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[PODCAST] EU Open Rundown 18.05.18

  • Asian stocks traded mostly positive but with gains contained as focus remained on US-China trade talks and the current geopolitical climate
  • The Chinese trade delegation was said to offer a package to reduce the US trade deficit by USD 200bln annually
  • Looking ahead, highlights include Canadian CPI, retail sales, Fed’s Mester, Kaplan and Brainard

TRADE

US President Trump stated on Thursday stated that China will not be ripping the US anymore and doubts China trade talks will be successful. However, it was later reported that the China trade delegation was said to offer US President Trump a package that cuts the US trade deficit by USD 200bln annually. In addition, US President Trump commented shortly after that it is important to keep trade cooperation between US and China, while China Vice Premier Liu He said China is willing to work with US on trade issues following the meeting with Trump. (Newswires) Talks are to resume today

China Mofcom said it is to end dumping investigation on US sorghum as measures would impact living costs for consumers and is therefore not in the public interest. (Newswires)

US House Appropriations Committee rejected US President Trump’s calls to help ZTE (763 HK) and included a measure in an appropriations bill that would proceed with sanctions against the Co. (Newswires)

US Trade Representative Lighthizer said NAFTA countries are nowhere near to a deal, while he added there are gaping differences on a range of issues such as intellectual property, agricultural access, energy, labor regulations and auto content. (Newswires) Canada’s PM Trudeau declined to comment when asked whether a NAFTA deal can be sealed this year but stated that current auto proposals are broadly acceptable to industries in the three nations, while Canada’s Finance Minister Morneau is optimistic a NAFTA deal can be completed and thinks the NAFTA sunset clause is not practical. (Newswires)

US President Trump said the EU has been terrible to the US on trade and reportedly told German Chancellor Merkel to drop support for a major gas deal with Russia and instead buy American gas instead to avoid a trade war, while White House economic adviser Hasset is also said to see no trade war if Germany invests. (Newswires) French President Macron said there will be no detailed talks with US without tariff exemptions and that Europe will retaliate to protect its interests. (Newswires)

ASIA

Asian stocks traded mostly positive but with gains contained as focus remained on US-China trade talks and the current geopolitical climate. Nonetheless, the region showed some improvement from the weakness on Wall St, after the Chinese trade delegation was said to offer a package to reduce the US trade deficit by USD 200bln annually. This was the same amount the US had demanded during the 1st round of trade talks earlier this month in Beijing, while President Trump also commented that it is important to keep trade cooperation between US and China, which is in contrast to an earlier pessimistic tone from Trump that he doubted trade talks would be successful. In addition, sentiment was further underpinned by China ending its anti-dumping investigation on US sorghum, while North Korea seemed to have reverted back from its recent change in temperament and is said to increase efforts to defuse military tensions. ASX 200 (-0.2%) initially opened higher but failed to hold on to gains amid weakness in financials and mining-related sectors, while Nikkei 225 (+0.3%) was kept afloat by a weaker currency. Chinese markets were somewhat indecisive with Shanghai Comp. (+0.3%) and Hang Seng (+0.3%) swinging between gains and losses but in a tight range with focus on trade talks. Finally, 10yr JGBs were marginally softer amid similar price action in T-notes and as yields tracked continued gains in their counterparts stateside, which saw the US 10yr yield extend above 3.100% and the 30yr yield reach its highest since September 2014.

PBoC skipped open market operations for a net weekly injection of CNY 410bln (Prev. net drain of CNY 140bln W/W). (Newswires)
PBoC set CNY mid-point at 6.3763 (Prev. 6.3679)

Japanese National CPI (Apr) Y/Y 0.6% vs. Exp. 0.7% (Prev. 1.1%)
Japanese National CPI Ex. Fresh Food (Apr) Y/Y 0.7% vs. Exp. 0.8% (Prev. 0.9%)
Japanese National CPI Ex. Fresh Food & Energy (Apr) Y/Y 0.4% vs. Exp. 0.4% (Prev. 0.5%)

UK/EU

UK Cabinet agreed a Brexit customs ‘backstop’ option with the new customs proposal to prevent a hard border in Ireland.

Reports stated that ministers signed off on the “backstop” that would see the UK match EU tariffs after 2020 if there is no deal on their preferred customs arrangements, while the measure offers the guarantee sought by the Irish government to stop a hard border being introduced at the end of the transition period. (BBC)

UK PM May is expected to approve the creation of about 10 Tory peers and hand at least one to Northern Ireland’s Democratic Unionist party in an attempted move to improve her weak position in the House of Lords, which has already voted 15 times against her government over Brexit. (Guardian)

EU is to brush off UK PM May’s pitch for customs plan guarantees, while there were also reports that UK established a ministerial team to deal with border disruptions after Brexit. (Newswires)

FX

In FX markets, the DXY remained firm and near YTD highs amid rising yields, which in turn kept its major counterparts subdued with EUR/USD and GBP/USD languishing at the lower end of the 1.1800 and 1.3500 handles respectively. Elsewhere, JPY continued to weaken with USD/JPY at its strongest in around 4 months as it eyed the 111.00 handle to the upside, following softer than expected inflation figures from Japan which adds to the slew of disappointing economic releases this week including Wednesday’s GDP miss and further supports the likelihood of a prolonged continuation of the BoJ’s powerful monetary easing. The greenback’s NAFTA-counterparts were also kept subdued after the ‘soft deadline’ passed, while US Trade Representative Lighthizer offered no comfort as he commented that NAFTA countries were nowhere near to a deal and noted gaping differences on a range of issues.

COMMODITIES

Commodities were uneventful overnight with oil prices taking a breather from the prior days swings in which WTI crude and Brent crude briefly rose above USD 72.00/bbl and USD 80.00/bbl respectively, before pulling back from their highest levels since 2014. Elsewhere, gold was lacklustre amid strength in the greenback, while copper was uneventful amid a flimsy risk tone in China.

Saudi Energy Minister Al-Falih said he had discussions with IEA’s Birol to underscore commitment to maintaining stability in the oil market. Furthermore, there were also reports that Saudi Arabia & UAE oil ministers spoke about oil prices and said they are both concerned about recent market volatility, while they both also see ample supply of oil and agree oil prices are being driven by geopolitical tensions. (Newswires)

GEOPOLITICS

US President Trump said on Thursday that US and North Korea are continuing to prepare for a summit next month and warned that if North Korea doesn’t make a deal they would most likely put in place a ‘Libya model’ which he referred to as a total decimation, but also stated that he thinks North Korea leader Kim would be very happy if they reached a deal. (Guardian) In separate news, the White House said the US has no intention of altering military exercises with South Korea. (Newswires)

North Korean state media reported overnight that North Korea is to increase efforts to defuse military tensions, while South Korea press reported that North Korea is said to have asked the US to cut back its weapons if peace settles. (KCNA/Newswires)

US

The Treasury curve steepened marginally, despite slightly softer volumes when compared to mid-week trade, and the ranges weren’t exactly wide on Thursday. Yields continued to rise to fresh highs along the cruve, except for in the 2yr sector, where they were slightly lower. Most of the action concentrated in the long-end of the curve, where 10yr yields were higher by c.1bps and 30yr by c.3bps at settlement. 2s30s widened by c.5bps, 2s10s and 5s30s by c.3bps. Today’s USD 11bln in 10yr TIPS auction tailed by 1bps, bid-to-cover came in at 2.42x in line with the 6-auction average though dealer participation was well above average. The Treasury announced next week’s supply of USD 48bln in 3-month bills, USD 42bln in 6-month bills and USD 26bln 52-week bills next. It will also auction USD 16bln in a 2-year FRN reopening, USD 30bln in 7-year notes, USD 36bln in 5-year notes and USD 33bln in 2-year notes. Of note, the Treasury finally introduced a two-month bill. US 10yr T-Notes futures settled one tick lower at 118-16+.

Fed’s Kaplan (Non-Voter, Neutral) does not see the US economy entering a recession and forecasts growth between 2.5% and 2.75%. Kaplan also stated that the US economy is either at or past full employment, while he added that he is concerned that there will be no capacity in the US for fiscal stimulus in the next recession. (Newswires)

Fed’s Kashkari (Non-Voter, Dove) said low wage growth is a big conundrum and noted a theory that there is more slack in the labour market. (Newswires)

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