang Seng (-0.7%) was weighed by losses in blue-chip property and energy names. Finally, 10yr JGBs were higher amid recent upside in T-notes and declines in US yields, although the gains for Japanese bonds were only modest amid a mixed 40yr auction which printed a higher b/c but lower prices from previous.

PBoC injected CNY 100bln via 7-day and CNY 80bln via 28-day reverse repos, for a net daily injection of CNY 50bln. (Newswires)
PBoC set CNY mid-point at 6.4021 (Prev. 6.3962)

UK/EU

BoE and UK Treasury were reported to be in disagreement regarding what the UK needs in terms of a Plan B for the financial services sector post-Brexit, although a central bank spokesperson later denied there was a rift. (FT/Newswires)

Britain will help to set the EU’s GBP 1trl budget up to 2027 after European countries defied Brussels and invited UK officials to take part in negotiations. (Times)

UK Manufacturing firms are said to plan calling for the government to drop its “max-fac” proposal advocated by Brexiteers for the customs union, as the companies view it as unrealistic and costly. (Newswires)

Spain nominates Bank of Spain’s director general of economy and statistics Hernandez de Cos to replace central bank Governor Linde when the latter’s term ends next month. (Newswires)

German Chancellor Merkel still hopes there will be no need for the EU to implement WTO-complaints measures with the US. (Newswires)

FX

In FX markets, the risk averse tone spurred flows into the safe-havens with JPY the main beneficiary which pushed USD/JPY briefly below the 109.00 handle, while JPY crosses were equally pressured with EUR/JPY and GBP/JPY at 11-month and 8-month lows respectively. This in turn dampened their relevant major pairs with EUR/USD also languishing from the political turmoil in the bloc with Italy on course for fresh elections and mired by impeachment calls against its President, while Spanish PM Rajoy is to also face a no-confidence vote later this week. Elsewhere, AUD/USD was pressured and underperformed its commodity-linked peers amid oil declines and on cross-related flows in which AUD/JPY tested 82.00 to the downside and with EUR/AUD supported at 1.5400.

COMMODITIES

WTI crude futures languished and failed to maintain a footing above the USD 67.00bbl level following the recent aggressive pull-back on prospects of an OPEC+ production increase next month, although prices have nursed some of the recent heavy losses and are about a buck off Monday’s lows. Elsewhere, gold is range-bound as support for the safe-haven from the broad risk averse tone is counterbalanced by a firmer greenback, while copper was marginally higher in a continuation of the short-covering as it maintains within its current price channel. (Newswires)

Canada will conduct probe on steel imports from China, South Korea and Vietnam, while there were separate reports that United Steelworkers union members in Labrador City, Canada ratify 5-year collective bargaining agreement with Iron Ore Company of Canada, which ends a 9-week strike. In other news, Canada is said to likely acquire the full Trans Mountain Pipeline Project, with the deal said to be announced as early as today. (Newswires)

GEOPOLITICS

North Korean senior official Kim Yong-choi is heading to Washington for possible working-level discussions. However, South Korea later stated it was not aware of a North Korean official visiting the US. (Yonhap)

US is said to prepare new sanctions push against North Korea although reports later stated the US is to hold off on sanctions for summit talks, while South Korean press reported that US is said to demand that North Korea ship out its nuclear weapons and missiles. (WSJ/Newswires/Chosun)

US

Fed’s Bullard (Non-Voter, Dove) said US inflation expectations remain low, while he also states Fed policy rate already close to neutral and that aggressive pace of hikes could invert yield curve. (Newswires)

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