The European stock market (Stoxx-600) closed around 376.70 Monday, edged up almost +0.22% in holiday-thinned trade on auto M&A boost and EU election optimism while undercutting by renewed Italian budget/fiscal deficit woes. European market activities were subdued as Britain is also on holiday along with the U.S. Stoxx-600 inched up on EU election relief (less than expected win by Eurosceptics in the exit polls as pro-EU votes limit their gains) and auto boost (M&A between Fiat and Renault (PA:RENA)). Overall, risk-on trade was muted as China also indicated they will not surrender before Trump’s pressure on some structural issues
The overall risk-on sentiment was subdued as although Trump was optimistic about a trade deal with Japan, he is now less optimistic about a trade deal with China. On Monday, Trump admitted that he's not ready to make a deal with China yet, quite contradictory of his late Thursday comments that he sees a “quick trade deal”. Trump also warned Chinese tariffs could go up very substantially and very easily in the coming days.
Trump said: “The US isn’t ready to make a trade deal with China yet. I think they probably wish they made the deal that they had on the table before they tried to renegotiate it. And, they would like to make a deal. We’re not ready to make a deal. And tariffs on Chinese goods could go up very, very substantially, very easily. Though I think sometime in future China and the United States will absolutely have a great trade deal, and we look forward to that--because I don’t believe that China can continue to pay these, really, hundreds of billions of dollars in tariffs. I don’t believe they can do that”.
But, the overall, trade tensions remained high, with China accusing the U.S. Secretary of State Pompeo of fabricating stories after he said Huawei's CEO was lying about the company’s close ties to the Chinese government. The overall risk-on sentiment was also dragged on lingering suspense about U.S.-China trade deal and as China said the U.S. demand on its SOE reform is equivalent to 'invasion' on economic sovereignty.
Also, comments from China remained hard over the weekend. A commentary published by the official media accused the US of “scapegoating” China for its trade imbalance and domestic economic issues: “The United States is attempting to squeeze an unequal trade deal out of China, using measures such as tariff hikes and targeting its tech companies”.
The article further said: “At the negotiating table, the U.S. government has made many arrogant requests, including restricting the development of state-owned enterprises. Obviously, this is beyond the field and scope of trade negotiations, (and) touches upon China’s fundamental economic system. This demonstrates that behind the trade war the U.S. has launched against China, there is an attempt to violate China’s economic sovereignty, (and) compel China to damage its own core interests”.
As per a 2011 document, China’s core interest includes “National sovereignty, national security, territorial integrity, national unity, the stability of the national political system and society at large as established by the Chinese Constitution and the basic guarantee of sustainable economic and social development”.
In brief, China is not ready to bow down on Trump pressure and changes its policies/laws.
Meanwhile, after spending much of the Sunday with Golf and Japanese Sumo, Trump was in a trade summit with Japanese Prime Minister Abe Monday, as part of his four-day trip to Japan. In the post-meeting joint press conference, Trump said he hoped to announce a trade deal with Japan very soon. He described the U.S. trade imbalance with Japan as “unbelievable large” but he hoped to address that. Trump said: “They are brilliant business people, brilliant negotiators and have put us in a tough spot but I think we will have a deal with Japan”.
Abe said: “Japanese companies are making investments in the U.S. and we have agreed to accelerate two-way trade talks. This visit of President Trump and Madame Trump is a golden opportunity to clearly show the unshakable bond to the whole world and inside Japan as well.
Earlier on before the meeting, Trump said: “Trade-wise, I think we’ll be announcing some things, probably in August, that will be very good for both countries… We’ll get the balance of trade, I think, straightened out rapidly”.
Trump also explicitly linked trade and security with Japan: “It’s all a balance sheet thing. When I talk about a security threat, I talk about a balance sheet. Japan had bought tremendous amounts of U.S. military gear. Trade-wise, I think we’ll be announcing some things, probably in August, that will be very good for both countries. We’ll get the balance of trade, I think, straightened out rapidly”.
On Sunday, Trump tweeted that he expected big moves on trade would wait until after Japan’s upper house election in July: “Great progress being made in our Trade Negotiations with Japan. Agriculture and beef heavily in play. Much will wait until after their July elections where I anticipate big numbers!”
Earlier Monday, the Japanese government announced new rules to limit foreign ownership of high-tech corporations, effective August 1. The government said that the rule aims at preventing leakage of technology deemed important for national security or damage to defense output and technological foundation.
As a reminder, the new rule is believed to be targeted at China, which was widely accused of IP theft. However, there is no mention of specific countries or companies that will be affected by such foreign ownership restrictions. Thus, based on the principle of reciprocity, if Japanese steel is security risks to the US, American companies could be risks to Japan too. It’s all up to bilateral relationship and interpretations.
On North Korea, Trump has a policy disagreement with Abe. Trump said on Monday: “I personally think that lots of good things will come with North Korea. I feel that. I may be right, I may be wrong, but I feel that”. On Sunday, Trump said: “I am not worried about a recent missile launch by North Korea”.
Also Monday, Trump met with the families of Japanese citizens abducted by North Korea decades ago and told the relatives that he would work with Abe to bring the abductees home. Back at home, Abe is under pressure on this North Korean abduction issues.
On Iran, there was a report that Abe may visit the nation in June to cool rising tension with the U.S. Iran is a vital supplier of heavy crude oil to Japan and currently may not be in a position to supply its oil to Japan due to Trump sanctions. Clearly, Abe is visiting Iran with prior “approval” from his close ally Trump, as Trump may be also interested to talk directly with Iran’s top leadership amid “mediation” effort by Abe. Trump said on Monday: “We’ll see what happens. But I know for a fact that the Prime Minister (Abe) is very close with the leadership of Iran, and we’ll see what happens”.
But on Tuesday, Japan Economy Minister Motegi said quite contradictory that Trump’s comment regarding a trade deal in August just reflects his own hope for quick progress in the negotiations. For now, the two sides are still working on “narrowing the gap”. Motegi clarified: “When you look at the exact wording of his comments, you can see that the president was voicing his hopes of swift progress in talks toward something that is mutually beneficial.”
Motegi also highlighted the differences between the U.S. and Japan and emphasized no timetable had yet been set for more meetings. He said, “we’ve agreed that we’ll strive to narrow the gap, including through possibly holding working-level talks”.
Thus, a trade deal between the U.S. and Japan is also not so much easy as Japan also has some point and limitations, contrary to Trump’s optimism.
Overall, the European market (Stoxx-600) tumbled almost -3.72% for the month of May (till date) on hopes & hypes of U.S.-China trade deal coupled with lingering Brexit uncertainty. For the month of May (till now), Germany’s export-heavy and Brexit savvy Dax-30 plunged -2.24% and made a monthly low-high of 11843.39-12420.26. France’s Cac-40 tumbled -4.42% and made a monthly low-high of 5247.66-5573.16. Italy’s MIB-40 plummeted almost -7.79% and made a low-high of 20119.50-21932.50. Britain’s FTSE-100 outperformed the overall European market on hopes and hypes of smooth and soft Brexit coupled with lower GBPUSD, plunged almost -2.87% in May (till now).
On early Tuesday, Stoxx-600 edged down almost -0.20% and made a session low of 375.96 on lingering Italian budget woes; earlier it made a session high of 377.58 on auto optimism amid Fiat-Renault merger talks.
There was a report late Monday that EU Commission was likely to start disciplinary procedures against Italy next week for breaking EU debt rules. As a result, Italy’s BTP yields soared and banks were under stress. Italy risks $4B penalty. The market is also worried about Italy’s growing political fights between the two main coalition partners and the rise of Eurosceptic politics. Italy now wants to boost the country’s GDP growth through additional fiscal stimulus, paying off the debt, but the EU Commission is dead against Italy’s growing structural and fiscal deficit.
Technical View (DAX-30, CAC-40, MIB-40, and FTSE-100):
Technically whatever may be the narrative, DAX-30 has to sustain over 12450 for a further rally to 12600*/12650-12725/12820-12875*/13095-13210*/13315 in the near term (under bullish case scenario).
On the flip side, sustaining below 12425-12375, DAX-30 may fall to 12230/12180*-12140/12100 and 12000*/11900-11830/11750 and further to 11600/11450*-11370/11320 in the near term (under bear case scenario).
Technically whatever may be the narrative, CAC-40 has to sustain over 5555 for a further rally to 5605*/5675-5715/5855 and 5925/6000-6075/6125* in the near term (under bullish case scenario).
On the flip side, sustaining below 5540, CAC-40 may fall to 5470/5425*-5380/5305* and 5275/5245*-5200/5180* and further 5130-5070 in the near term (under bear case scenario).
Technically whatever may be the narrative, MIB-40 has to sustain over 21650 for a further rally 21745/21925-22025/22105 and 22200/22295-22380*/22445 in the near term (under bullish case scenario).
On the flip side, sustaining below 21630-21570, MIB-40 may fall to 21440/21350-21245/20900 and 20795/20575-20525/20475 and further 20395-20295 in the near term (under bear case scenario).
Technically whatever may be the narrative, FTSE-100 has to sustain over 7525 for a further rally to 7600/7715-7775/7890 and 7930/8000-8050/8115 in the near term (under bullish case scenario).
On the flip side, sustaining below 7500-7485 FTSE-100 may fall to 7390/7350*-7290/7220* and 7150/7095-7045/7000 in the near term (under bear case scenario).