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[PODCAST] EU Open Rundown 28.05.18

  • Asian equity markets traded mostly higher on warming geopolitical ties with prospects of the US-North Korea summit back in play
  • 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
  • Today’s calendar sees a lack of tier 1 highlights. UK and US markets are closed

ASIA

Asian equity markets traded mostly higher on warming geopolitical ties with prospects of the US-North Korea summit back in play after President Trump mentioned a US team was sent to make arrangements and following an unannounced inter-Korean meeting between Moon and Kim. However, it wasn’t all smooth sailing as the region also digested a slump in crude prices following reports that Saudi Arabia and Russia are nearing an agreement to raise output. ASX 200 (-0.6%) was dragged by commodity names after WTI crude extended on last week’s losses to briefly trade below USD 66.00/bbl and after iron ore also slipped nearly 4% on Friday. Nikkei 225 (+0.1%) lacked direction amid an indecisive currency, while Shanghai Comp. (+0.2%) and Hang Seng (+0.6%) were initially choppy amid the aforementioned opposing risk factors but then eventually traded positive after strong Industrial Profit growth and a tepid net liquidity injection of CNY 30bln. Finally, 10yr JGBs were relatively flat alongside indecisive trade for Tokyo stocks and lack of a BoJ rinban announcement.

Chinese Industrial Profits (Apr) Y/Y 21.9% vs. (Prev. 3.1%); 6-month high. (SCMP)

PBoC injected CNY 20bln via 7-day reverse repos and CNY 10bln via 28-day reverse repos for a net daily injection of CNY 30bln, while it hiked 28-day reverse repo rate by 5bps to 2.85% which is inline with what the central bank did to the other tenors previously following the March Fed hike. (Newswires)
PBoC set CNY mid-point at 6.3962 (Prev. 6.3867)

UK/EU

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)

UK Foreign Minister Johnson has stressed the need for the UK to come “fully out” of the EU customs union if the UK is to be a global trading nation. (Guardian)

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)

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”. Following the veto by Mattarella, M5S leader Di Maio said it is unclear what will happen in the next few months and that the President should be impeached for betraying the constitution, while League leader Salvini said Italians should vote again. (Newswires/Guardian) President Mattarella has reportedly summoned former-IMF senior director Cottarelli to meet today in a move viewed by some as laying the groundwork for a technocratic government. (Newswires)

Moody’s placed Italy Baa2 rating on downgrade watch. (Newswires)

FX

EUR/USD reclaimed the 1.1700 handle to the upside on reports that Italian PM-designate Conte gave up on forming a government after President Mattarella rejected Eurosceptic Paolo Savona for the Economy Minister position. Despite the uncertainty following the veto including the possibility of fresh elections, EUR strengthened across the board due to the rejection of the Eurosceptics and in turn, dragged the DXY back below the 94.00 level. Elsewhere, USD/JPY traded choppy as the initial upside from the revival of the US-North Korea summit hopes was counterbalanced by the crude slump, while commodity-linked currencies were mixed as the CAD suffered and antipodeans weathered the crude sell-off storm.

COMMODITIES

Commodities were lacklustre overnight following Friday’s losses in which WTI crude futures extended on last week’s decline of around 5% with another near 3% decline to briefly trade below USD 66/bbl after reports on Friday suggested that Saudi Arabia and Russia were nearing an agreement to raise production. Elsewhere, gold opened lower on renewed prospects for a summit US-North Korea summit, while copper consolidated overnight amid an initial choppy risk tone.

Russian Energy Minister Novak said OPEC+ are likely to agree to gradually raise output and that proportional easing for OPEC+ members seems a fair option. However, Novak added no final decision has yet been taken about easing cuts deal and it is too soon to say how much of the cut supply will be coming back to the market. (Newswires)

Russian President Putin said oil prices at USD 65/bbl suit Russia, while Russian Deputy Finance Ministry Oreshkin said 3-year forecast assumed oil prices at USD 60/bbl. (Newswires)

US Baker Hughes Total Rig Count (18 May) 1059 (Prev. 1046). (Newswires)

NHC said storm Alberto continues to head for the Northern Gulf Coast. (Newswires)

GEOPOLITICS

US President Trump tweeted that a US team arrived in North Korea to make arrangement for summit between Trump and Kim Jong Un. (Twitter) In related news, there were also reports that South Korea President Moon may join US and North Korean leaders for a trilateral summit, according to an official. (Yonhap)

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)

North Korean delegates headed for Singapore today in preparation for a possible US-North Korea summit. (Yonhap)

Iran Deputy Foreign Minister said after talks with Europeans, negotiations will continue to try and salvage the nuclear deal, while there were also reports that Iran is weeks away from deciding to stay or exit their nuclear deal. (Newswires)

US

Treasury yields fell across the curve amid continued uncertainty in Europe around the upsurge of the new populist government in Italy, which sent the spread between 10yr Bunds and BTPS above 200bps, and also on the prospect that Spanish PM Rajoy will likely face a confidence vote. Treasuries caught a bid during European hours as safe haven assets drew demand, and stabilised near session highs as investors squared-up their books ahead of the long weekend in the US/UK. Most of the action was concentrated in the belly of the curve with 10yr yields higher by c.5bps, the front end of the curve was higher by c.3bps and the long end by c.4bps. 2s5s and 2s10s narrowed by c.2bps whilst 5s30 and 10s30s widened by c.2bps. US 10yr T-Notes futures settled 11+ ticks higher at 119-27+.

Fed’s Bostic (voter, dovish) said there are a lot of reasons to proceed with gradual hikes, not the least because that is what the Fed has guided. (Newswires)

Fed’s Kaplan (non-voter, neutral) said he is very carefully monitoring impact of dollar and is hopeful the IOER will help the Fed better set the funds rate, while Kaplan reiterated the case for gradual hikes and cited the possibility for ‘rapid change’. (Newswires)

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