New Italian government? Check. New Spanish government? Check. Trade war between the US and Europe, Mexico and Canada? Check. Deutsche Bank downgraded to a B-handle? Check. All these potentially risky events have happened in just the past few hours, yet global stock markets couldn’t care less, and together with US equity futures are a sea of green this morning, heading for a positive end to a volatile, tumultuous week in which political developments in Europe and escalating trade tensions roiled markets, only to get a happy ending, even as the all important payrolls report looms, which is expected to show payrolls rising and the unemployment rate holding at the lowest since 2000, suggesting continued tightening by the Fed.
As Bloomberg notes, the (surprisingly) strong positive reaction in European equity markets is the main focus this morning despite the sharp escalation in the global trade dispute
Instead, what traders appear more focused on is the formation of the new Italian government, whose finmin is perceived, perhaps erroneously, as a quasi technocrat despite the clearly Euroskeptic views posted on his blog. For now, however, the Italian FTSE MIB is higher by 2.8%, rallying the most since the end of February and recouping much of its losses for the week as populist parties surged to power, bringing to an end a three-month political deadlock though opening the way to a period of friction with Europe…
… while BTPs have rallied in relief at formation of new govt, with the 2Y Italian yield back under 1%…
…. while the Italian-German spread is back to just above 200bps, with Italy’s bank sector rallying heavily.
On Friday, Spain also got a new government when Socialist leader Sanchez becomes PM after lawmakers voted Rajoy out of office. The vote was 180 to 169 with the passing of the vote very much expected. Prior to this Rajoy accepted his defeat and said that Sanchez is set to be the new PM. Spanish assets rallied after Rajoy’s ouster, opening the way for Socialist leader Pedro Sanchez to take over, and sending 2Y Spanish yields sharply lower.
And yet, as Bloomberg’s Heather Burke notes, despite today’s relief rally, “traders are still bracing for long-term downside, with the cost of bearish versus bullish options based on the index’s three-month 90%/110% skew still near a one-year high.” As a result a return to the 8 1/2-year high for Italian stocks seen in May could prove tough:
Even if an outright euro exit is a low-probability risk, the prospective Italian government could run into tensions with the bloc down the road. Political developments are also still playing out in neighboring Spain, while global trade relations may be souring again. With investors still clearly jittery, there’s plenty of room for risk sentiment to pull back.
Meanwhile, over in Germany as noted earlier, Deutsche Bank stock was unimpressed by the S&P downgrade to BBB+ due to the CEO’s reassuring (repeat) report on liquidity position, with the stock rebounding from yesterday’s all time low…
… even if the CDS is far less convinced that all is well, as DB’s default risk is by far the highest of all major banks.
So as a result of all the various resolutions, even if they were not what one would call “bullish”, the Stoxx Europe 600 index is headed for its biggest gain in a month, led by banks and basic-resources stocks, while S&P equity-index futures pointed to a higher U.S. open.
The risk-on mood prevailed despite President Trump’s launch of tariffs on imports from key trading partners. According to Bloomberg, investors remain optimistic that threats of more international tariffs will not materialize into an all-out trade war between the U.S. and its key partners, while the latest developments in Italy and Spain also removed uncertainty, providing some well-needed relief within Europe
Earlier in the session, Asian stocks traded mixed amid trade war concerns following the US announcement to impose steel and aluminium tariffs on EU, Canada and Mexico, which in turn triggered threats of retaliation against the US. In addition, a slight miss on Chinese Caixin Manufacturing PMI data and looming US NFP jobs data have added to the tentative tone. ASX 200 (-0.4%) was led lower by financials with ANZ Bank pressured on cartel allegation charges related to a share sale in 2015 and as the energy sector also suffered from weakness in crude prices, while Nikkei 225 (+0.1%) shrugged off its opening losses on favourable currency moves. Hang Seng (-0.1%) and Shanghai Comp. (-0.5%) were indecisive and swung between gains and losses as participants digested a range of factors including weaker than expected Caixin Manufacturing PMI data and a firm net liquidity injection of CNY 410bln for the week, as well as the debut of China A-shares in the MSCI Emerging Market benchmark index.
Meanwhile, the TSY curve is marginally steeper as futures edge lower, tracking move in bunds, pushing the 10Y TSY yielld to 2.89% this morning. German bunds led a drop in core European debt as the flight to safety reversed, while peripheral bonds such as Italy’s and Spain’s gained.
Despite the ongoing political risks in the euroarea and the revival of trade-war fears, the currency market was just as blaze as European stocks, and is trading with its familiar pre-payrolls bias, one with relatively low volumes and tight trading ranges:
- The dollar traded mixed versus Group-of-10 peers as the market entered a consolidation mode ahead of the U.S. data later today and with Scandinavian currencies benefiting from the improvement of market sentiment
- The euro reversed modest gains made in Asia as Italy prepared to form a populist government while BTPs climbed for the third day, extending a relief rally
- The yen slid against all G-10 peers and USD/JPY climbed to a high of 109.29 after a brief selloff following a cut in the Bank of Japan’s bond purchases
- The Aussie declined amid an escalation of global trade tensions after the U.S. slapped metal tariff
- TRY heavily offered and the Borsa Istanbul 100 Index tumbled after tanking on Thursday by the most in a month, after Turkey’s President Recep Tayyip Erdogan called last night on Turkish citizens to repatriate assets from abroad.
In overnight central bank news, Fed’s Bullard (Non-Voter, Dove) reiterates already at a neutral rate, adds appropriate for Fed to hedge views on rate hikes and that inflation would have surprise to the upside for rate hikes.
As reported yesterday, at the stroke of midnight, US metal tariff exemptions for EU, Canada and Mexico expired overnight which sees US’ closest allies to be subject to 25% tariffs on steel and 10% on aluminium heading into the US. Elsewhere, there were also comments from President Trump that the US will agree to a fair NAFTA deal or no deal at all.
In geopolitics, North Korean leader Kim said their will for denuclearization of the peninsula is unchanged, consistent and fixed, while he hopes that North Korea and US ties will be solved step by step and added North Korea has agreed to a summit with Russia. North and South Korea have agreed to meet on June 14th for military talks.
In commodities, oil is up on the day heading into the weekend with both WTI and Brent up modestly on the day after touching lows in late US trade. This comes after bearish signals in products within the DoE data discounted a wider than expected crude draw. A broader risk averse tone spurred on by trade concerns is dampening prices slightly, however. Gold is lacklustre with the yellow metal essentially flat on the day with traders holding fire ahead of US jobs data. Steel has extended its climb to hit multi-month highs, with aluminium also rising slightly on the day amid the imposition and retaliation of tariffs, as well as continually declining steel stockpiles.
Bulletin Headline Summary from RanSquawk
- Italian assets seeing significant positivity as government edges closer
- Spanish PM Rajoy ousted as Socialist Sanchez takes power
- Looking ahead, highlights include, US NFP, ISM mfg, Baker Hughes and Fed’s Kashkari
Market Snapshot
- S&P 500 futures up 0.4% to 2,715.50
- STOXX Europe 600 up 0.9% to 386.40
- MXAP down 0.01% to 172.15
- MXAPJ up 0.2% to 563.45
- Nikkei down 0.1% to 22,171.35
- Topix up 0.1% to 1,749.17
- Hang Seng Index up 0.08% to 30,492.91
- Shanghai Composite down 0.7% to 3,075.14
- Sensex down 0.08% to 35,294.06
- Australia S&P/ASX 200 down 0.4% to 5,990.39
- Kospi up 0.7% to 2,438.96
- Brent futures up 0.4% to $77.87/bbl
- Gold spot little changed at $1,299.28
- U.S. Dollar Index up 0.1% to 94.08
- German 10Y yield rose 3.4 bps to 0.375%
- Euro down 0.04% to $1.1688
- Italian 10Y yield fell 12.0 bps to 2.526%
- Spanish 10Y yield fell 4.1 bps to 1.462%
Top Overnight News from Bloomberg
- President Donald Trump on Thursday night warned Canada that any renegotiated North American Free Trade Agreement must be “a fair deal, or there will be no deal at all”
- EU’s Mogherini: EU will defend its interests; EU response to tariffs will be reasonable and WTO compliant
- Italy’s populist Five Star Movement and League parties prepared to sweep to power with a program for fiscal expansion that poses a challenge to European rules. Giuseppe Conte, 53, a law professor with no political experience, will be sworn in as prime minister along with his cabinet at 4 p.m. local time on Friday by President Sergio Mattarella
- U.S.-North Korean talks over a possible summit in Singapore shift to the White House on Friday, where President Donald Trump will host a top aide to Kim Jong Un
- European May Manufacturing PMIs: Spain 53.4 vs 54.0 est; Italy 52.7 vs 53.0 est; France 54.4 vs 55.1 est; Germany 56.9 vs 56.8 est; Eurozone 55.5 vs 55.5 est; U.K. 54.4 vs 53..5 est.
- Spain: Rajoy concedes defeat ahead of no-confidence vote in Spanish parliament; says Sanchez will become new PM; later officially confirmed in full vote
- Deutsche Bank downgraded one notch to BBB+ by S&P; CEO Sewing reaffirms bank’s financial strength is beyond doubt; ECB supervisors see capital and liquidity positions as good, according to people familiar: Reuters
- BOJ cuts purchases in 5-10y bucket by 20b to 430b yen in regular rinban operation
- Spanish Prime Minister Mariano Rajoy was ousted by a no- confidence vote on Friday. Socialist leader Pedro Sanchez is due to be sworn in as premier by King Felipe in the coming days.
- The U.S. has opened a criminal investigation into whether traders manipulated prices in the $550 billion market for corporate bonds issued by Fannie Mae and Freddie Mac, according to people familiar with the matter.
- The recent volatility in markets has sparked a rebound in trading revenue for global banks, as clients turn their attention to risks such as Italy’s political crisis and step up their hedging, a BNP Paribas SA executive said.
- U.K. manufacturing growth unexpectedly quickened in May as firms worked through backlogs and built up their inventories; IHS Markit’s PMI for the industry rose to 54.4 in May, up from 53.9 in April and beating economists’ estimates for a drop.
Asian markets traded mixed after trade war concerns resurfaced following the US announcement to impose steel and aluminium tariffs on EU, Canada and Mexico, which in turn triggered threats of retaliation against the US. In addition, a slight miss on Chinese Caixin Manufacturing PMI data and looming US NFP jobs data have added to the tentative tone. ASX 200 (-0.4%) was led lower by financials with ANZ Bank pressured on cartel allegation charges related to a share sale in 2015 and as the energy sector also suffered from weakness in crude prices, while Nikkei 225 (+0.1%) shrugged off its opening losses on favourable currency moves. Hang Seng (-0.1%) and Shanghai Comp. (-0.5%) were indecisive and swung between gains and losses as participants digested a range of factors including weaker than expected Caixin Manufacturing PMI data and a firm net liquidity injection of CNY 410bln for the week, as well as the debut of China A-shares in the MSCI Emerging Market benchmark index. Finally, 10yr JGBs were lower after the BoJ reduced purchases of 5yr-10yr maturities in its Rinban announcement which saw a breakdown of near-term support at 150.94, while price action was also consistent with a recovery in Tokyo stocks and US yields. Chinese Caixin Manufacturing PMI (May) 51.1 vs. Exp. 51.2 (Prev. 51.1). PBoC injected CNY 40bln via 7-day reverse repos, CNY 10bln via 14-day reverse repos and CNY 30bln via 28-day reverse repos, for a net weekly injection of CNY 410bln vs. last week’s CNY 30bln net drain.
Top Asian News
- China’s Oceanwide Said to Explore Property Sales for Cash
- Chinese Stocks Decline as MSCI Inclusion Fails to Lift Sentiment
- Some Turks Fear Culture Clash With Erdogan Is About to Get Worse
- SoftBank CEO Adds Driverless Tech to 300-Year Plan With GM Deal
- Singapore’s Biggest Property Broker Is Said to Prepare IPO
European equities bounced back from yesterday’s losses (Eurostoxx 50 +1.1%) with all the major bourses firmly in the green. Italy’s FTSE MIB (+2.8%) is outperforming its counterparts amid a coalition deal revival by the Italian populist parties. As a result, Italian banks are leading the gains with the Italian Bank Index higher by over 5%. Across the continent, Spain’s IBEX (+1.7%) is showing a solid performance while the country’s PM Rajoy accepts his defeat and says opposition Sanchez is set to be the PM. Elsewhere, Deutsche Bank (+3.0%) tries to nurture yesterday’s wounds (shares dropped to record lows after US subsidiaries were added to a federal problem bank list) after ECB sources reassures investors that the bank now has a tighter management team, good liquidity and capital. Finally, Dialog Semiconductors (-14.9%) is the most noticeable mover in the Stoxx 600 after a revenue warning amid tech giant Apple building their own chips.
Top European News
- U.K. Manufacturing Growth Picks Up in ‘Unconvincing’ Rebound
- Italy Bonds Gain as Populists Take Power But Skepticism Lingers
- A $2 Billion Setback Leaves Genmab CEO Undeterred on Pipeline
- Euro-Area Manufacturing Growth Slows to 15-Month Low in May
- World Cup Fever Is Coming as Traders Seek Market Mayhem Rescue
In FX, the DXY index is straddling 94.000 ahead of today’s US jobs data amidst relatively narrow bands for most Dollar/G10 pairings, bar Usd/JPY that has broken above 109.00 and into a firmer trading range amidst a broad improvement in risk sentiment on Italian political grounds over heightened global trade tensions. However, Jpy bears and Greenback bulls may encounter more offers at 109.50 and some technical resistance ahead of the 30 DMA around 109.56. CAD A partial recovery for the Loonie after Thursday’s post-Canadian GDP data dive, with Usd/Cad retreating from circa 1.3000 to sub1.2950, and perhaps acknowledging retaliatory action against US steel and aluminium tariffs rather than dwelling on NAFTA deal prospects that look more remote. AUD Another relative underperformer despite exemptions from the aforementioned US import taxes, with 0.7600 still proving to be a formidable chart hurdle to overcome convincingly and a softer Caixin Chinese manufacturing PMI also undermining the Aud. TRY The Lira is lagging other EMs and not deriving any support from latest CBRT operations, as Usd/Try rebounds back above 4.6000
in wake of a further/faster contraction in Turkey’s manufacturing PMI.
In commodities, oil is up on the day heading into the weekend with both WTI and Brent up modestly on the day after touching lows in late US trade. This comes after bearish signals in products within the DoE data discounted a wider than expected crude draw. A broader risk averse tone spurred on by trade concerns is dampening prices slightly, however. Gold is lacklustre with the yellow metal essentially flat on the day with traders holding fire ahead of US jobs data. Steel has extended its climb to hit multi-month highs, with aluminium also rising slightly on the day amid the imposition and retaliation of tariffs, as well as continually declining steel stockpiles.
Looking at the day ahead, there will be the May employment report due in 1:30pm BST including nonfarm payrolls (190k expected), unemployment rate and the all important average hourly earnings (2.6% yoy expected). The final manufacturing PMI for May, April construction spending and May’s ISM manufacturing prints are also due in the US. Elsewhere, the US automakers’ May sales figures are also due. Finally, US Commerce Secretary Ross is travelling to China this weekend for another round of trade talks
US Event Calendar
- 8:30am: Change in Nonfarm Payrolls, est. 190,000, prior 164,000
- Unemployment Rate, est. 3.9%, prior 3.9%
- Average Hourly Earnings MoM, est. 0.2%, prior 0.1%
- Average Hourly Earnings YoY, est. 2.6%, prior 2.6%
- Average Weekly Hours All Employees, est. 34.5, prior 34.5
- Labor Force Participation Rate, prior 62.8%
- 9:45am: Markit US Manufacturing PMI, est. 56.6, prior 56.6
- 10am: Construction Spending MoM, est. 0.8%, prior -1.7%
- 10am: ISM Manufacturing, est. 58.2, prior 57.3
- Wards Total Vehicle Sales, est. 16.7m, prior 17.1m
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