Market movers today
In light of another day of only tier-2 data releases, political headlines - be it the US-China trade spat or Brexit - will remain in focus today. In the UK, PM Theresa May will convene a cabinet meeting today to consider how to respond to the collapse of the cross-party talks with Labour.
In the Euro area, consumer confidence data for May is on the agenda. Domestic demand, especially private consumption, was an important growth driver in Q1 as consumer sentiment recovered some ground after the H2 18 weakness. We will look for any signs that this trend might go into reverse amid the latest trade war escalation.
Central bankers will also be on the wires today, with ECB Vice President De Guindos speaking in London and the Fed's Evans and Rosengren discussing the economy and monetary policy.
Overnight to Wednesday, Japanese export figures for April are due out and will shed some light on where the Japanese export sector is heading after the surprisingly strong Q1 GDP figures released yesterday.
Selected market news
The equity market used yesterday to digest the news over the weekend that the White House has blacklisted Huawei. In the stock market, in particular semiconductor producers - the trade war/Huawei proxy - came under pressure with, for example, Intel (NASDAQ:INTC) falling to the lowest level in 2019. But the day started out on more positive footing in Europe with better-than-expected Japanese GDP, a victory for the market-friendly liberal-national government in Australia, talks about a Japan-US trade agreement and President Trump's talk over the weekend that they "had a deal" but "they [China] changed it". But the mood changed as later in the day Chinese Foreign Ministry spokesman Lu Kang denied that China had agreed to anything. He said, "We don't know what this agreement is the United States is talking about. Perhaps the United States has an agreement they all along had extravagant expectations for, but it's certainly not a so-called agreement that China agreed to."
Overnight, it is noteworthy that the Chinese central bank once again injected cash into the system. The central bank offered 80b yuan of seven-day funding, the biggest single-day injection in more than a month. It has fuelled hopes that the Chinese will stimulate the economy further and Chinese stocks are close to 2% higher this morning and both European and US equity futures are pointing higher. A 90-day waiver granted for certain US broadband companies using Huawei equipment might have also helped sentiment. Google (NASDAQ:GOOGL) will also be able to provide key Android mobile updates for 90 days.
The market is also looking to the Fed for help, but so far the Fed has been reluctant to soften its stance further in the wake of the ongoing trade concerns. Overnight, Powell repeated this view, saying that the outcome of the trade negotiations is highly uncertain and that it would be premature to make a judgement. The market is priced for approximately two Fed rate cuts of 25bp over the next 12 months.
Scandi markets
We have two Riksbank speeches today. Floden will talk at 10.00 CEST in London and Ohlsson will talk at 16.00 CEST in Copenhagen at Danske Bank’s Nordic Corporates and Institutions ‘Navigating climate change and a new world order’ Summit. Both talks are about the development of the payment market.
Fixed income markets
We saw a modest rise in core-EU government bond yields yesterday, driven from the long end of the curve. Italian government bonds also rose and the 10Y spread to Germany widened despite comments from Minister of Finance Tria that Italy will not be breaching the EU growth and stability rules on the budget. However, it shows the split between earlier comments from Vice-PM Salvini and Tria on the budget if there is an economic slowdown. This is not positive for Italian government bonds.
The geopolitical uncertainty continues to drive markets, with a further escalation of the trade issues between the US and China, tensions between the US and Iran, and Brexit. On top of this, we have the EU parliamentary elections at the weekend. We believe that core- EU yields will remain low in this environment and that there is risk of further pressure on Italy.
Today, the Dutch State Treasury will launch a new 20Y Green bond. The plan is to sell between EUR4bn and EUR6bn, and to have fulfilled 70% of the funding for 2019 after the deal. Tomorrow, the Danish Debt Office will tap in the 2Y and 10Y benchmarks. See more here.
FX markets
Markets in Q2 are increasingly the opposite of Q1 and Monday proved to be little else than red numbers. Inflation expectations continue to decline and equity volatility is back, as semiconductors (trade war proxy) opened down more than 3%. With central banks remaining remarkably silent/not dovish and US-China relations worsening, we think the sell-off has more to go.
Hence, we expect JPY strength, commodity currencies to continue struggling and to some extent for this to weigh on Scandies also in the near term, as we have seen in recent days with both EUR/NOK and EUR/SEK testing the upper end of recent trading ranges.
EUR/USD is steady so far, while continued status quo in the trade war and on monetary policy raises downside risks for our 1.13 3M (NYSE:MMM) forecast.
