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Authored by Bill Blain via MorningPorridge.com,

“Where Alph, the sacred river, ran through caverns measureless to man down to a sunless sea..”

Just as I was getting into this morning’s Porridge the proverbial “Man from Porlock” arrived in the form of the Ocado delivery! (Extra points to anyone who can connect Porlock, Opium and this morning’s quote.) Result is I lost the thread completely… which is apparently happening all around the globe. (This morning had already started badly: my mental health is clearly frayed… for the second time this week I unthinkingly pored milk into my Earl Grey. Next week I’ll be going into my office and forgetting to put on a tie. This really is the end…) 

Back to markets… While the rest of the World will be focused on what Trump is going to say about China (Clue – he talks big before the event, but will disappoint), this morning’s rant is about Yoorp.

How many times have we heard some grand poo-bah Eurocrat herald a grand plan to advance the Union. This time its Ursula Von der Leyen (VDL) announcing the €750 billion Next Generation EU recovery fund to help the EU tackle an “unprecedented crisis” and a raft of new proposals for Brussels.

The Next Generation fund will be part of  €1.85 trillion EU budget devoted to addressing the crisis. That’s a lot of dosh for an entity that can’t get its books signed off.. The fund will comprise grants and loans from Brussels to parts of Europe suffering from the virus effects by focusing money on increasing productivity and competitiveness. That’s interesting – why has it now become a Brussels responsibility and not a domestic competency? Ah… Brussels knows best. 

Let’s not kid ourselves. It’s a political compromise designed to partially placate the 4 Frugal nations, quell the increasing doubts of the Eastern Members, stave off further dissent about budget contributions across the union by making them think someone else will pay for debt,  and plays into the hands of German politicians by setting clear limits on future debt mutualisation. Like all bad compromises it’s a bit of Camel – a horse designed by a committee. Brussels is betting it’s enough of a compromise to get it pushed through sceptical domestic governments. 

It’s also a power grab by Brussels – which reckons it can solve its budget crisis by running the fund, obscure the hold created by Brexit by setting precedent for allowing itself to fund massively in the global markets, and giving itself a greater role in setting green objectives as a pre-cursor to taxing EU members directly. It looks and smells like debt mutualisation – but without it being mutualisation. The Germans will be happy – their courts have already established a precedent for them to walk away on the basis they can retroactively declare it all ultra-vires.  

VDL says the Brussels knows best; the COVID crisis can ‘t be solved by countries alone. Actually… the virus is probably the best example of something countries and regions should manage from themselves. The success of Germany in testing for COVID was largely due to decentralised labs. The logistical failures have largely been exacerbated by centralised bureaucracy. 

Yesterday I wrote:

I don’t see problem with the plans for the EU to increase its budget to finance virus crisis recovery. It’s a wonderful, generous and brave initiative. If workers in Germany, and the rest of prosperous Europe, value increased European unity so highly let’s make it happen! If they wish to show solidarity, and are willing to pay the pensions of Southern European workers with their taxes funding these economies and everything else that goes with them, while sacrificing yet more of their democratic sovereignty to the unelected Brussels nomenklatura, then good luck with this laudable European initiative. 

I was being cynical. 

Lots of other commentators genuinely think it’s a great idea and massive positive step. They reckon it will restore growth and renew the march towards closer union within the European project. 

A digression: Europe has nothing to do with Alexander Hamilton

For some curious reason, even smart financial analysts have taken to equating the new EU Recovery Plan with US Founding Father Alexander Hamilton’s federalisation of US debt in the 18thCentury. I wrote a Porridge comment lambasting the Bloomberg story linking Hamilton and the Euro last week. 

I don’t know how familiar with history these writers are, but Alexander Hamilton was able to secure a strong and workable agreement on state funding and central banking between 13 colonies sharing (broadly) common culture, a shared history of 2/3 generations in the New World, similar goals and a single language. They were united after successfully banding together to throw off the oppressor’s yoke – chasing out the Brits. I would also remind readers that just a few generations later their shared culture broke down as the economic forces of slavery and industrialisation triggered civil war.

In contrast the Europeans have over 3000 years of history – of repeated warfare, the rise and fall of nation states, invasions, migrations, plague & famine, and share little common culture (except perhaps a general envy/dislike of the Germans). They are also divided by shared religion where tiny nuances in application led to the slaughter of millions in the name of the same God . The only common language is English – and less than 2% of the Union have it as a mother tongue (and even they would claim to speak something else…) Europe does at least share a common enemy – historically that’s been themselves… If there is a discernible trend, its generally France vs everyone else on a rotating basis. 

Push a Europhile hard enough and he/she will claim the European Union has avoided war between member states. A bit like the Roman Empire then? It was founded as a trade agreement, a common market, but over the years its morphed into a grand and enticing vision (for Brussels Eurocrats) that the tired and exhausted nations of Europe can pull together as a genuinely  United States of Europe. 

Back to the main story…. 

I don’t have any problem with a unified Europe. I just don’t see how it happens. 

At the moment the project is at an impossible stage: it is a monetary union without political union. National Governments serve their electorates to deliver growth, jobs and prosperity, but have lost the ability to so in times of crisis because of the rules of monetary union.  

The nations of Europe want to go their way, but the money wants to go another – which is the crisis at the heart of Europe. The shared common currency rules need to bend in times of crisis –but it’s the lack of flexibility that is causing the ongoing crisis. Such flexibility requires the agreement of each sovereign nation. The recent decision to the German Constitutional Court to declare QE as potentially outside the remit of the ECB highlights the issue. Turkeys don’t vote for Christmas.

As a result, the Euro has become a monetary trap and negative feedback loop: 

• Nations that control their own currency can print money to finance fiscal recovery through recessions – and run the risks of devaluation and inflation if they squander credibility while doing so. 

• Euro members lose the ability to print money  – and are constrained by rules on debt. In times of crisis highly indebted nations have no choice but to enact counter-cyclical austerity policies to get debt ratios down… It’s happening again as we enter the next European Sovereign Debt Crisis. 

To avoid crisis and sustain confidence the EU is being forced into a negative loop to deflate the European economy with negative interest rates and QE Infinity. Just as nations are trapped into austerity, the ECB is trapped into backstopping markets. It will almost certainly raise the QE thresholds next week and continue to expand its buying remit to avoid Italy becoming the spark of the coming crisis. 

Italy’s debt to GDP was 134% before the crisis. It will likely see negative growth through 2020 and debt soar to 160% of GDP. It’s going to look like Greece on steroids. Like Greece it will have little choice but to remain within the Euro so that Europe continues to guarantee its solvency, but trapped in long-term austerity. 

Clearly Italy needs help… but it’s unlikely to come from a politically driven European Recovery Fund run from Europe – that will look like interference and push Italy into a Greece like conflict with Europe. Italy needs help today, not sometime next year when some kind of agreement has been reached by the 27 member states and the fund is up and running. 

2 week ago I said buy Italy on the basis the European Recovery Fund will look like a solution. Sure enough… it tightened.  Get ready to sell. In the next few weeks we’re going to see push back internally in Italy, and from across the EU. 

Summary:

• SK closes 250+ schools just days after reopening
• Nearly 80 new cases reported Thursday, with another 50+ on Friday
• France declares Paris no longer a ‘red’ zone’
• UK loosens some restrictions on household visitors
• Russia reports record jump in deaths
• Brazil reports record jump in cases, deaths
• Philippines reports record daily jump in cases as Manila reopens

* * *

As more US states see the number of newly confirmed cases – and, in some states, deaths as well – climb more than a month after Georgia and a handful of other states took the first aggressive steps toward reopening, South Korea – which has also seen cases tick higher over the past two weeks – has closed hundreds of schools just days after reopening them.

After Denmark became the first EU member to reopen its schools earlier this week, South Korea has decided to return students to their remote learning routines after confirming 79 new cases – the highest daily total in two months – on Thursday (cases are reported with a 24-hour delay). A total of 251 schools in Bucheon have now been closed. And a further 117 schools in the capital Seoul have also postponed their re-opening after one student was found to be infected.

Most of these new cases have been linked to a distribution center outside Seoul, in the city of Bucheon, which is run by e-commerce giant Coupang, South Korea’s Amazon (for lack of a better comparison)

According to the BBC, officials have said the facility was not strictly complying with infection control measures. During an inspection, health officials discovered traces of Covid-19 on workers’ shoes and clothes.

The country is now bracing for potentially hundreds of more cases as it tests thousands of workers. Some 58 new cases were recorded on Friday, bringing the total number of cases nationwide to 11,402.

Public parks and museums across Seoul and the surrounding area have now once again been closed, businesses are once again being asked to allow workers to work from home, and people are once again being asked to avoid mass gatherings.

As we reported last night, Brazil reported a record jump in new cases and deaths on Thursday, as more critics of President Jair Bolsonaro are accusing the president of deliberately ignoring the virus and taking other steps to encourage a return to street violence and unrest – so that his administration would be justified in a crackdown that would return Brazil to de facto dictatorship.

In the Philippines, residents in Manila will see their lockdown – one of the toughest and longest in the world – ease from Monday, as we reported earlier this week, even though the country reported a new record jump in cases on Thursday, with 539 new infections reported, bringing the total to 15,588 and 921 deaths.

In the UK, while the number of deaths remains stubbornly high, PM Boris Johnson has said members of different households will be allowed to meet on patios and in gardens, but must remain 2 meters apart.

But it wasn’t all bad news: The risks posed by the virus have been reduced to “orange” across Paris, according to French PM Edouard Philippe. Still, Paris lags the majority of French regions, which have been designated “green.”

Russia recorded a record jump in coronavirus-related deaths on Friday, with 232 in the past day, pushing the nationwide total to 4,374.

Russian health officials said 8,572 new infections had been confirmed, bringing the national tally to 387,623, according to TASS, leaving Russia with the third-highest total in the world. Of these deaths, 50 were recorded in Dagestan, 20 in Moscow and the surrounding area, and 11 in St. Petersburg, while North Ossetia, Krasnoyarsk and Oryol reported 6 each.

Emini futures dropped on Friday as investors braced for President Donald Trump’s response to China’s national security legislation for Hong Kong, threatening to take the shine off a monster week – and month – for Wall Street, which pushed the S&P above 3,000 and the 200 DMA for the first time since March. Treasuries gained alongside most European bonds, yet the dollar unexpectedly slumped on what many said was month-end FX flows.

U.S. stock indexes sold off late on Thursday’s after algos discovered that Trump was going to make a statement on Friday about China, one which had been scheduled since Monday. Trump has vowed a tough US response to China’s move, which many fear could erode some of the U.S. economic privileges that Hong Kong enjoys. 

Amid Sino-US jitters, Europe’s Stoxx 600 fell for the first time in five days, sliding as much as 1.3%, with almost all industry groups in the red. Autos, travel and bank shares slide the most, while telecom is only sector to advance. A rebound laggards resume position at the bottom after rallying hard in recent sessions. As BMO notes, German ex-auto retail sales volumes fell much less-than-expected in April (-5.3% MoM). Multiple data points from a few major economies have been less bad than feared in Q2. Sweden’s merchandise trade surplus increased by 2 billion kronor in April, though exports and imports both collapsed. The Riksbank does not need to worry about an overly strong SEK yet, but Sweden’s export sector is exposed to a weak European economy and global trade decoupling.

Asian stocks fell, led by finance and industrials, after rising in the last session. Markets in the region were mixed, with Jakarta Composite and Shanghai Composite rising, and Australia’s S&P/ASX 200 and Japan’s Topix Index falling. Trading volume for MSCI Asia Pacific Index members was 53% above the monthly average for this time of the day. The Topix declined 0.9%, with IBC and Nissan falling the most. The Shanghai Composite Index rose 0.2%, with Zhongchang Big Data and Shaanxi Broadcast & TV Network Intermediary Group posting the biggest advances

While global stocks have mostly shrugged off escalating tensions between Washington and Beijing until now, confident Trump would not do anything to jeopardize the market’s gains, Trump’s recent actions appear to have spooked investors. They come amid growing good news on the economic front as governments add to stimulus and ease lockdown measures in the wake of the coronavirus. Meanwhile, clues on the next stages for Federal Reserve policy may also come Friday, when Chairman Jerome Powell participates in a virtual discussion.

“I’m very cautious on my medium and even long-term outlook for the markets,” Kate Jaquet, a portfolio manager at Seafarer Capital Partners LLC, said on Bloomberg TV. “I perceive there to be a very large disconnect between stock-market valuations across the globe and underlying company fundamentals.”

Meanwhile, in an escalation in the feud between Trump and Twitter, a day after the president signed the order threatening social media firms with new regulations over free speech, Twitter hid a tweet from the President and accused him of breaking its rules by “glorifying violence.” Twitter shares were down about 0.9% in pre-market trading.

In rates, Treasuries were underpinned on last trading day of the month by pension fund flows, which features a heavy slate of US economic data, a White House news conference on China, comments by Fed Chair Powell and a large Treasury Index duration extension. Yields lower by 0.5bp to 2.5bp across the curve with 2s10s flatter by 1.1bp and 5s30s little changed; 10-year yields around 0.66%, richer by 2bp vs Thursday’s close.Curve is slightly flatter with 20-year bond outperforming. Session low yields were reached during Asia session as USD/JPY slid into the Tokyo fixing. Bunds, gilts cheaper by 0.5bp vs. Treasuries.

In FX, the Bloomberg Dollar Spot Index fell 0.4%, with the greenback falling against most of its major peers. Leveraged funds shorted the greenback ahead of Trump’s conference in view of sliding oil, stock prices and month-end flows, according to Asia-based FX traders. EUR-funded FX carry pairs received some of the biggest lifts (TRY -0.7%, RUB -0.6%). Given the prospect of worsening Sino/US tensions and additional RMB depreciation, broad USD weakness seems all the more peculiar.

In commodities, WTI and Brent crude futures continue to ebb lower in early European trade. However, losses remain modest thus far with WTI July eyeing USD 33/bbl (vs. high 33.77/bbl) to the downside whilst Brent August drifts lower towards USD 35.50/bbl – having already dipped below the level to a base at 35.41/bbl (vs. high 36/bbl). Again, fundamentals largely surround US-China tensions in the absence of OPEC updates and in the run-up to the JMMC/OPEC/OPEC+ meetings on June 8th, 9th and 10th respectively, whilst reports yesterday alluded to Russian companies hesitant to extend current curtailments past the agreed-upon end-June.  Iron ore surged past $100 a ton as supply woes in Brazil coincide with sustained, robust demand in top steel producer China. Gold jump as the dollar slumped.

To the day ahead now, and there are a number of highlights to look out for. From central banks, we’ll hear from Fed Chair Powell and the ECB’s Visco. Data releases include German retail sales for April as well as the flash estimate of Euro Area CPI for May. Meanwhile on the other side of the Atlantic, there’s personal income and personal spending from the US for April, along with May’s MNI Chicago PMI and the final University of Michigan sentiment reading. Canada will also be releasing their GDP for March.

Market Snapshot

• S&P 500 futures down 0.6% to 3,021.00
• STOXX Europe 600 down 1.2% to 351.28
• MXAP down 0.3% to 150.43
• MXAPJ down 0.07% to 474.25
• Nikkei down 0.2% to 21,877.89
• Topix down 0.9% to 1,563.67
• Hang Seng Index down 0.7% to 22,961.47
• Shanghai Composite up 0.2% to 2,852.35
• Sensex up 0.2% to 32,259.98
• Australia S&P/ASX 200 down 1.6% to 5,755.69
• Kospi up 0.05% to 2,029.60
• German 10Y yield fell 1.8 bps to -0.437%
• Euro up 0.2% to $1.1103
• Italian 10Y yield fell 7.6 bps to 1.255%
• Spanish 10Y yield fell 2.1 bps to 0.559%
• Brent futures down 3.3% to $34.12/bbl
• Gold spot up 0.3% to $1,723.69
• U.S. Dollar Index down 0.3% to 98.12

Top Overnight News from Bloomberg

• Japanese factory output dropped in April by the most since the 2011 tsunami and retail sales slid sharply as the coronavirus froze demand at home and abroad and the recession deepened
• Stocks slipped and U.S. futures edged lower on Friday as President Donald Trump’s planned press conference on China threatened to further stoke tensions between the world’s two largest economies. Treasuries gained along with most European bonds.
• German Chancellor Angela Merkel is preparing a second phase of stimulus of between 50 billion euros ($55 billion) and 100 billion euros to turbo-charge the economy’s recovery from the coronavirus crisis, according to a person with knowledge of the matter
• The death toll in India has surpassed the number of lives lost in China, while Brazil’s cases hit another daily record as hot spots shift to developing countries ill-equipped to contain its spread. Latin America now accounts for 40% of daily virus deaths as cases surge in countries from Mexico to Peru
• Next week’s round of Brexit talks between the European Union and the U.K. will be decisive for whether the two sides reach an agreement over their future trading relationship, according to the EU’s chief negotiator, Michel Barnier
• Boris Johnson says Britons can meet outside as Cummings Row Lingers
• Hong Kong leader Carrie Lam issued a letter to the city’s people asking them to understand and support national security legislation that has sparked the biggest protests since last year and fresh concerns about future autonomy from China
• Oil trimmed its biggest monthly advance on record as crude was swept up in the broader negative sentiment around deteriorating U.S.-China relations, even as historic supply cuts tighten the market

Asia-Pac indices mostly declined following the late selling pressure on Wall St. after President Trump announced to conduct a press conference regarding China later today, while weak data releases and month-end factors added to the lacklustre risk tone. ASX 200 (-1.6%) underperformed with the declines led by Financials and Industrials although gold miners bucked the overall trend after the recent rebound in the precious metal. Nikkei 225 (-0.2%) was also negative after a slew of data releases including the largest Y/Y decline in Retail Sales since 1998 and a wider than expected contraction in Industrial Production, that forced the government to cut its assessment on industrial production which it labelled as ‘decreasing rapidly’ for the first time since November 2008. In addition, large Japanese automakers suffered after output in the sector fell by a record 33% M/M and Nissan posted its worst loss in 2 decades. Elsewhere, Hang Seng (-0.7%) and Shanghai Comp. (+0.2%) began subdued ahead of President Trump’s press conference on China which follows the NPC passage of the Hong Kong national security legislation, but with the mainland showing signs of resilience after another firm liquidity operation by the PBoC which injected CNY 670bln of funds this week through reverse repos following a near 2-month hiatus. Finally, 10yr JGBs were rangebound with prices uninspired despite upside in T-notes and the mostly negative risk tone, as well as the BoJ’s presence in the market for JPY 840bln of JGBs with 3yr-25yr maturities.

Top Asian News

• Malaysia’s Stocks Set for Bull Market as Glove Makers Surge
• BOJ Tweaks Buying Ranges, Frequency for Short Bonds in June Plan
• China’s JD.com, NetEase Win Hong Kong Approval for Listings

European equities (Eurostoxx 50 -0.6%) have bucked their recent trend of starting the session off on the front-foot as stocks stage a pullback heading into month-end. Despite being a key theme throughout the week (where stocks have gained), US-China tensions are hampering sentiment early doors in Europe as markets brace themselves for US President Trump’s press conference later today (time TBC) on China. Ahead of this press conference, China has been on the offensive this morning reiterating that they are willing to take countermeasures against the US in relation to its actions over Hong Kong, urged Canada to release the Huawei CFO immediately and threatened to take countermeasures against Britain if it offers permanent residency to Hong Kong citizens. Sectoral performance in Europe thus far has seen a reversal of some of the trends throughout the week with travel & leisure names underperforming today with Tui (-7%) a notable laggard after the Co’s UK unit has cancelled all its foreign holidays until 1 July, and some that were not due to depart until November. Other movers in the sector include Carnival (-6.3%), Deutsche Lufthansa (-4.3%), easyJet (-4.2%), IAG (-4.2%) and Air France (-2.8%); note, the travel & leisure sector trades higher by 7.8% for the week. Elsewhere, to the downside, Rolls Royce (-9.1%) sits at the foot of the Stoxx 600 after the Co. was downgraded to junk by S&P amid disruptions from COVID-19. Renault (-4.9%) shares are hampering the Automobile sector after the Co. announced it is to reduce its headcount by 14.6k over three years in an attempt to save over EUR 2bln, but with the plan implementation costing EUR 1.2bln. Also, in a reversal of trends seen throughout the week, the Stoxx 600 banking sector is trading lower by 1.8%, albeit holds onto gains of 7.8% since Monday.

Top European News

• Europe Autos Slide Amid Renault Revamp, German Aid Postponement
• Banks Target June for ThyssenKrupp Elevator $9 Billion Debt Sale
• This Italian Bond Offering Couldn’t Have Been Timed Better
• Italy Shouldn’t Expect ‘Free’ Help From Europe, Visco Says

In FX, the Dollar index continues to descend with month-end flows cited as one of the main factors. DXY again fell below its 200 DMA (98.505) from a high of 98.549 and thereafter dipped below the 55 WMA (98.191) before printing a current base just under at 98.170. The State-side data slate sees April PCE Price Index, but Fed Chair Powell’s webcast (1600BST) and President Trump’s announcement on China (time TBC) will likely garner today’s focus and set the themes. On that note, tensions between the two largest economies see no signs of subsiding, and rhetoric remains harsh. Nonetheless, the Yuan has nursed its overnight losses with the USD/CNH sub-7.1700 having printed an APAC high at 7.1766.

• JPY, AUD, SEK – All beneficiaries of the USD pullback with the Yen outperforming potentially on safe-haven tailwinds. USD/JPY sees itself on the softer side of the current 107.06-71 daily band, having briefly dipped below its 21 DMA at 107.19 as it inches closer towards the 107.00 psych mark. AUD/USD probes 0.6650 as it eyes its 200 DMA (0.6656), albeit pair topped but failed to close above the level for four consecutive sessions. SEK also trades on the firmer side after shrugging off a QQ Q1 GDP beat as the annualised figure missed. EUR/SEK dipped below 10.5100 to session lows from a high of 10.5500.
• EUR, GBP – Mixed trade in the core European currencies with some attributing month-end demand propping up EUR/GBP past 0.9000 to a high of 0.9030 (vs. low 0.8980). As such, Cable briefly took out 1.2300 to the downside, exposing the 21 and 55 DMAs at 1.2290 and 1.2272 respectively. Meanwhile, the Single currency gleans support from an offered Dollar and has extended its move above 1.1100 after probing a short-term Fib level at 1.1111, with little initial reaction to in-line EZ flash CPI. EUR/USD opex today sees some EUR 1.1bln between 1.1145-55 – formidable against the month-end background.
• CAD, NOK, NZD – The G10 laggards with CAD and NOK failing to reap rewards from the softer Buck amid weaker oil prices – USD/CAD posts mild gains above 1.3750 in a contained range as the pair eyes Canadian Q1 GDP figures. Similarly, EUR/NOK trades flat at 10.8400 in a 10.8170-8500 parameter. The Kiwi’s underperformance meanwhile could be a function of AUD/NZD regaining ground above 1.0700. NZD/USD trades on either side of 0.6200 awaiting the next catalyst.

In commodities, WTI and Brent crude futures continue to ebb lower in early European trade. However, losses remain modest thus far with WTI July eyeing USD 33/bbl (vs. high 33.77/bbl) to the downside whilst Brent August drifts lower towards USD 35.50/bbl – having already dipped below the level to a base at 35.41/bbl (vs. high 36/bbl). Again, fundamentals largely surround US-China tensions in the absence of OPEC updates and in the run-up to the JMMC/OPEC/OPEC+ meetings on June 8th, 9th and 10th respectively, whilst reports yesterday alluded to Russian companies hesitant to extend current curtailments past the agreed-upon end-June. Furthermore, Russia’s Rosneft reportedly told the Russian Energy Ministry that it would be hard to maintain cuts to the end of the year as it does not have enough crude to ship to customers part of long-term supply deals, sources state. Elsewhere, spot gold meanders around yesterday’s levels having had seen a session of gains on the back of potential trade-related allocations. The yellow metal resides in mildly positive territory around USD 1720/oz ahead of yesterday’s USD 1728/oz high. Copper prices remain subdued amid the broader risk aversion as prices threaten a test of USD 2.4/lb to the downside.

US Event Calendar

• 8:30am: Advance Goods Trade Balance, est. $65.0b deficit, prior $64.2b deficit, revised $64.4b deficit
• 8:30am: Retail Inventories MoM, est. -0.8%, prior 0.9%
• 8:30am: Wholesale Inventories MoM, est. -0.7%, prior -0.8%
• 8:30am: Personal Income, est. -6.0%, prior -2.0%
• 8:30am: Personal Spending, est. -12.8%, prior -7.5%
• 8:30am: Real Personal Spending, est. -12.9%, prior -7.3%
• 8:30am: PCE Deflator MoM, est. -0.6%, prior -0.3%
• 8:30am: PCE Deflator YoY, est. 0.5%, prior 1.3%
• 8:30am: PCE Core Deflator YoY, est. 1.1%, prior 1.7%
• 9:45am: MNI Chicago PMI, est. 40, prior 35.4
• 10am: U. of Mich. Sentiment, est. 74, prior 73.7
• 10am: U. of Mich. Current Conditions, est. 84, prior 83; Expectations, est. 68.4, prior 67.7

DB’s Jim Reid concludes the overnight wrap

10 weeks ago as schools were shut here in the UK, we were a bit worried about my daughter’s reaction to it and on the first day at home we decided she deserved an afternoon ice cream as it was such a lovely day. A one-off treat on a rare warm March day. It wouldn’t last. 10 weeks, virtually no rain, and 70 ice creams later she’s going back to her nursery school on Monday and we’ve no idea how to wean her off her addiction. The weather just got hotter and hotter and it was harder and harder to say no with not much for her to do. There is going to be some almighty come down from the sugar over the next few days!

Over the same period, sugar has been fueling the equity rally too, but yesterday we saw some evidence that even while there is an abundance of liquidity present and economic data seems to be improving, there are still potential landmines out there for risk assets. The S&P 500 fell over 1% in the last hour or so of trading, as tensions between the US and China continued to escalate. It finished the day marginally lower after President Trump announced that he will host a news conference on China later today. The agenda is unclear but given the recent mood and legislation that has passed through Congress it is likely to be confrontational. The US and China have been trading blows for over a week now, with the latest round starting early yesterday when the National People’s Congress approved security legislation for Hong Kong, which follows a number of recent protests in the city. In response, the governments of the US, UK, Canada and Australia issued a joint statement, which said that the “decision to impose a new national security law on Hong Kong lies in direct conflict with its international obligations under the principles of the legally-binding, UN-registered Sino-British Joint Declaration.” Furthermore, in a sign that US hostility to China is by no means limited to President Trump and the Republicans, the Democratic speaker of the House, Nancy Pelosi, referred to President Xi yesterday as a “very oppressive tyrant”.

In terms of the moves, the S&P 500 fell -0.21%. The S&P 500 now has not been able to rally four consecutive days since early February, even though yesterday was the third time the index has rallied three days in a row this month alone. The NASDAQ was down -0.46% as tech continues to underperform slightly. It was an old-fashioned risk-off pullback, with defensives like Utilities and Consumer Staples the best-performing industry groups, while the winners of the last 2 days (Autos, Banks, and Energy) were among the worst-performing stocks. Europe saw a strong risk-on day as they had long been closed by the time US equities traded lower. The STOXX 600 ended up +1.64%, while the DAX also climbed +1.06% in what was its 9th move higher in the last 10 sessions.

The positivity in European markets yesterday was also seen in fixed income, where peripheral sovereign bonds continued to rally. Indeed, by the close, the spread of 10yr Italian debt over bunds had come down by -7.2bps to a 2-month low of 184.4bps, while Spanish (-6.1bps), Portuguese (-8.7bps) and Greek (-6.7bps) spreads also fell to two-month lows. US 10yr Treasuries yields were up +0.8bps to 0.690%, bunds were roughly unchanged at -0.419%, while 10yr gilt yields rose +1.7bps to 0.21%.

Staying with fixed income, Craig in my team reported the remarkable stat that over the last few days US IG credit issuance hit one trillion dollars for 2020. According to his note, this is 55% higher than the record issuance year (2017) at this stage and 92% above the same point last year. His note also highlights rel val opportunities in on-the-run bonds versus off-the-runs as a result of this issuance binge. See it here.

A quick check on markets this morning shows that risk has continued to struggle for the most part with the Nikkei (-0.35%), Hang Seng (-0.71%) and Kospi (-0.42%) all down. Chinese bourses are, however, little changed having pared earlier losses while futures on the S&P 500 are down -0.38%.

In terms of overnight news, the Times has reported that the UK has approached the US about creating a club of nations that would include the G7 nations plus Australia, South Korea and India, in order to reduce their reliance on China for 5G wireless technology. The article states that the move is designed to funnel public investments in advanced wireless research toward companies that are based within those 10 countries and was prompted by concerns over the dominance of Huawei. Meanwhile, President Trump signed an executive order that seeks to limit liability protections social-media companies enjoy. Mr. Trump told reporters that his order “calls for new regulations under section 230 of the Communications Decency Act to make it that social media companies that engage in censoring or any political conduct will not be able to keep their liability shield.”

In other news, Hong Kong Chief Executive Carrie Lam wrote an open letter urging the city’s citizens to support the national security legislation saying the law “will only target an extremely small minority of illegal and criminal acts and activities.” She also said that “External forces have intensified their interference in Hong Kong’s internal affairs, passed laws relating to Hong Kong and flagrantly glorified the illegal acts of radicals, all of which seriously jeopardize our nation’s sovereignty, security and development interests.”

Back to yesterday and prior to the late pullback, yesterday’s earlier risk-on was given further support by data that showed that the US economy might be turning a corner, with the number of continuing jobless claims falling for the first time since the pandemic began, suggesting that we might be past the worst of the labour market damage. The numbers showed that continuing claims fell to 21.052m in the week through May 16, down from 25.073m the previous week, and the insured unemployment rate for the same week was down to 14.5%, compared with 17.1% the week previously. Nevertheless, before we get too excited, the initial jobless claims number for the week through May 23 still came in at 2.123m, so there’s still a long way from being back to normality.

Other US data came in better than expected, even if that nowadays means the numbers were bad rather than dire. The preliminary April number for nondefence capital goods orders (excluding aircraft and parts) fell by ‘only’ -5.8%, which was some way above the -10.0% decline expected, while durable goods orders excluding transportation were down -7.4 per cent, contrary to a -15.0% expected decline.

Meanwhile, one of the 9 members on the Bank of England’s Monetary Policy Committee, Michael Saunders, said that “It is safer to err on the side of easing somewhat too much … rather than ease too little and find the economy gets stuck in a low-inflation rut.” Investors are still pricing in a change that the BoE will move interest rates into negative territory in early 2021. Looking elsewhere, we had an unexpected rate cut from Poland, which cut its main rate to 0.10%, as well as Nigeria, which lowered rates down to 12.50%.

Other news worth mentioning from yesterday includes Germany preparing for a second phase of stimulus of between EUR50bn and EUR 100bn, according to Bloomberg. The report also added that Finance minister Olaf Scholz and his Social Democrat group want spending at the upper end of that range, while Merkel’s ruling conservative bloc is pushing back to avoid too much debt. The proposals are likely to be presented at a meeting of coalition leaders in Berlin on Tuesday.

Wrapping up with yesterday’s other data, and the European Commission’s economic sentiment indicator rose slightly from its record low of 64.9 in April, up to 67.5. That said, that’s still well below the 103.4 reading from February. Meanwhile the preliminary reading of German CPI in May came in at +0.5% on the EU’s harmonised measure, its slowest rate since August 2016.

To the day ahead now, and there are a number of highlights to look out for. From central banks, we’ll hear from Fed Chair Powell and the ECB’s Visco. Data releases include German retail sales for April as well as the flash estimate of Euro Area CPI for May. Meanwhile on the other side of the Atlantic, there’s personal income and personal spending from the US for April, along with May’s MNI Chicago PMI and the final University of Michigan sentiment reading. Canada will also be releasing their GDP for March.

Millions of Americans feel like the country is drifting precariously close to the point where social cohesion unravels. What’s the Minneapolis PD’s solution? Arrest a team of journalists live on air…

The same police department that hired the officer who cruelly and arbitrarily murdered George Floyd has responded to the intensifying media coverage of the riots that are now beginning to spread across the US with what some might describe as ‘Stalinist’ tactics.

CNN tweeted a photo of reporter Omar Jimenez being taken into custody in the middle of the live report.

pic.twitter.com/ixKsirOuC6

— CNN (@CNN) May 29, 2020

This video was captured by the crew while they were being arrested.

A CNN crew was arrested while giving a live television report in Minneapolis, where the crew was covering ongoing protests over the death of George Floyd. They had clearly identified themselves as press. https://t.co/QklqlJm7mD pic.twitter.com/0xreuTPuWS

— CNN International (@cnni) May 29, 2020

According to CNN, police told the crew they were being detained because they were told to move, and didn’t, one member of the CNN crew relayed to the network. In a statement, the network accused the police of arresting the men for doing their jobs.

A CNN reporter & his production team were arrested this morning in Minneapolis for doing their jobs, despite identifying themselves – a clear violation of their First Amendment rights. The authorities in Minnesota, incl. the Governor, must release the 3 CNN employees immediately.

— CNN Communications (@CNNPR) May 29, 2020

Jimenez could be seen holding his CNN badge while reporting, identifying himself as a reporter. He could be heard telling the officers that they would move wherever the police needed them, while also making it clear that he was in the middle of a live report.

An officer gripped his arm as Jimenez talked, then put him in handcuffs.

“We can move back to where you like. We are live on the air here…Put us back where you want us. We are getting out of your way – wherever you want us (we’ll) get out of your way,” Jimenez said.

“We were just getting out of your way when you were advancing through the intersection,” Jimenez said.

CNN’s Josh Campell was nearby but was allowed to remain.

“I identified myself…they said, ‘OK, you’re permitted to be in the area,'” recounted Campbell, who is white. “I was treated much differently than (Jimenez) was.”

Jimenez and the crew had been reporting from the site, which was near a police precinct that was burned down by protesters overnight.

Update (0710ET): Trump has responded to Twitter’s latest tag, accusing the company of “doing nothing” to censure Chinese officials and members of the radical left – which is why, Trump insisted, Section 230 should no longer apply to the company.

Twitter is doing nothing about all of the lies & propaganda being put out by China or the Radical Left Democrat Party. They have targeted Republicans, Conservatives & the President of the United States. Section 230 should be revoked by Congress. Until then, it will be regulated!

— Donald J. Trump (@realDonaldTrump) May 29, 2020

* * *

As we wait for the first of the inevitable flood of lawsuits challenging Trump’s latest executive order, Twitter has continued with its new policy of affixing ‘warning labels’ on certain tweets from the president that violate the company’s “community standards”. Just this morning, Twitter affixed a “glorifying violence” warning to a Trump tweet decrying the outburst of violence in Minneapolis in retaliation for the brutal slaying of George Floyd.

We have placed a public interest notice on this Tweet from @realdonaldtrump. https://t.co/6RHX56G2zt

— Twitter Comms (@TwitterComms) May 29, 2020

The tweet was part of a thread published late Thursday evening by the president where he accused the “weak” mayor of Minneapolis of not doing enough to quell the riots. Trump threatened to send in the National Guard – in our view, a completely reasonable response, though some hysterical leftists might decry the decision as part of some genocidal plot or whatever other hysterical nonsense they’re spewing to try and justify the riots – to stop the “THUGS who are dishonoring the memory of George Floyd, and I won’t let that happen.”

….These THUGS are dishonoring the memory of George Floyd, and I won’t let that happen. Just spoke to Governor Tim Walz and told him that the Military is with him all the way. Any difficulty and we will assume control but, when the looting starts, the shooting starts. Thank you!

— Donald J. Trump (@realDonaldTrump) May 29, 2020

Twitter, of course, continues to deny allegations of partisan bias, even though the political dynamics at play here are blindingly obvious. The media clearly isn’t comfortable with President Trump’s “new approach” to police killings, and has chosen, seemingly with one voice, to sympathize with the rioters, as if their actions will somehow alleviate the pain and suffering endured by the victim’s family, or will somehow correct the widespread racial injustice they have fingered as the animus behind Floyd’s murder.

Of course, the media has found a racist connection to the language used by Trump.

According to Buzzfeed, the phrase “when the looting starts, the shooting starts” has a not-so-secret racist history. In 1967, Miami Police Chief Walter Headley used it to describe how his department handled looting in black neighborhoods.

“When the looting starts, the shooting starts,” is a threat coined by Miami Police Chief Walter Headley, who promised violent reprisals on black protesters in 1967. He also said: “We don’t mind being accused of police brutality. They haven’t seen anything yet.” https://t.co/inm7T4N804 pic.twitter.com/yfYY59Xfel

— Todd Zwillich (@toddzwillich) May 29, 2020

It all ties together nicely: All the clues the public needs to see that the sympathy Trump has expressed for Floyd and his family is really just an act during an extremely precarious time – politically speaking – for the president, and that he is, essentially still the same president who described the “literal Nazis” at Charlottesville as “very fine people”.

Earlier this week, Twitter labeled a Trump tweet about mail-in ballots as misleading, infuriating the White House and directly provoking the executive order signed last night. In a statement about the label, Twitter said that while the tweet will remain up, users won’t be able to like, reply or retweet it – though they will be allowed to retweet it with comment.

“We’ve taken action in the interest of preventing others from being inspired to commit violent acts, but have kept the Tweet on Twitter because it is important that the public still be able to see the Tweet given its relevance to ongoing matters of public importance,” the company said.

Also, CEO Jack Dorsey had a direct hand in crafting the company’s response to the tweet, according to Twitter PR.