Month: July 2017

Gold Up 8% In First Half 2017; Builds On 8.5% Gain In 2016

 – Gold up 8% in first half 2017; builds on 8.5% gain in 2016
– U.S. dollar down 6.5% – worst quarter in seven years
– Gold higher in all currencies except Draghi’s euro 
– Gold outperforms bonds; similar gains as stock indices
– S&P 500 and Dax outperform gold marginally
– World stocks (MSCI World) up 10%; gold outperforms Eurostoxx (+6%) & FTSE (+2.3%)
– Silver up 3.7% in first half ; builds on 15% gain in 2016
– Stocks, bonds, property buoyed by stimulus
– Resilience in gold as world struggles to hold confidence
– “If one hasn’t diversified this would be a good time to do that” – Shiller

Editor: Mark O’Byrne

Finviz.com

From President Trump taking office, Fed policy tightening to European and UK elections, Brexit rumblings and growing Middle Eastern risks, the first half of 2017 gave witness to a few trends which look set to impact markets in the coming months.

Gold and silver are amongst the best performing assets in 2017, with gains of 8% and 4% respectively and stayed resilient despite poor sentiment.

Demand drivers such as geopolitical uncertainty, a weak dollar and low interest rates continue to provide support for the precious metals as does renewed robust demand in the Middle East,  India and China.

Given 2016 finished with a sell-off in the precious metals, both gold and silver have remained impressively resilient in the face of overwhelmingly bearish sentiment in much of the media and with the retail investing public in the U.S. and most of the western world.

Gold rose in value in all currencies except the euro in which it fell 1.2%.

This is compared to say the likes of crude oil which has been under pressure of late and experienced a 20% correction. Not even the world’s two top oil producers agreeing in May to prolong their ongoing output cut from the first half of 2017 to the end of the first quarter of 2018 has been enough to prop up the price.

For silver fans, the last few weeks have been disappointing as silver has dropped 4.9%, while gold has dropped only 1.9%. Silver often mimics gold but of late industrial traits in the metal have affected its price more than usual.

We may have seen a turnaround this week however as silver has traded near a two-week highs as a stumbling dollar provided a boost to both precious metals.

Trump’s arrival in January set off quite a Trump rally in the first quarter of the year however this was not able to be maintained. Multiple distractions have meant that Trump’s policy agenda has been thrown off course and delayed.

The Trump rally in the first quarter appears to be stalling badly as false promises come to fruition and he struggles to execute policies in the face of powerful vested interests in corporate America and on Wall Street.

The world is changing rapidly posing risks to any sort of conventional economic recovery.

As a McKinsey study highlighted this week, ‘Even if we rebuild factories here and you build plants here, they’re just not going to employ thousands of people — that just doesn’t happen,” said report co-author and McKinsey Global Institute Director James Manyika. “Find a factory anywhere in the world built in the last 5 years — not many people work there.”

Robert Shiller, Nobel Laureate economist, told CNBC this week that investors should be cautious about investing in US stocks in such ‘an unusual market.’ The CAPE index he devised thirty years ago is at ‘unusual highs’ which is concerning. The Yale professor advised,

‘One should have a little of everything if one hasn’t diversified this would be a good time to do that.’

Trump delays and scandal has weakened the US currency and benefited gold. Despite this record-high equity prices and bond prices with higher U.S. bond yields appear to have kept a lid on gold and silver prices which would normally have seen greater gains in an environment of such uncertainty.

Speaking of currencies, strength in the euro has meant investors are currently paying the least for gold than they have in earlier months as the currency climbs amid speculation that the ECB plans to reduce monetary stimulus.

Gold priced in euros is currently down more than 10% from its 2017 peak in April. However, further euro gains against the US dollar would likely support the sentiment surrounding gold and could lead to gold breaking out in dollar terms above the key $1,300/oz level.

Gold in Euros (5 Years)

Positivity around the euro is unlikely to last as fears regarding contagion in the eurozone begin to resurface.

The government of Italy’s bailout of two Italian banks of a sum equal to the country’s defence budget will be enough to remind markets that a couple of positive election results is not enough to support the eurozone which is just balancing on a precipice of unsustainable debt levels.

Eurozone banks in Spain, Portugal, Greece and Ireland remain vulnerable.

Central banks elsewhere continue to affect sentiment around precious metals and sometimes in an unexpected fashion. Federal Reserve rate policy was expected to weaken gold, however rate hikes prior to June prompted gold to climb as opposed to tumble, as one might expect. Across markets interest rates remain historically low and government bond yields are low to negative.

Worries over this situation are exacerbated further as disparities between how central banks move forward are becoming clear. For example the U.S. Federal Reserve is starting to raise interest rates but some major central banks continue to keep rates low and print more money.

As a result, gold and silver both remain far more attractive stores of value.

Brexit has and will continue to provide support for both metals. Gold has outperformed sterling this year (+2%) as the currency continues to suffer thanks to uncertainty regarding the divorce talks between the sovereign country and the European economic union.

The country’s assumed fail safe London property market is rapidly coming undone as 75% of houses sell for below asking price.

Goldman Sachs explained this week that the bank is bullish on the yellow due to ‘global growth momentum likely having peaked’ and gold therefore representing a ‘good hedge for equity.’

More importantly it pointed towards peak gold mine supply in 2017 as a reason for gold to head above it’s commodity team year-end target of $1,250.

Supply of gold will continue to be anaemic while demand remains robust as the likes of China, India and Russia buy up physical gold. Yuan weakening and a slowing property market has helped to drive demand in China, while India saw its gold imports rise fourfold in May compared to last year.

Considering Robert Shiller’s comments, the reasons for diversification continue to grow every day, mainly due to fear trades and poor economic management. Where should we start?

Worsening relations in the Middle East, worries over North Korea’s nuclear program and therefore US-China relations, Brexit uncertainty, the gaping difference between central banks’ monetary policies, lack of progress in US congress and finally the looming threat of inflation following on from years of QE around the world.

Whilst gold and silver may not have performed to the same extent they did in the first-half of 2016, we can be assured as they have held themselves well despite a bearish environment in terms of U.S. and western sentiment. There seems little cause for the precious metals to be pushed lower in the medium to long-term.

The primary cause of the global financial crisis was insolvent banks and massive debt in all segments of society.  This has yet to be addressed in any sustainable manner.

Arguably, the financial position of banks and even more so western sovereign nations is in a far worse place than in 2008 whilst political instability is very real and poses very real risks to markets and risk assets.

Gold and silver’s continuing gains reflect both the massive global financial bubble and increasing geopolitical dangers.

Investment and savings diversification is now more important than ever.

News and Commentary

Gold steady ahead of U.S. Independence day holiday (Reuters.com)

Asia Stocks Mixed While Oil Gains for Eighth Day (Bloomberg.com)

Industrials Push Rebound in U.S. Stocks; Oil Gains (Bloomberg.com)

U.S. Consumers Sour on Outlook While Happy With Their Finances (Bloomberg.com)

UK household savings ratio plunges to all time low (Nasdaq.com)

Source: bmgbullion

Blowing bubbles: New world economic order (ABC.net.au)

The Coming Carmageddon (DailyReckoning.com)

World’s Most Dangerous Man (DailyReckoning.com)

U.S. Gold Exports Surge As Its Gold Trade Deficit Continues (SRSRoccoReport.com)

Bitcoin Nears Bear Market Territory (Fortune.com)

Gold Prices (LBMA AM)

03 Jul: USD 1,235.20, GBP 952.09 & EUR 1,085.00 per ounce
30 Jun: USD 1,243.25, GBP 957.43 & EUR 1,090.83 per ounce
29 Jun: USD 1,246.60, GBP 959.88 & EUR 1,093.14 per ounce
28 Jun: USD 1,251.60, GBP 976.25 & EUR 1,101.91 per ounce
27 Jun: USD 1,250.40, GBP 980.31 & EUR 1,111.36 per ounce
26 Jun: USD 1,240.85, GBP 975.56 & EUR 1,109.32 per ounce
23 Jun: USD 1,256.30, GBP 987.70 & EUR 1,125.27 per ounce

Silver Prices (LBMA)

03 Jul: USD 16.48, GBP 12.72 & EUR 14.49 per ounce
30 Jun: USD 16.47, GBP 12.69 & EUR 14.44 per ounce
29 Jun: USD 16.83, GBP 12.98 & EUR 14.76 per ounce
28 Jun: USD 16.78, GBP 13.08 & EUR 14.78 per ounce
27 Jun: USD 16.66, GBP 13.07 & EUR 14.79 per ounce
26 Jun: USD 16.53, GBP 12.98 & EUR 14.79 per ounce
23 Jun: USD 16.71, GBP 13.12 & EUR 14.97 per ounce

Recent Market Updates

– Pensions Timebomb In America – “National Crisis” Cometh
– London Property Bubble Bursting? UK In Unchartered Territory On Brexit and Election Mess
– Shrinkflation – Real Inflation Much Higher Than Reported
– Goldman, Citi Turn Positive On Gold – Despite “Mysterious” Flash Crash
– Worst Crash In Our Lifetime Coming – Jim Rogers
– Go for Gold – Win a beautiful Gold Sovereign coin
– Only Gold Lasts Forever
– Your Future Wealth Depends on what You Decide to Keep and Invest in Now
– Inflation is no longer in stealth mode
– James Rickards: Gold Will Start Heading Higher On “Dwindling” Supply
– Billionaires Invest In Gold
– Brexit and UK election impact UK housing
– In Gold we Trust: Must See Gold Charts and Research

via http://ift.tt/2syaDRW GoldCore

From Bill Blain of Mint Partners.

Morning Porridge – July 3rd 2017

“If you can keep playing tennis when somebody is shooting a gun down the street, that’s concentration…”

* * *

Welcome to the second half of 2017. This week is likely to be thin – the first week of the great summer slowdown and Wimbledon, US holidays and payrolls on Friday.

But… what comes next?

We’ve muddled through the first half. It’s been confusing, interesting and frustrating in equal measure. Global Equities have added over $14 trillion – and with Global Market cap now at $76 trillion, they are about equal to Global GDP. (That’s not a level to panic about overvaluation – but it’s worth noting.) The positives, I am reliably informed, include improving signs of global growth, a supposed economic renaissance in Europe, and a general switch away from bonds into equity. Lots of participants remain very concerned on the prospects for bubblicious stock market reversal later this year, but others point to yet more upside. After all, stock market surprises don’t occur when everyone predicts them…..

The numbers can paint the story:

GDP expectations: In Jan the IMF forecast 3.6% global GDP Growth. Europe was seen at 1.6%, US at 2.3% and UK at 1.4%. These are now forecast as Global growth at 3.5% GDP (down 0.1%), Europe down at 1.4% (down 0.2%), US at 2.5% (up 0.2%), and UK down at 1.3% (down 0.1%). Nothing to panic about.

Global Stocks: FTSE was 7177 Jan and 7346 this morning. Dow was 19881 in Jan and 21350 this morning. Nothing to fret about… 

Global Bonds: 10-yr Treasuries were 2.45% in Jan, and 2.31% this morning. 10-yr bunds were 0.36% in Jan and 0.46% this morning. 10-year Gilts were 1.42% in Jan and 1.28% this morning. Nothing to get stressed over…

In short, it’s been an up, down and shake it all about kind of year… There are clear signals of concern about what the withdrawl of “extraordinary monetary policy” will mean. Normalisation is seen as a threat by some, but by others as a very useful “reset” to get markets back on a properly priced realistic track.

However, the political picture has been very mixed – and looks likely to continue to lead markets. We’re moving into a new phase as existing relationships are re-drawn at all levels, from the geo-political, to Brexit concerns. All have the ability to move market sentiment.

In Europe there is a new mood in play: the massive concerns earlier this year about French political stability were unfounded and Macron has kick-started a new era of hope for the EU. We still have doubts about Italy, but Merkel looks untouchable. The ECB has the occasional wobble (like last week’s mixed messages) about how its going to rein in QE, but the main risk for markets is the new Macron/Merkel axis over-promises and under-delivers growth and reform, potentially triggering a new confidence reversal across Europe just as the ECB runs out of capacity for further QE. The market very much expects the “do-whatever-it-takes” dictum means the ECB will step in and stabilise.  

However, we have a significant leadership vacuum elsewhere in the West.

The UK’s strong and stable government proved illusionary, and has crashed into disorder just as the critical Brexit negotiations begin. Are markets really pricing in the fact their does not actually appear to be any plan? It’s less than helpful the mixed signals and apparent disunity at the BOE about timing the next hike also suggest dither and weakness.

In the US Donald Trump’s unfulfilled promises and rabid twittering are not only embarrassing, but potentially destabilising, raising doubts about leadership, policy implementation and Fed independence of action. 

Trump is notionally “leading” an increasingly fragmented and distracted West while Putin remains very much in charge in Russia and Xi imposes his will across SE Asia. The weekend’s 20th anniversary of Hong Kong’s “liberation” from Britain was a blunt message to the former colony: “forget the past, your future is China”. Weak occidental leadership opens opportunities for Russia and China.

And what about Japan – where the Abe era looks to be sliding? Abe’s LDP is losing seats and confidence in him is dropping. Things change slowly in Japan, but the new girl on the Block, Tokyo Mayor Yuriko Koike is described as Japan’s Macron by my senior Japan watcher, Martin Malone. And even the Bank of Japan is thinking about how much more to dosh into markets – the answer is less.

Markets move on confidence, and confidence is a function of politics…

Bit of fun this morning as I heard an Irish politician arguing Ireland should follow the UK out of Europe. Hah. But he may have a point.. after all, the Irish have got all the roads and EU infrastructure grants they can possibly use…

via http://ift.tt/2t8OVlX Tyler Durden

The tensions between the Trump administration’s populist win and its more traditionally Republican establishment types have been well-documented in recent months. And now, more than two months after Treasury Secretary Steven Mnuchin and National Economic Council chief Gary Cohn unveiled an outline of the administration’s tax-reform ambitions, another battle between the two wings appears to be brewing.

Trump’s chief strategist Steve Bannon is said to be pushing to raise the top tax rate on individuals, with Axios saying the former Breitbart CEO would like the top rate to have “a 4 in front of it” – currently, the highest income-tax bracket in the US is 39.6% for individuals earning more than $414,000 a year.

Some officials – code for Mnuchin, Cohn and the other members of the more traditionally corporatist (or rather Goldmanist) wing of the Trump administration – believe Bannon’s ideas are crazy. But Bannon believes raising taxes on the wealthy could help the administration boost its populist bona fides, an angle which Trump appears to be actively pursuing once again having recently failed with his more traditional fiscal reform push. But as tax reform is shaping up to be a must-win for the Trump administration, it would hardly be a surprise to see Bannon’s plan shelved in favor of across-the-board cuts that would help rally the Republican Party’s conservatives to support whatever reform package Trump ultimately presents.

Cohn and Mnuchin reportedly view tax reform as a top priority for the administration. However, as Axios notes, time to pass comprehensive reform is quickly running out.

• Lobbyists who have met with Gary Cohn and Treasury Secretary Steven Mnuchin say they've been struck by how impatient the two appear:
• Cohn has told associates that if tax reform doesn't get done this year, it's probably never going to happen.
• Sources who know Cohn speculate that he'll leave the White House the instant he concludes tax reform is dead.
• While Cohn and Mnuchin differ stylistically — Cohn is brash and physically imposing while Mnuchin is mild-mannered — sources who've been meeting with them say they share the same philosophy: Go big or go home.

Ironically, Cohn and Mnuchin are warming to an idea that Bannon supported in the aftermath of the election, when he claimed that he's "not a conservative" and said he would support spending packages that blow out the deficit, arguing that the US should rebuild its infrastructure now while interest rates are low. Mnuchin, for his part, has refused to promise that tax reform wouldn’t lead to wider deficits when he and Cohn unveiled the outline for the administration’s reform plan back in April.

Cohn and Mnuchin aren't bluffing when they say they want to slash the corporate tax rate to 15% from the current 35%. Neither man has any interest in timid tax cuts, and they wager that special interests will relinquish their loopholes if they become convinced their tax rate really will be in the teens.

 

• They're becoming far less wedded to revenue neutrality — the idea, favored by House and Senate Republican leadership, that tax cuts mustn't add to the deficit.
• They're increasingly tantalized by an idea some conservatives (like Grover Norquist and Sen. Pat Toomey) are pushing: Allow major tax cuts to last longer than 10 years without having to balance the budget.
• Conservatives like Toomey favor a more expansive 20- or 25-year period. But top White House officials are more cautious, and are said to be weighing a 15-year period.

The last time the US passed comprehensive tax reform, the legislative battle took two years. Thus, a new theme is emerging that applies not just to tax reform, but to Trump’s agenda more broadly: Do it now, or let it go.

Context: The last time Congress passed major tax reform, in 1986, it was a two-year rollercoaster. This time, the White House officials driving the process have concluded there's no chance of getting Democrats to support what Trump wants to do. So, they believe it must be done before the 2018 midterm elections or not at all.

 

That's going to be a heck of a challenge. They need to first pass a budget, which is embroiled in fights over defense spending and welfare reform. And they need to finish with health care. Some top Republicans have come to believe, contrary to conventional wisdom, that tax reform stands a better chance if health care fails — so desperate will Trump and Republican leaders be for a victory.

The x-factor here, of course, is Trump. How does he feel about raising taxes on the wealthy? And, more importantly, is Bannon succeeding in moving the Trump administration in a more populist direction, following Trump's decision to largely abandon his protectionist rhetoric? A few more tweets from the president should provide the answer.
 

via http://ift.tt/2tI2ieu Tyler Durden

• Health Bill Faces Resistance Among GOP Governors (WSJ)
• Saudi Arabia, allies give Qatar two more days to accept demands (Reuters)
• Qatar Responds to Saudi Bloc Demands as Trump Works Phones (BBG)
• Trump says he will speak with German, French officials on Monday (Reuters)
• Goldman to Review Commodities After Worst Start in a Decade (BBG)
• U.S.-Backed Forces Close to Trapping ISIS Holdouts in Raqqa (NYT)
• Missing Caterpillar export filings could open a new avenue for U.S. tax investigators (WSJ)
• Tarnished Abe Plunged Into Crisis After Tokyo Election Loss (BBG)
• French Energy Giant to Invest $1 Billion in Iran’s giant South Pars Gas Field (NYT)
• Euro-Area Manufacturing Accelerates as Orders Fuel Optimism (BBG)
• China, Russia share opposition to U.S. THAAD in South Korea: Xi (Reuters)
• The EU’s New Presidency Is Already in Trouble (BBG)
• Toshiba Hasn’t Revealed That SK Hynix Could Get Stake in Its Chip Business (WSJ)
• Tesla’s Musk says Model 3 gets regulatory nod for production (Reuters)
• How Retailers Can Fight Back Against Amazon (BBG)
• How the iPhone Built a City in China (WSJ)
• El-Erian: What Stock Investors Need to Know, and Why (BBG)
• Maersk brings all major IT systems back online after cyber attack (Reuters)
• UK government not aware of plans for Trump visit in next few weeks: May’s spokesman (Reuters)

Overnight Media Digest

WSJ

– Federal investigators believe Caterpillar Inc failed to submit numerous required export filings with the government in recent years, adding to questions facing the company. on.wsj.com/2t7m5Cs

– Plan for the sale of Toshiba Corp’s semiconductor unit includes an option for SK Hynix Inc to eventually take a minority stake in the business. on.wsj.com/2t7HknX

– The U.S. government has partly rescinded a ban on the use of laptops on some U.S.-bound international flights only days after rolling out demands for enhanced security measures at overseas airports. on.wsj.com/2t84bj9

– House lawmakers approved Democratic revenue and spending measures, sending to the Senate what could become the Illinois’s first budget in two years. on.wsj.com/2t7QaSu

– State government remained closed in New Jersey on Sunday, with Republican Governor Chris Christie and Democratic lawmakers seemingly no closer to reaching a budget deal that would reopen state parks and beaches for the remainder of the holiday weekend. on.wsj.com/2t7ARJp

FT

Iran plans to sign a new contract to develop its giant South Pars gas field with France’s Total SA and China’s CNPC on Monday, an Iranian oil ministry official said on Sunday.

Former Barclays Plc Chief Executive John Varley, along with his three former colleagues at the bank, will appear at Westminster magistrates court on Monday to officially face charges brought by the Serious Fraud Office.

Brazil’s largest producer of sugarcane ethanol Raízen Energia SA is planning to increase production by more than fivefold at a new “second-generation” biofuel plant within two years, in a move that will increase the productivity of one of the country’s most important industries.

Britain will begin the withdrawal from a convention that allows European vessels to fish in its territorial waters on Monday, in a move to control EU fishing in its waters after Brexit.

NYT

– U.S. President Donald Trump posted a short video to his Twitter account on Sunday in which he is portrayed wrestling and punching a figure whose head has been replaced by the logo for CNN. nyti.ms/2uA5rcJ

– Puerto Rico power utility PREPA defaulted on a deal to restructure roughly $9 billion in bond debt and sought court protection from its creditors, the government said on Sunday. nyti.ms/2shpWKy

– French energy company Total SA has agreed to invest $1 billion in Iran to develop a huge offshore gas field, Iranian news media reported on Sunday. nyti.ms/2t7IHTF

– American officials on Sunday exempted Etihad Airways from a ban on laptops and other types of electronics on some flights bound for the United States, restrictions instituted in March because of concerns that the Islamic State was developing a bomb that could be hidden in portable devices. nyti.ms/2ufZPFi

– Forces backed by the U.S. have nearly sealed off the northern Syrian city of Raqqa, trying to trap as many as 2,500 hard-core Islamic State militants defending the capital of their self-proclaimed caliphate. nyti.ms/2tfJG2f

Britain

The Times

* British tech start-up, Blippar, which once claimed it would be “bigger than the internet,” has quietly closed its San Francisco office as part of a cost-cutting drive and launched a search for new funding. (bit.ly/2sC0xuq)

* Deliveroo is in talks with investors including SoftBank Vision Fund, over a bumper fundraising that would value the food delivery service at more than 1 billion pounds ($1.30 billion). (bit.ly/2swk3x2)

The Guardian

* John Varley, the former chief executive of Barclays Plc , will be among three former bankers to appear at Westminster magistrates court on Monday to face charges of fraud for events that took place at the height of the financial crisis. (bit.ly/2sgSLGO)

* Nisa, the convenience chain that is in takeover talks with Sainsbury’s, has angered several hundred head office staff by denying them annual bonuses despite hitting performance targets. (bit.ly/2sgLHKo)

The Telegraph

* Electric motor racing series Formula E burned up a net loss of 29.8 million pounds last year as start-up costs accelerated. (bit.ly/2swD96f)

* Insurers face a bigger blow from planned changes to the rules on personal injury damages than from flooding in the North of England, the head of an industry lobby group has claimed. (bit.ly/2uzKTB9)

* Word-of-mouth holiday booking firm Travel Counsellors is considering a stock market float as an option for its next stage of growth. (bit.ly/2ufdJXV)

Sky News

* Tracey McDermott, who quit the Financial Conduct Authority last year after failing to land the top job, will be among about 20 inaugural directors of bank lobbying group UK Finance. (bit.ly/2sg9tWX)

via http://ift.tt/2sioGXA Tyler Durden

FX Week Ahead, courtesy of Rajan Dhall from fxdaily.co.uk

Despite the NY market holiday over Independence day in the US, we have a number of notable data releases leading up to the main event next week in the May employment report (Friday). 

In a half day session on Monday we get the ISM manufacturing index and alongside the new orders component, the employment index should carry some weight due to the strong correlation with headline jobs growth of late.  The non mannufacturing ISM is not until Thursday, ahead of which is the ADP private jobs survey which somewhat wrong-footed the market last month.  The lead non farm payrolls number at the end of the week is expected to show a 180k rise after the disappointing 138k print for April, but the Fed are also keen to see a pick up in wage growth again with average hour earnings expected to improve slightly at rate of +0.3%.

In the mix, Wednesday’s FOMC minutes are unlikely to alter sentiment on the USD, as scepticism over the Fed rate path espoused by Fed chair Yellen and colleagues such as the NY Fed’s Dudley have been at odds with the economic feedback.  Recent weakness has been seen to be transitory and there have been certain elements in the latest stats for enouragement.  The Q1 GDP figure was revised a little higher to 1.4% last week despite core PCE still slipping, but personal income growth for May also exceeded expectations.

Until we get improvement in the hard data, the USD will remain on the back foot, but going against the drop in the ($) index has been a resilient USD/JPY rate.  That said, we hit a wall of resistance at 113.00 las week, but 113.40-50 is the area we are watching here.  Calls for levels north of 115.00 have been pretty quiet of late, and this in spite of moderate acceleration in Japanese divestment flow.  Europe has been a key beneficiary with notable economic momentum building up and a relative underperformance in the EU bourses offering value against Wall Street.  EUR/JPY is destined for 130.00 or higher as a result, while elsewhere we see GBP/JPY with an eye on 150.00 and CAD/JPY having outpaced its commodity counterparts.

 
From the Japanese perspective, the BoJ continues to plug away with their stimulus program as domestic inflation remains frustratingly sluggish, as are improvements in broader activity and growth.  The Tankan survey has lost its influence under the present circumstances, but we get the latest activity reports on Sunday night.

The Canada day holiday on Monday may tame some of the CAD gains, which have now taken out 1.3000 vs the greenback, and below here we watch the 1.2950-20 zone which will has been pressured by the ongoing reversal in the record short positioning seen recently.  It took a change in BoC rhetoric to prompt the more aggressive moves to the downside here, responding to the healthy growth and employment data in the last 6 months, but we would not be surprised to see a near term correction as the RSIs (4hr and daily) delve into oversold territory.  Manufacturing PMI’s due out when Canada returns on Tuesday, and trade on Thursday but Canadian jobs Friday are the main event. 

Onto Europe, and the concern over the strong EUR gains are clearly starting to unnerve the ECB, ever wary of sparking a full-on taper tantrum.  In the latest EUR/USD run higher, we have seen the 1.1300 level removed, and it was not long before we were testing the next area of note up at 1.1440-50.  We are likely to see continued tests higher, especially as USD bears need little encouragement, but we are also seeing traders taking up any slack in the other notable EUR pairs, with the CHF rate now into the mid 1.0900’s where 1.1000 higher up has been particularly strong. 

It is unlikely that the pan European PMI data will materially impact on the aggressive positioning for an eventual QE taper later this year, but if EUR/USD rushes up to 1.1500-1.1600 in the week (or two) ahead, we expect to see a more sizeable pullback. Many anticipated a deeper pullback through 1.1100 a little over a week ago.  The ECB minutes will likely serve as a reminder of the turn in sentiment, with presdident Draghi’s comments this week on ‘reflationary pressures’ still ringing in the ears.

EUR/GBP also shows signs that it is ‘waiting in the wings’ for the next push up.  UK rate hike jitters were set off on Haldane’s shift in sentiment and were compounded by gov Carney later in the week sending Cable on another jaunt through 1.3000.  As a result, we may have to weather some further downside in to the low 0.8700’s, if not 0.8650 or so.  If GBP is indeed gaining on the hawkish developments at the MPC, then we expect the initial target in Cable will be 1.3200-1.3300, with the higher end representing levels seen just ahead of the pre-emptive rate cut last August post Brexit. 

There is also an element of a more conciliatary mood over the EU talks ahead with PM May’s weakened hand (of her own making) suggesting to some that she may have little option other than to adopt a softer line.  We maintain that in the lengthy period of talks ahead, there is far too much uncertainty to base a bullish call on GBP at this stage, but our perceived 1.2400-1.3000 range may have to be widened – in both directions!
All three PMI releases in the UK are released in the first half of the week, but there is little need to emphasise the services component due out on Wednesday.  Trade stats and industrial production also on the schedule later on.

Back to Asia, and also at the very start of the week, we get the release of Caixin manufacturing PMIs, and this comes after last week’s official figures showing modest improvement (from 51.2 to 51.7).  This fuelled a little more of the recovery in Iron ore prices after some heavy losses of late, while the broader risk tone also benefited.

As we mentioned above, cross/JPY is on an upward trajectory but in some cases we are moving into overbought territory.  Carried along with the buoyant outlook on the NZ economy, NZD/JPY is now moving ever closer to the highs seen at the start of the year.  We ended last week near the weekly top a little shy of 82.50, coinciding with ongoing congestion in the key 0.7330-50 area in NZD/USD.  There is little next week to derail positive sentiment on NZ other than the Fonterra dairy auctions on Tuesday, but prices will have to deviate significantly from futures pricing to impact on NZD.  Fluctuations have been much tighter this year. 

AUD/NZD has also reflected the mood in NZ, such that we have tested key support levels below 1.0400.  The weekly series of higher lows now show 1.0350-70 as major area, but as noted, metals prices have recovered well and this has revived the AUD upturn.  AUD/USD breached 0.7700 last week in line with Copper tipping USD2.70, but we look to the RBA meeting ahead, where we expect another balanced outlook to preserve their neutral stance near term.  The prospects for AUD remain to the upside, as recent central bank rhetoric has been relatively upbeat, and this can only have been enhanced by the commodities backdrop.  0.7750-0.7850 is a major target area, but just as we expect with NZD near 0.7500, higher levels may push both the RBA and RBNZ to try and rein in some of this strength with some well chosen words.  Nb, RBNZ were pretty relaxed in their recent views on the currency, and we expect it will be a similar line from the RBA.  Through the week, we also have the AIG PMIs – manufacturing on Monday – with trade data later in the week. 

Manufacturing PMIs in Sweden and Norway are also due out next with  both indices firmly above thre expansionary 50.0 – Sweden now close to 60.0.  Focus will be on the Riksbank, where the market feels the central bank is delaying a move on its ultra loose policy stance. However, the ECB are set to rein in purchases and neutralise rates, pre-emptive SEK buying shows the market is positioning for a potential change in tack.  In contrast, the Norges bank have highlighted the improvement in the economy, notably higher capacity utilisation, but maintain rates are not likely to move (up) until 2019. The NOK/SEK cross rate has been hit down towards parity as a result, though has held up on initial attempts.

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Ahead of this week’s G-20 summit in Hamburg, Germany, Donald Trump called the leaders of China and Japan to discuss the “threat posed by North Korea’, along with trade issues, the White House said on Sunday. Trump spoke with Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe, whose LDP had just suffered a devastating loss in the Tokyo Assembly elections, and according to the White House read out, “both leaders reaffirmed their commitment to a denuclearized Korean Peninsula” adding that “President Trump reiterated his determination to seek more balanced trade relations with America’s trading partners.”

The terse statement did not provide further details of the call or say if Trump managed to persuade Xi to endorse his approach of exerting maximum pressure on North Korea, including a slew of further economic and trade sanctions.

According to Reuters, the call may have been prompted by Trump increasing frustration with China’s inability to rein in North Korea, and the reference to trade was an indication the president may be ready to return to his tougher-talking ways on business with Beijing after holding back in hopes it would put more pressure on Pyongyang. Trump and Xi discussed the “peace and stability of the Korean peninsula”, China’s Foreign Ministry said, without elaborating.

Ministry spokesman Geng Shuang later told a daily briefing that the United States was “very clear” about China’s position on North Korea. Geng did not elaborate on what Xi told Trump about North Korea.

And while Trump may have been pushing for another PR push to demonstrate that he is on top of the N. Korea situation, what he got in return was a clear debuke from President Xi Jinping, who urged Trump to abide by Washington’s decades-old “one-China” policy during the phone call “as tensions between the two countries resurfaced over Taiwan, disputes in the South China Sea and how to handle North Korea’s nuclear weapons programme” SCMP reported.

Confirming that US-Sino relations have deteriorated substantially in recent weeks, Xi issued an implied warning to the US president, saying US-China relations have been affected by “negative factors” since the two men met for the first time at the Mar-a-Lago summit in Florida in April, the state broadcaster China Central Television reported.

“We attach great importance to the US government’s reaffirmation of the one-China policy and hope the US side will properly handle the Taiwan problem by adhering to the one-China principle and the three communiqués between the two sides,” Xi was quoted as saying. The call came after the Trump administration agreed a US$1.4 billion arms sales package with Taiwan, which China slammed over the weekend.

In the past week, diplomatic realtions between China and the US have chilled substantially, after Beijing lodged protests following Washington’s announcement of the Trump administration’s first arms sales to Taiwan. China has also protested against the blacklisting of a small Chinese bank accused of illicit dealings with North Korea.

Beijing was further infuriated last week with a bill approved by the US Senate Armed Services Committee that would allow regular stops by American naval vessels to Taiwan’s ports. Tensions have also been raised between the two countries over China’s assertive claims to islands in the South China Sea.

Adding to Beijin’s anger, on Sunday, the USS Stethem, a guided-missile destroyer, sailed within 12 nautical miles of Triton Island, part of the Paracel Islands in the South China Sea, to which China responded by dispatching military vessels and fighter jets to intercept the US warship. Analysts quotedb y SCMP said Beijing may in future have to deal with a more confrontational approach from the Trump administration, which appears to be using Taiwan as leverage against Beijing.

The Arleigh Burke-class guided-missile destroyer USS Stethem

The former Taiwanese deputy defence minister Lin Chong-pin said US moves signalled Trump was likely to shift his China policy towards a harder approach. “Apparently, Trump still wants to step up pressure on Beijing in exchange for China’s support on North Korea. But given Trump’s track record of being unconventional and unpredictable, it remains to be seen how far he will go to get tough on China,” he said.

Robert Daly, the director of the Kissinger Institute on China at the Wilson Centre in the US, said Washington’s recent critique of China’s human rights record, its imposition of secondary sanctions on China, the arms sales to Taiwan and pending tariffs on Chinese steel exports to the US may represent a hardening of Trump’s views on China.

 

“They are a return to normalcy for American China policy. This hardening is in keeping with China’s long-term expectations for the relationship, but it disappoints China’s unrealistic short-term hopes for managing the Trump administration,” he said. “Of course, the Trump administration’s return to the mean in China relations could be as short-lived as its experiments with scrapping the one-China policy and cosying up to Xi Jinping. The relationship remains dangerously unstable.”

Separately, Trump talked to Japanese Prime Minister Shinzo Abe by phone as well as Xi. The call was focused on the threat posed by North Korea’s accelerated nuclear weapons programme, the White House said.

“They reaffirmed that the United States-Japan Alliance stands ready to defend and respond to any threat or action taken by North Korea,” the White House statement said. After the call, Japan’s Chief Cabinet Secretary Yoshihide Suga told a news conference the two countries and South Korea will have a trilateral summit at the G20 meeting, but he didn’t want to speculate on what might be said there.

“It’s important for these three nations to show their strong unity and cooperation both within and without,” Suga said. “Things such as strengthening pressure on North Korea or urging China to fulfill even more of a role. Things like this have been agreed on before as well.”

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S&P500 futures have started the second half solidly in the green, up 0.3% to 2,429, tracking European markets broadly in the green, while Asian stocks fell slightly and crude oil is little changed. With US markets set to close at 1pm today trading volumes in many markets remain light before Tuesday’s July 4th holiday and as investors await Friday’s report on the American jobs market. Traders will be looking at key upcoming economic data for validation of the hawkish shift from central banks that roiled markets last week. 

The Asian session opened with the Yen initially strengthens following Prime Minister Abe’s shocking election loss in the Tokyo Assembly elections, but later reversing gains to trade materially weaker at 112.95 last, on speculation Abe will be forced to inject more stimulus to salvage his standing amid a muted reaction to strongest Tankan survey since 2014. Australian 10-year yield rise four basis points; T-note yield two basis points firmer at 2.32%; shares in Tokyo and Sydney steady in narrow ranges. MSCI’s broadest index of Asia-Pacific shares outside Japan held steady, staying within a stone’s throw of a two-year peak hit last week. Japan’s Nikkei ticked up 0.1 percent, helped by the solid Tankan report.

In China, the PBOC drained liquidity for ninth day, pulling a net 70 billion yuan; Hong Kong’s Hang Seng and the Shanghai Composite climbed 0.1 percent amid concerns the world’s second-biggest economy could be slowing down. In Hong Kong financial shares benefited from the launch on Monday of the “Bond Connect” scheme linking China’s $9 trillion bond market with overseas investors. Industrial metals rose across the board after the Chinese Caixin Mfg PMI rebounded back into expansion territory, rising to 50.4 in June from 49.6 in May, and beating estimates.  Dalian iron ore 2.3% higher: the benchmark iron ore contract climbed on Friday for its best one-week gain since November and is up almost 22% from its $53.36 June 13 low, which by definition places it in a bull market. China’s bond connect program with Hong Kong will give offshore investors another way to access the mainland’s $10 trillion debt market.

European stocks started the new quarter with solid gains, rising for the first time in five days as oil and metal gains spurred energy companies and miners. Banks rallied as the Stoxx Europe 600 Index advanced 0.7% to 382.03, after suffering its biggest month loss in a year in June on worries over tightening monetary conditions. France’s CAC 40 index rose 0.8 percent, Spain’s IBEX 0.9 percent and Italy’s FTSE MIB 1 percent. Britain’s main FTSE 100 index added 0.3 percent.

European economic data showed a modest retreat with most final Eurozone PMIs backing off slightly from recent flash reading (except for Germany which printed at 59.6, above the 59.3 exp.). Final Eurozone Manufacturing PMI was at 57.4 in June (Flash: 57.3, May Final: 57.0), with a notable observation that Greece returned to expansion while job creation stayed close to May’s survey record.

While the final PMIs disappointed modestly from the preliminary prints, this is how Eurozone’s various mfg sentiment surveys close the month of June:

• Austria, 60.7: 76-month high
• Germany, 59.6: 74-month high
• Netherlands, 58.6: 74-month high
• Ireland, 56.0: 23-month high
• Italy, 55.2: 2-month high
• France, 54.8: 2-month high
• Spain, 54.7: 2-month low
• Greece, 50.5: 37-month high

Meanwhile, unemployment in Italy rose to 11.3% in May, higher than the expectation of an unchanged 11.2% April print.

Crude was modestly in the green, climbing for an eighth day running, the longest winning streak this year extending gains after Baker Hughes data on Friday showed the number of active U.S. rigs falling for the first time in 24 weeks. WTI has climbed 8% in the past 8 days. Hedge fund wagers on lower prices in the week through June 27 increased at a slower pace than the two previous weeks, according to data from the Commodity Futures Trading Commission, suggesting the bearish sentiment may be about to turn.  Prices surged last week while WTI and Brent still posted a monthly loss in June on concerns over rising global supply; Libyan production has climbed to more than 1m b/d for 1st time in 4 years.

“Given the recent upward momentum, it wouldn’t be surprising to see oil fairly close to some sort of downward correction,” says Ric Spooner, a market analyst at CMC Markets in Sydney. “Libya is probably close to its peak production. Nevertheless, the fact its output reached these levels faster than some had anticipated is a negative for the overall supply situation.”

Elsewhere, wheat jumped to a two-year high on the Chicago Board of Trade as agriculture markets soared on an expanding drought in the U.S. and disappointing data on sowed acreage.  Gold slipped 0.5 percent to $1,235.89 an ounce.

The yen fell 0.4 percent to 112.87 per dollar, after erasing an earlier advance of as much as 0.4 percent. The Bloomberg Dollar Spot Index rose 0.3 percent after dropping 1 percent last week and touching the lowest level since October. The euro, which hit 14-month highs against the dollar last week after European Central Bank President Mario Draghi hinted at tweaks to the bank’s bond-buying stimulus program, fell 0.3 percent to $1.1394.

The pound finally fell 0.4% to $1.2973 after an eight-day rally…

… following weaker than expected June PMI data (54.3, vs Exp. 56.3, Last 56.3).

The yield on 10-year Treasuries rose one basis point to 2.31 percent, adding to a 16-basis point surge last week, the steepest since March. U.K. 10-year yields added two basis points to 1.27 percent.  While French and German 10-year yields fell one basis point, the hawkish sentiment hardly looks exhausted, with 0.50% on the 10Y Bund looking increasingly likely.

Later today, investors can look forward to ISM data and Wards vehicle sales data later on Monday.

Market Snapshot

• S&P 500 futures up 0.3% to 2,429.00
• STOXX Europe 600 up 0.7% to 382.14
• MXAP down 0.2% to 154.32
• MXAPJ down 0.09% to 504.51
• Nikkei up 0.1% to 20,055.80
• Topix up 0.2% to 1,614.41
• Hang Seng Index up 0.08% to 25,784.17
• Shanghai Composite up 0.1% to 3,195.91
• Sensex up 0.8% to 31,173.55
• Australia S&P/ASX 200 down 0.7% to 5,684.49
• Kospi up 0.1% to 2,394.48
• German 10Y yield fell 0.4 bps to 0.462%
• Euro down 0.3% to 1.1387 per US$
• Italian 10Y yield rose 0.6 bps to 1.865%
• Spanish 10Y yield fell 4.6 bps to 1.493%
• Brent Futures up 0.3% to $48.91/bbl
• Gold spot down 0.5% to $1,236.08
• U.S. Dollar Index up 0.3% to 95.95

Top Overnight News

• ECB’s Mersch says patience needed as upturn in inflation not yet self-sustained, don’t need 2% inflation to adjust policy; Weidmann says council agrees expansive policy needed, will normalize once inflation justifies it
• U.S. Navy sends a guided- missile destroyer near disputed Triton Island
• China June Caixin manufacturing PMI 50.4 vs 49.6 previously
• Japan PM Abe’s LDP suffers a surprise defeat in Tokyo assembly election
• Abe adviser Nakahara says BOJ needs fresh face as Kuroda out of ideas
• Goldman Said to Review Commodities After Worst Start in a Decade
• Trump’s Rural Broadband Goal Won’t Be Easy. It Will Be Costly
• Qatar to Respond to Saudi-Led Bloc Demands as Trump Works Phones
• Kindred Sells Nursing Unit to BlueMountain-Led JV for $700m
• Autoliv Enters LiDAR Commercialization Deal with Velodyne
• Rakuten, Lifull Team Up With Homeaway on Home Sharing in Japan
• CN Resumes Service Near Chicago After Derailment, Crude Leak
• Delek Drilling Says Tamar Reserve 13% Bigger Than Pvs Estimate
• EU’s Vestager Says Received No U.S. Reaction to Google Fine
• HuntsmanClariant May Sell Units for M&A Cash, FuW Cites Next CEO
• VTG Aktiengesellschaft to Buy CIT’s Nacco Unit for About EUR780m
• Jakks Pacific Files Up to 5.24m- Share Offer for Holder Meisheng
• Facebook Wins Dismissal of Privacy Suit Over Internet Tracking
• Facebook’s Small Print Might Be Antitrust’s Next Big Target
• Tesla CEO Says Model 3 Passes All Regulatory Requirements

Asian markets traded mixed following an indecisive close last Friday on Wall St. where US indices finished their best H1 performance since 2013 in a choppy manner, as energy posted a 7th consecutive gain and tech underperformed. ASX 200 (-0.6%) slipped below 5,700 with utilities and healthcare weighing on the index, while Nikkei 225 (+0.2%) was kept afloat following the mostly better than expected Japanese Tankan data. Shanghai Comp. (Unch.) and Hang Seng (Unch.) failed to benefit from better than expected Caixin Manufacturing PMI data (50.4 vs. Exp. 49.8) and the launch of the bond connect, with participants despondent after the PBoC refrained from liquidity injections for the 7th consecutive session. However, Chinese markets then recovered gradually throughout the session to return flat. Finally, 10yr JGBs were flat alongside an inconclusive risk tone, although mild support was seen after the BoJ’s JPY 880b1n Rinban operation. Chinese Caixin Manufacturing PMI moved back into expansion overnight, rising to 50.4 for June, vs. Exp. 49.8 (Prey. 49.6). The Japanese Tankan Large Manufacturers Index also beat expectations for Q2 rising to 17 vs. Exp. 15 (Prey. 12). Tankan Large Manufacturing Outlook (Q2) Q/Q 15 vs. Exp. 14 (Prey. 11) Tankan All Large CAPEX (Q2) Q/Q 8.00% vs. Exp. 7.40% (Prey. 0.60%)

Top Asian News

• Tarnished Abe Plunged Into Crisis After Tokyo Election Loss
• Xi, Abe Get Phone Calls From Trump as Asian Tensions Rise
• Idemitsu to Sell Shares, Diluting Founding Family’s Stake
• Tata Steel 1Q Sales Volume Jumps 28% to 2.75m Tons
• Toshiba Mulls a Swiss IPO for Landis+Gyr by September

European stocks traded in the green in subdued fashion amid cautious trade as we open the second half of the year. Markets have opened in the green; with global equities trading near record highs on bets of improving growth. All ten sectors trade in the green, as Energy is one of the noticeable out performers as a result of oil continuing to extend on gains, now in the green for the eighth consecutive day — longest winning streak of the year.
The uncertainty out of Japan, following a crushing defeat of Japanese Prime Minister’s Shinzo Abe’s party in the Tokyo elections did not weigh on stock markets, however the flight to safety was clear, as initial buying was seen in safe haven assets. The Asian buying was short lived, as last week’s hawkish tone continued to weigh on treasuries through the afternoon of Asian trade. lOy paper is struggling, despite some reprieve seen in Bunds and Gilts, the selling pressure is evident with Gilts trading near session lows around 124.96.

• Top European News
• BOE Staff Vote in Favor of Strike Action Over Pay, Unite Says
• U.K. Manufacturing Slowdown Raises Doubts About Economic Outlook
• Euro-Area Manufacturing Accelerates as Orders Fuel Optimism
• Nets Rises on Deal Report; Wirecard Leads Payments Peers Higher
• Poland’s Kaczynski Invokes Nazis as EU Refugee Clash Deepens
• EU Presidency Clouded by Feud Threatening Host’s Government
• Thyssenkrupp Rises on HB News; Bankhaus Lampe Expects Tata Deal

Looking at Monday’s economic data, we’re kicking off in Europe with the final revisions to the June manufacturing PMIs along with a first look at the data for the UK and periphery. Also due out this morning is the Euro area unemployment rate for May. Over in the US we’ll also receive the final manufacturing PMI revision along with the manufacturing ISM for June and May construction spending. Later in the day we’ll also get June vehicle sales data.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, est. 52.1, prior 52.1
• 10am: ISM Manufacturing, est. 55.2, prior 54.9; Prices Paid, est. 58.5, prior 60.5; New Orders, prior 59.5; Employment, prior 53.5
• 10am: Construction Spending MoM, est. 0.25%, prior -1.4%
• Wards Total Vehicle Sales, est. 16.5m, prior 16.6m
• Wards Domestic Vehicle Sales, est. 12.9m, prior 12.8m

DB’s Jim Reid concludes the overnight wrap

As I reflected on H1 over the weekend, the highlight at home was welcoming back my wife and Maisie yesterday from “In the Night Garden” live. For those not in the know this is basically hallucinogenic Teletubbies. My wife bought Maisie a huge replica of star character Upsy Daisy (who she also had a meet and greet with) and from the moment she got given her to the moment she went to bed 8 hours later she refused to let her go. She wouldn’t eat lunch or dinner without her by her side. She wouldn’t walk around in the house or garden without dragging her along (impressive as she’s bigger than her) and wouldn’t let me change her nappy without Upsy helping and she wouldn’t go to  bed without her in her cot. It was very sweet but she really wasn’t interested in Daddy all day. Good preparation for the teenage years.

Bond markets went a bit Upsy Daisy last week and it’s hard to imagine that it was only this time last week that we were saying there wasn’t much to get excited about in markets but that there were a couple of events that we should keep an eye on in the week ahead. One of these was the ECB forum in Sintra. Although a big focus, little did we know what that event would unleash in financial markets last week. I suppose one of the big questions is whether the slew of hawkish central bank speak was vaguely co-ordinated or whether there was an element of randomness to it. It felt like the former but these words will be meaningless if the data (growth and inflation) doesn’t come through but last week’s comments probably indicate that the data bar has been lowered for tightening. Rather than looking for a reason to tighten it feels that we’ve entered a period where central banks might be looking for a reason not to.

So we will perhaps become a little more sensitive to data and as we highlight in the week ahead, today is global PMI/ISM day and a big event in the monthly calendar. The US is off for Independence Day tomorrow so trading might  be thin this week especially in the early half. By the end of the week we have another payroll number to look forward to after last month’s disappointing 138k print. Before we get there, it’s not been a particularly busy weekend for newsflow but there are a few bits and bobs worth pointing out. The first concerns more chatter out of the ECB. Bundesbank President Jens Weidmann told an audience in Germany that “at the moment we see that the economic situation is rather positive” and that “if this sustainably passes on to inflation rates then monetary policy needs to be more taut, and it’s not about putting full brakes on monetary policy, but to lift one’s foot off the gas a little”. His fellow board member, Yves Mersch, said a day later that recent ECB policy has been successful but it is not yet self-sustained and the ECB needs to continue to have “patience with this policy”. Mersch also indicated that the ECB doesn’t necessarily have to wait for inflation to hit 2% before adjusting policy.

The other significant news to report is out of Japan where PM Abe has suffered a landslide defeat in the Tokyo elections with city governor Yuriko Koike’s new party appearing to be headed for a big victory. Koike’s Tomin First party captured 49 of the 127 assembly seats while Abe’s Liberal Democratic Party won just 23 seats (down from its current 57 seats). That total for Abe is less than the previous record low for his party of 38 seats set in 1995 and 2009. With the support of the Komei Party, the Tomin First will easily secure a comfortable majority in the assembly. The FT is reporting that the result could spur Yurkio Koike to mount a similar challenge against Abe in a national election. Abe has called for an extraordinary meeting within his party this morning while reports are suggesting that the result could force Abe to reshuffle his cabinet and, according to Bloomberg, slow down his push to revise Japan’s pacifist constitution.

While seemingly a surprise, the Yen is little moved post that result although that may in part reflect an overall upbeat Q2 Tankan survey in Japan this morning. The headline manufacturing index for large manufacturers rose 5pts to +17 (vs. +15 expected) while the outlook index rose 4pts to +15 (vs. +14 expected). Nonmanufacturing readings also rose, as did readings for smaller manufacturers. Meanwhile the Nikkei manufacturing PMI in Japan this morning was revised up 0.4pts to 52.4 (versus 53.1 in May). The Nikkei (+0.13%) and Topix (+0.10%) are a shade higher as we go to print. Meanwhile in China this morning the Caixin manufacturing PMI printed back above 50 again at 50.4 (vs. 49.8 expected) which is a rise of 0.8pts from May. Despite that bourses in China are weaker (Shanghai Comp -0.30%) while the Hang Seng is little changed. It’s worth also highlighting this morning that it is the first day of the China-Hong Kong bond connect which mirror the two stock-connect programmes.

Moving on and quickly recapping how markets finished up on Friday. Given the magnitude of the moves for bonds over the week, while weakening a bit more of Friday the moves were relatively subdued all things considered. 10y Bund yields finished 1.4bps higher at 0.465% which means for the week as a whole they were 21.2bps higher. That is the biggest weekly sell-off since December 2015. Gilts were 0.7bps higher on Friday at 1.257% and for the week were 22.6bps higher (weakest since November 2016). OATs were less than 1bp higher on Friday and 20.8bps higher for the week. Meanwhile the periphery finished up to 1.8bps higher on Friday and for the week yields were higher by 11.9bps to 23.9bps. As we know, Treasuries got swept up in the moves too. Yields were another +3.7bps on Friday to close above 2.300% and for the week were 16.1bps higher (most since March 2017). As we’d seen over the week the sell-off for bonds continued to weigh on equity markets in Europe with the Stoxx 600 (-0.34%) ending lower for the fourth consecutive day. For the week the index was down -2.13% which is the fourth down week in succession and the weakest since November last year. It was however a slightly better story across the pond where the S&P 500 edged up +0.15% on Friday to trim its weekly loss to a more modest -0.61%. Further gains across the commodity complex and particularly late in the day for Oil (WTI +2.47% and back above $46/bbl) certainly seemed to help.

Friday’s moves for bonds in Europe could probably be put down to the flash June inflation report for the Euro area. As indicated by some of the regional reports, inflation was a little firmer than expected with headline CPI of +1.3% yoy beating estimates for +1.2% (although down from +1.4%) and core CPI of +1.1% yoy beating the consensus estimate for +1.0%. That core reading marked an increase of two-tenths from May.

Meanwhile in the US the core PCE deflator for June was confirmed as rising +0.1% mom as expected which puts the annual rate at +1.4% yoy and down one-tenth from May. Elsewhere personal spending nudged up +0.1% mom which matched the consensus although real personal spending (+0.1% mom vs. +0.2% expected) was a modest disappointment. Personal income was up a relatively robust +0.4% mom in May and a tenth more than expected. Away from that the Chicago PMI for June rose to a surprisingly high 65.7 (vs. 58.0 expected) which marked a jump of 6.3pts. That was in fact the higher level since May 2014 which is likely to be a supportive read through for today’s manufacturing data. The other data out on Friday across the pond was the final revision to the June University of Michigan consumer sentiment reading (revised up 0.6pts to 95.1). 1-year ahead inflation expectations were left unchanged at 2.6% however 5-10 year expectations were revised down one-tenth to 2.5%. It’s worth noting that the Atlanta Fed revised down their Q2 GDP forecast by two-tenths to 2.7% on Friday.

On to the week ahead now. Today we’re kicking off in Europe with the final revisions to the June manufacturing PMIs along with a first look at the data for the UK and periphery. Also due out this morning is the Euro area unemployment rate for May. Over in the US this afternoon we’ll also receive the final manufacturing PMI revision along with the manufacturing ISM for June and May construction spending. Later this evening we’ll also get June vehicle sales data. Tuesday looks to be quiet with Independence Day in the US. The main attraction is likely the RBA meeting overnight while the only data due out is Euro area PPI. Wednesday looks to be much busier. Overnight in Asia we’ll receive the remaining Caixin PMIs in China and Nikkei PMIs in Japan. In Europe we’ll also get the remaining services and composite PMI revisions as well as retail sales data for the Euro area. In the US on Wednesday data due out includes factory orders for May and the final durable and capital goods orders revisions for May. The FOMC minutes from the June meeting will then be out in the evening. Turning to Thursday, factory orders in Germany is the only release of note in Europe while in the US we’ll get the June ADP print, initial jobless claims, May trade balance, ISM non-manufacturing for June and the final PMI revisions (services and composite). We close out the week in Europe on Friday with industrial production in Germany and trade data and industrial production in France and the UK. In the US on Friday it’s all about the June employment report including nonfarm payrolls.

Away from the data, the Fedspeak this week consists of Bullard this morning, Powell on Thursday and Fischer on Friday. The ECB’s Praet and Nowotny speak tomorrow and Weidmann and Nowotny speak on Thursday on the future of the euro. The ECB minutes are also due out on Thursday. Other events to note this week are China President Xi Jinping’s visit to Moscow on Tuesday where he is due to meet Putin. Germany’s Merkel and China’s Xi meet ahead of the G20 summit on Wednesday and the summit itself is on Friday and Saturday. The Fed will also publish its 2017 monetary policy report to Congress on Friday ahead of Yellen’s testimony on July 12th.

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Authored by Ahmed Chari via The Strategic Culture Foundation,

Qatar has been known for years as a small peninsula nation that punches far above its weight. Its immense oil wealth and enormous influence, through its English- and Arabic-language Al Jazeera channels, have given it diplomatic clout across the Arab world. Its soft power has been felt in negotiations in Darfur, Tripoli, Sanaa and elsewhere. Everywhere it has been either admired or envied.

Now Qatar is on its back feet, fighting off criticism from all sides. Qatar’s candidate to run UNESCO is now almost certain to lose; a few months earlier, he was the frontrunner. Activists are pressing FIFA to bar Qatar from hosting the World Cup. Pressure is mounting to close the U.S. air base in Qatar; U.S. Air Force general Charles Wald, who opened the base in 2001, is now, in retirement, publicly calling for its closure. A coalition of thirty-four thousand predominantly African American churches protested Qatar in Washington, DC, on June 28, citing Qatar’s persecution of Christians, Jews and other religious minorities. (Qatar bans crosses on the outside of churches and bars public prayer by Christians, even though there may be more Christians in the country than the three hundred thousand native Qataris.) The protest, outside Qatar’s embassy at Twenty-Fifth and M Streets, is the first-ever public demonstration against Qatar in Washington. It won’t be the last.

What happened? Qatar was found to be funding the enemies of America and its Arab allies. Washington policymakers are concerned that Qatar has funded, according to the U.S. State department, Al Qaeda affiliates in Syria as well as elements of ISIS—the very groups America is bombing in its campaign to liberate northern Iraq. It also supports Hamas, which both the United States and EU have designated as a terrorist organization. Bahrain believes that Qatar is supporting armed opposition groups against its royal family. The Saudis fault Qatar’s financial support to the Yemen-based Houthi rebels (opposed to the Saudi regime) as well as Qatar’s backing for violent opposition groups in the Saudi province of Al Qatif, which is mostly Shia.

Meanwhile, Qatar has offered a sanctuary to the Muslim Brotherhood and known terrorists. The oil sheikhdom also shelters the Muslim Brotherhood’s spiritual guide, Yusuf al-Qaradawi; Khaled Meshal, who was until recently the leader of Hamas; and Abbassi Madani, an Algerian Islamist leader—as well as many Taliban leaders. Nor was Qatar simply giving these extremists a roof and a cot. It gave them a platform, through Al Jazeera, to raise funds, woo followers and boost their prestige.

In contrast with its neighbors’ conflicts with Iran, Qatar is in business with the Islamic Republic. It shares with Iran the Pars Sud gas field, one of the world’s largest.

While Iran was under embargo, Qatar continued to sell Iranian natural gas to Europe. The shared gas field gave Qatar the perfect cover to help its partner in crime, Iran. Yet shipping by sea is slow, costly and risky. Qatar proposed a pipeline across Syria to move Iran’s energy products (as well as its own) to the power-starved European market. A pipeline would have cut costs while strengthening Qatar’s hand. The Syrian dictator soon put an end to this pipe dream.

In short, Qatar’s support for Iran was the last straw for its neighbors. The U.S. State Department is trying to be neutral, and is asking for evidence of Qatar’s transgressions. Meanwhile, President Donald Trump has been far clearer: he has demanded that Qatar stop funding America’s enemies.

Clearly, Qatar must stop opening the money spigot for groups designated as terrorists by its allies, and it should turn over the terror leaders it is hosting to face justice in their native lands.

The U.S. State Department should also invite Morocco to help. Iran, and indirectly Qatar, is backing armed uprisings by minority Shia groups across the Sunni-majority Arab world. Morocco’s king, Mohammed VI, is also his kingdom’s supreme religious ruler. His words and moderate religious teachings have calmed restive Shia populations and inspired them to oppose violence. Under the king’s leadership, Morocco is now enjoying a new influence in Africa. Mohammed VI, as a spokesman for political and religious moderation, is an important voice to combat Shia uprisings and Sunni reprisals.

Qatar must stop fanning the flames of Islamic division, and Morocco and the Gulf Arabs should be given a real chance to head off a religious civil war between Sunnis and Shia, which could cost millions of lives in a war that could drag on for decades.

We have come to a time when confrontation with Qatar will produce peace, and compromising will lead to war. Trump’s instincts are right. If Qatar doesn’t change, the world around it will.

via http://ift.tt/2sCAz9W Tyler Durden

With Illinois, which on Saturday morning entered its third fiscal year without a budget, facing a catastrophic downgrade, late on Sunday evening the Illinois House approved the most controversial element of a budget package, a tax hike which will increase the income tax rate by 32% from 3.75% to 4.95%, and the corporate income tax rate from 5.25% to 7%, to try and end a historic budget impasse. The bill passed 72-45. The House also approved a $36 billion spending plan minutes later on a 81-34 vote. According to the Sun Times, it cleared an initial hurdle on Friday with 23 Republicans voting “yes.”

“While no one could say this was an easy decision, it was the right decision,” House Speaker Mike Madigan said after the spending bill vote. “There is more work to be done.” Dems said they would work with Republicans on other resolution of other issues on table.

The proposed tax increase will now head back to the Illinois Senate, which approved a revenue bill on May 23 with all Democratic votes as part of its “grand bargain” package. But Governor Bruce Rauner has said he’ll only support an income tax hike if it’s limited to four years and paired with a four-year property tax freeze. He’s also still seeking changes in workers’ compensation and pensions.

Commenting on the just passed House bill, Rauner said he’ll veto the revenue bill.

“I will veto Mike Madigan’s permanent 32% tax hike. Illinois families don’t deserve to have more of the hard-earned money taken from them when the legislature has done little to restore confidence in government or grow jobs,” Rauner said.

“Illinois families deserve more jobs, property tax relief and term limits. But tonight they got more of the same.” He also said in an emailed statement that “if the legislature is willing to pass the largest tax hike in state history with no reforms, then we must engage citizens and redouble our efforts to change the state.”

Some commentators promptly countered that Rauner’s veto will likely be overriden.

The tax bill passed with some essential Republican support: it needed 71 votes. But Illinois House Republican Leader Jim Durkin questioned how it will address the state’s $14 billion backlog. Durkin is seeking to get Rauner the “balanced budget package,” he wants, which includes spending reductions and “meaningful reforms.”

“I am disappointed that we’re taking this up at this moment when there has been significant, significant progress to address the priorities of the governor and also the priorities of this caucus,” Durkin said.

 

There are, of course, political ramifications to supporting a tax hike, on both sides of the aisle. Some House Democrats were expected to vote no to try to shield themselves from Illinois Republican Party attacks in next year’s election. But some House Republicans, knowing they’d too be targeted for supporting it. said there’s no other choice.

Others were even more fatalistic: “If I lose my seat so be it,” state Rep. Michael Unes, R-Pekin said, adding the state shouldn’t have gotten so close to a financial collapse. “Without this, we will lose thousands of lives and thousands of jobs and the alternative is so much worse. I don’t like this. This is not easy. This is really, really difficult,” Unes said. “But the alternative is much worse than this. The alternative is literally taking our state off the cliff.”

David Harris was among the Republicans who supported the bill, while also urging the governor to sign the revenue and spending bills if passed: “Have the courage to do what is right and bring this madness to an end.” 

“I was not elected as a state legislator to help preside over the financial destruction of this great state,” Harris said. “I respect my colleagues who are voting no. But to me, enough is enough.”

Meanwhile, changes made by House Democrats from the original Senate bill include the removal of streaming and satellite fees. It also closed corporate tax loopholes, increased the earned income tax credit, and restored the research and development and manufacturers’ tax credit to attract more businesses.

House Democrats filed amendments to both the tax and spending measures on Sunday, which included nearly $400 million more in cuts. Although some House Republicans voiced frustrations over changes, House Democrats said they were reflective of topics discussed during negotiations.

It is unclear if the passed tax increase will be sufficient to placate S&P. Recall July 1 was the date when the credit agencies said they would drop the state to “junk” status without a budget. Ultimately, the fate of Illinois’ credit rating is now in the hands of Rauner, and whether and how fast his imminent veto is overriden.

Ultimately, Illinois faces a lose-lose dilemma: get junked and see its funding costs soar, or save its lowest possible investment grade rating, and watch as what is already the worst metropolitan exodus (recently the population of Chicago shrank the most of any US city), go into overdrive as tens of thousands more scramble to escape the state’s soaring tax rates.

via http://ift.tt/2uAj4Zt Tyler Durden