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[PODCAST] EU Open Rundown 22.05.18

  • Asian stocks traded mostly subdued amid holiday closures and a lack of fresh catalysts. DXY was sideways around 93.50 following its recent pullback from YTD highs
  • Italy’s President Mattarella reportedly expressed concerns with the 5SM/League fiscal plan and is said to need time to mull the PM choice
  • Looking ahead, highlights include BoE QIR testimony, ECB’s Liikanen, UK/EU trade talks and US 2yr Note Auction

TRADE

US and China said to have reached a broad outline for settling ZTE (763 HK) issue, in which the export ban could be removed, while the Co. would have to make board and management changes. Furthermore, other source reports noted that the side were nearing an agreement that would remove ban on ZTE and would include China pledge to remove tariffs on, as well as increase imports of, US agricultural products. (Newswires)

US Trade Representative Lighthizer said on Monday that he still sees the need of real work to achieve changes in China and noted that intellectual property issues are more important than the trade gap. (Newswires)

US Commerce Department announced it will impose anti-dumping rate of 200% and countervailing rate of 256% on some cold-rolled steel from Vietnam produced using substrate originating from China. (Newswires)

ASIA

Asian stocks traded mostly subdued amid holiday closures and a lack of fresh catalysts, which saw sentiment wane from the prior day’s trade-related gains that boosted the DJIA above the 25k level for the first time since March. ASX 200 (-0.8%) weakened amid broad losses across all sectors and with telecoms underperforming on continued woes for Telstra shares, while Healthscope was the worst performer after it flagged impairment charges. Nikkei 225 (-0.1%) traded indecisive as exporters suffered from a firmer currency and with Sony shares pressured after its 3-year strategy and targets was met with disappointment, while Shanghai Comp. (-0.4%) was also weaker following a continued net neutral liquidity position by the PBoC and with market closures in both Hong Kong and South Korea adding to the humdrum tone, although baby-related stocks were underpinned on prospects China could relax its child-policy restrictions. Finally, 10yr JGBs were lacklustre alongside an indecisive risk tone in Japan and with participants side-lined ahead of 20yr auction which eventually saw a mixed result, while a deluge of comments from BoJ Governor Kuroda also failed to spur price action as he kept to reiterations and suggested the BoJ is still far from an exit.

PBoC injected CNY 50bln via 7-day and CNY 50bln via 14-day reverse repos for a net neutral daily position. (Newswires)
PBoC set CNY mid-point at 6.3799 (Prev. 6.3852)

China Vice Premier Liu said China will actively increase imports, while there were also separate reports that China is said to consider ending birth limits as soon as this year. (Newswires)

BoJ Governor Kuroda said will take into consideration side effects including impact on financial institutions when guiding monetary policy currently, while he added that he is not seeing conditions rife to study timing of exit and that the BoJ will not exit easy policy prior to reaching 2% price target. (Newswires)

UK/EU

UK Foreign Secretary Boris Johnson hints that government could seek tougher action against Russian oligarchs following spy poisoning incident and is looking closely at the US approach. (Newswires)

Italy’s M5S leader Di Maio said that Conte will be premier of the government. (ANSA) In related news, Italy’s President Mattarella reportedly expressed concerns with the 5SM/League fiscal plan and is said to need time to mull the PM choice. Furthermore, Mattarella was reported to demand leaders of Italy’s Lower and Upper House to attend a meeting on Tuesday. (Newswires)

FX

FX markets were quiet amid a sparse calendar and with no tier-1 data releases scheduled overnight. As such, the major currency pairs traded range-bound and the DXY was sideways around 93.50 following its recent pullback from YTD highs. Elsewhere, EUR/USD was contained by resistance at 1.1800 and GBP/USD languished amid the ongoing Brexit-related impasse, with markets also awaiting a slew of BoE speakers which dominates the European morning schedule including Governor Carney. USD/JPY marginally extended below the 111.00 handle following the USD-pullback and safe-haven flows to JPY, while commodity-linked currencies held near the prior day’s best levels after oil prices hit fresh multi-year highs last seen in 2014.

COMMODITIES

Commodities were mixed in which crude extended on gains to print fresh highs last seen in 2014 with geopolitics remaining at the fore after US Secretary of State Pompeo warned of the severity for Iran sanctions, while the US also imposed sanctions on Venezuela following the election last weekend. Elsewhere, gold was subdued and retreated from last week’s resistance levels, while copper mirrored the lacklustre risk tone.

US President Trump signed order on Venezuela preventing the selling-off of Venezuelan accounts receivable related to oil, according to a senior US Official. Elsewhere, US Secretary of State Pompeo stated the US will take ‘swift economic and diplomatic actions to help the restoration of Venezuela’s democracy. (Newswires)

GEOPOLITICS

US Secretary of State Mike Pompeo said US sanctions on Iran will be the strongest in history and that Tehran will be battling to keep its economy alive once they come into full effect. In related news, a Pentagon spokesperson said the US will take ‘all necessary steps to confront and address Iran’s malign influence in the region’. (Newswires)

US

The yield curve flattened modestly on Monday with most of the action concentrated in the short end of the curve, 2yr yields were higher by c.2bps amid some of Europe away from market and ahead of Fed minutes this week. 2s5s and 2s10s were narrower by c.1bps at settlement. The sell-off was helped by positive news on the US-China front, though ranges and volumes were thin for the session. This week the  US will auction 2s, 5s and 7s. The US Treasury increased the auction sizes at the most recent refunding announcement and will auction a total of USD 115bln in 2-year notes (USD 33bln, today), 5-year notes (USD 36bln, Wednesday) and 7-year notes (USD 30bln, Thursday), as well as 2y FRNs (USD 16bln, Wednesday) this week. With a total of USD 70.6bln maturing, the auction will raise net USD 44.4bln in the week. The last auction, in April, was poor; the line was covered just 2.61x, below the 6-auction average of 2.81x, the auction also tailed by 0.5bps and dealers were left with a larger than average chunk of the issuance. US 10yr T-Notes futures settled 10+ ticks higher at 118-27.

Fed’s Bostic (voter, dovish) said he sees 2 more rate hikes in 2018 and that it remains to be seen how much slack remains in the US economy. (Newswires)

Fed’s Harker (non-voter, dovish) initially stated he sees two more rates hike this year but could potentially support an additional hike if inflation accelerates, although he is not seeing signs of that yet. Harker also said he favours pausing hikes once the Fed has hit neutral rates, while he later provided a conflicting remark that he would support three more hikes in 2018 if inflation is sustained at current levels. (Newswires)

Fed’s Kashkari (non-voter, dove) said wage growth has not picked up and that there may still be slack in the jobs market, while he also suggested the need to allow the economy to continue strengthening. (Newswires)

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