US stocks gap lower, DOW breaks near term support

    US stocks gap broadly lower today. While the decline is so far “relatively” limited, recent support levels are taken out. That is, DOW drops through, 25222.51 support and the fall from 26695.96 is resuming. Similarly, S&P 500 gaps through 2801.43 support to as low as 2778.45 so far.

    Development so far is in line with our view. That is, fall from 26695.96 is the third leg of the consolidation pattern from 26951.81 historical high. Further fall should be seen in near term to 38.2% retracement of 21712.53 to 26695.96 at 24792.28. But we’re looking at at least a break of 61.8% retracement at 23616.20 before bottoming.

    BoC stands pat, drops no hint on rate hike, USD/CAD spikes higher

      Canadian Dollar weakens notably after BoC kept overnight rate unchanged at 1.75% as widely expected. The central bank assessed that economic developments were broadly in line with the April MPR, including growth and inflation.

      Also, recent slowdown in late 2018 and 2019 was “temporary” even though “global trade risks have increased”. Thus, “degree of accommodation being provided by the current policy interest rate remains appropriate.”

      BoC also sounded noncommittal to any future rate move. It just noted that “Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment”. That is, for the near term, there is still no chance of a rate hike.

      USD/CAD spikes higher to 1.3546 after the release, through 1.3521 resistance. But there is no follow through buying yet. Further rise is in favor as long as 1.3429 support holds.

      Full statement here:

      Bank of Canada maintains overnight rate target at 1 ¾ per cent

      The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

      Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

      Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.

      The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.

      Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.

      Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.

      Into US session: Franc and Yen strong again as China readies rare earth war

        Entering into US session, Swiss Franc and Yen are running as the strongest ones for today. US-China trade war is again the main theme. There are reports that China is weaponizing its dominance on rare earths. Some claimed that might risk serious disruption to US industries. We’re skeptical on the impact of such move. And, the reactions from stocks are relatively mild too, considering DOW future is just down -167pts for the moment. Nevertheless, the message is reinforced. That is, China is not going to back down and rectify its own unfair practices. And the maximum pressure way of Trump is useless. Trade war is not as easy to as it seems to some people and it’s going to drag on longer.

        Staying in the currency markets, for now, Dollar is following as the third strongest for the day shrugging off persistent decline in treasury yields. 10-year yield is currently down -0.0368 at 2.228, and could hit 2.2 handle pretty soon. New Zealand Dollar is the weakest one for today s far, followed by Sterling. Canadian Dollar is a the third weakest as markets await BoC rate decision. Euro is mixed while markets await European Commission’s formal warning letter to Italy for its deficit.

        Some previews on BoC:

        In Europe, currently:

        • FTSE is down -1.31%.
        • DAX is down -1.34%.
        • CAC is down -1.79%.
        • German 10-year yield si down -0.0075 at -0.165.

        Earlier in Asia:

        • Nikkei dropped -1.21%.
        • Hong Kong HSI dropped -0.57%.
        • China Shanghai SSE rose 0.16%.
        • Singapore Strait Times dropped -0.06%.
        • Japan 10-year JGB yield dropped -0.0229 to -0.094.

        ECB Rehn: Central scenario is not recession despite soft patch in economy

          ECB Governing Council member Olli Rehn told Reuters today that the “central scenario is not a recession,” despite the “soft patch in the economy.” Though, he reiterated the unified message that an ample degree of stimulus is still appropriate for now. Policymakers are going to wait for the new economic forecasts, to be released next week, before debating on adjusting monetary policies.

          Regarding the policy framework, Rehn said the definite of price stability should be loosened. Currently ECB sees inflation target as being close to 2%, below 2%. But Rehn said “My view is that 2% is not a ceiling and inflation can deviate in both directions.”

          Italian Deputy Prime Minister Matteo Salvini called for a new role for ECB to “guarantee” government debt in order to keep bond yields low. Rehn bluntly responded saying it goes against the principal of modern central banking that we are forbidden to do monetary financing.”

          ECB: Growth outlook central to all main risks to financial stability

            ECB warned in the Financial Stability Review that “uncertainty about global economic growth prospects has contributed to bouts of high volatility in financial markets”. And, “weaker than expected growth and a possible escalation of trade tensions could trigger further falls in asset prices”.

            The report noted that materialization of downside risks to economic growth could spark greater financial market volatility. Persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments . Bank profitability prospects are subdued given slow progress in addressing structural issues

            ECB Vice President Luis de Guindos said in the statement, “if downside risks to the growth outlook were to materialize, risks to financial stability may arise. And “the growth outlook is central to all the main risks to financial stability.”

            Full statement here.

            Swiss KOF dropped to 94.4, economy developing rather sluggishly

              Swiss KOF Economic Barometer dropped to 94.4 in May, down from 96.2 and missed expectation of 96.2. The reading dived further below its long-term average. KOF noted “Swiss economy is developing rather sluggishly.” And, majority of sets of indicators are tending downwards.

              The indicators for banking and insurance, consumption and foreign demand have developed negatively. The prospects for accommodation and food service activities and the other service providers have become gloomier. In the manufacturing sector, the outlook hardly changed compared to the previous month. For the construction sector, the outlook has improved.

              Full release here.

              France Q1 GDP growth confirmed at 0.3%, exports growth decelerated sharply

                France GDP grew 0.3% qoq in Q1, unrevised from first estimate. Looking at the details, Households disposable income rose 0.9%. However, household consumption expenditure just grew 0.4%. Total gross fixed capital formation slowed down a bit to 0.5%. Overall, final domestic demand excluding inventory changes kept increasing at the same pace. Imports jumped 1.4% due to fuel. Exports growth decelerated sharply to 0.4%, down from 2.0%. Foreign trade balance contributed negatively to GDP growth: -0.3%.

                Full release here.

                Canadian Dollar mixed as BoC expected to stand pat, some previews

                  Canadian Dollar is trading mixed as markets await BoC rate decision. BoC is widely expected to keep policy rate unchanged at 1.75%. At last meeting in April, BoC removed chance of rate hike in the near- to medium- term. The central bank also downgraded GDP growth forecast, and lowered the range of neutral rate.

                  Economic data released since then showed not special deterioration. Headline CPI accelerated to 2.0% yoy but BoC’s preferred gauges of inflation – trimmed CPI, median CPI and common CPI – either eased or stayed unchanged, giving an average reading of +1.9%, down slightly from March’s +1.97%. Job market grew strongly by 106.5k. GDP contracted -0.1% mom in February but 0.3% mom rebound is expected in March. This would probably translate to an annualized growth of 0.7% qoq in 1Q19.

                  BoC Governor Stephen Poloz said recently that , “the natural tendency is for interest rates to still go up a bit”. Though, that depends on whether the slowdown is temporary. Though, Poloz is uncertain about the size and timing of the rate hike. Overall, we’re not expecting any drastic change with today’s announcement.

                  Here are some suggested readings on BoC:

                  New Zealand ANZ business confidence improved to -32.0

                    New Zealand ANZ Business Confidence rose to -32.0 in May, up from -37.5. But all sectors remained deeply negative, with agriculture confidence worst at -63.9. Activity Outlook also improved to 8.5, up from 7.1. Manufacturing scored best in activity at 21.5.

                    ANZ noted that “how quickly the economy will bounce back is a key question. If the forward indicators start to suggest that the Reserve Bank’s relatively sharp V-shaped recovery is overly optimistic, it will be game on for further OCR cuts this year.”

                    Full release here.

                    BoJ Kuroda: Best to manage inflation expectations with flexible targeting framework

                      In academic conference organized by BoJ, Governor Haruhiko Kuroda expressed his openness to flexible inflation targeting. Former ECB President Jean-Claude Trichet also emphasized that medium- to long-term inflation expectations are what really matter.

                      Kuroda said “If missing inflation comes from structural factors such as globalization and digitalization, central banks should continue examining how best to manage inflation expectations .. within the flexible inflation targeting framework.” He also noted the need to expand the policy tools to fight the next downturn. “While policy makers have developed a wide range of unconventional policy tools, their effectiveness and transmission mechanisms may differ depending on financial conditions and economic structure,” Kuroda said.

                      Trichet also said it’s not necessary for central banks to target exactly the same level of inflation in a set period of time. Instead, “there is a consensus among central banks that real success is to solidly anchor inflation expectations in the medium- to long-term in line with their definition of price stability.”

                      EU to decide next Commission and ECB Presidents in June

                        EU28 leaders agreed to have swift process on choosing the next European Commission and ECB Presidents in a meeting overnight. The decision would be made at a June 20-21 summit. But for now, Germany and France seem to be at odds over the choices. German Chancellor Angela Merkel is standing by the center-right German lawmaker Manfred Weber to succeed Jean-Claude Juncker and Commission President. But Weber is seen as is failing to gain traction. French President Emmanuel Macron appeared to be pushing for Brexit negotiator Michel Barnier as a compromise.

                        Macron told reporters after the summit that “the key for me is for the people at the most sensitive positions to share our project and be the most charismatic, creative and competent possible.” On the other hand, Merkel bluntly said “I am warning against telling the EU Parliament that somebody who has only made experiences in parliament is not experienced… And that somebody who has made experiences in the Commission, is experienced. We shouldn’t deal with each other in this currency.”

                        Meanwhile, at least five candidates are believed to be running to succeed Mario Draghi as ECB Presidents. Contenders include Bank of France Governor Francois Villeroy de Galhau, Finland’s Olli Rehn and Erkki Liikanen, and Bundesbank President Jens Weidmann. Chances of Weidmann and de Galhau will depend on who takes the Juncker’s job.

                        US Treasury said limited Yuan intervention seen, but urges China to avoid a persistently weak currency

                          US Treasury announced that nine countries are put in the “monitoring list” on currency manipulation, but no major trading partner is named as manipulator. The nine countries include China, Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, and Vietnam. That conclusion was made even after the Treasury revised and updated the thresholds it uses to assess where unfair currency practices or imbalanced macroeconomic policies may be emerging.

                          In the statement, US Treasury Secretary Steven Mnuchin singled out China and said “Treasury will continue its enhanced bilateral engagement with China regarding exchange rate issues, given that the RMB has fallen against the dollar by eight percent over the last year in the context of an extremely large and widening bilateral trade surplus.”

                          US Treasury also estimated that “direct intervention by the People’s Bank of China in the last year has been limited.” But it surged China to “take the necessary steps to avoid a persistently weak currency”. Also, it urged China to aggressively address market-distorting forces, including subsidies and state-owned enterprises, enhance social safety nets to support greater household consumption growth, and rebalance the economy away from investment.

                          Full statement here.

                          10-year yield breaks 2.27, Dollar shrugs though

                            Recent decline in US 10-year yield resumes today and hits as low as 2.264 so far, breaking even 2.27 handle. Though, much like the fall in German yield earlier today, the move is not much reflected in the forex markets yet. Dollar remains steady for now, even against Yen. Indeed, USD/CHF is extending this week’s recovery from 1.0008 and is heading back towards 1.0119 resistance.

                            We’ll continue to keep an eye on the developments of 10-year yield. For now, based on currently momentum, we’d expect further decline to 61.8% retracement of 1.336 to 3.248 at 2.066, which is close to 2.034 support as well as 2.0 psychological level. Strong support could only be seen around that level to bring sustainable rebound.

                            EU Juncker: Crystal clear, no Brexit renegotiation

                              European Commission President Jean-Claude Juncker reiterated EU’s stance that Brexit agreement is not open for renegotiation. He said before a meeting of EU leaders in Brussels, “I will have a short meeting with Theresa May, but I was crystal clear. There will be no renegotiation.”

                              That’s in complete opposite of what some UK ministers believe in. Foreign ministers Jeremy Hunt wrote in Tuesday’s Daily telegraph. He noted “trying to deliver no deal through a general election is not a solution; it is political suicide… “A different deal is, therefore, the only solution – and what I will pursue if I am leader.”

                              Trade Minister Liam Fox also said “If the EU doesn’t want to negotiate any changes – which I think would be unfortunate and I think would be quite surprising – then I think that of course does increase the chance of a no-deal exit.”

                              US consumer confidence rose to 134.1, no significant pull back in spending ahead

                                Conference Board Consumer Confidence for US rose to 134.1 in May, up from 129.2 and beat expectation of 130.0. Present Situation Index rose to 175.2, up from 169.0. Expectations Index rose to 106.6, up from 102.7.

                                “Consumer Confidence posted another gain in May and is now back to levels seen last Fall when the Index was hovering near 18-year highs,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The increase in the Present Situation Index was driven primarily by employment gains. Expectations regarding the short-term outlook for business conditions and employment improved, but consumers’ sentiment regarding their income prospects was mixed. Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”

                                Full release here.

                                Into US session: German yield dives on Italy concern, US yield follows

                                  Concerns over Italy’s fiscal health is the major focus for today. Deputy Prime Minister Matteo Salvini’s comments confirmed that European Commission is considering to fine the country EUR 3B for breaking EU fiscal rules. European Economic Commissioner Pierre Moscovici was said to be in favor of “dialogue than sanctions”, but there was no confirmation on such position.

                                  Italian 10-year yield surges strongly today and is up 0.1284 at 2.713. On the other hand, German 10-year yield down -0.015 at -0.144, after hitting as low as -0.16. US 10-year yield is dragged down through 2.3 handle too.

                                  Reactions in other markets are muted though. Entering into US session, Yen is so far the strongest one but it’s held above last week’s lows against all major currencies. There is no strength seen in Swiss Franc too, arguing that risk aversion is not totally back yet. For now, Australian Dollar follows Yen as the second strongest. Canadian is the weakest one for today, followed by Franc.

                                  In Europe, currently:

                                  • FTSE is up 0.05%.
                                  • DAX is down -0.28%.
                                  • CAC is down -0.42%.
                                  • German 10-year yield is down -0.015 at -0.144.

                                  Earlier in Asia:

                                  • Nikkei rose 0.37%.
                                  • Hong Kong HSI rose 0.38%.
                                  • China Shanghai SSE rose 0.361% to 2.909.91, regained 2900.
                                  • Singapore Strait Times dropped -0.17%.
                                  • Japan 10-year JGB yield dropped -0.0038 to -0.07.

                                  Eurozone economic sentiment jumped to 105.1, driven by industry and France

                                    Eurozone Economic Sentiment rose to 105.1 in May, up from 103.9 and beat expectation of 103.9. The improvement of euro-area sentiment resulted from higher confidence in industry and, to a lesser extent, in services and among consumers, while confidence remained virtually flat in retail trade and cooled down significantly in construction.

                                    Amongst the largest euro-area economies, the ESI increased sharply in France (+4.0), markedly also in Italy (+1.7) and Spain (+1.3) and mildly in Germany (+0.4). Sentiment eased only in the Netherlands (-1.3).

                                    Industrial Confidence rose to -2.9, up from -4.3 and beat expectation of -4.2. Services Confidence rose to 12.2, up from 11.8 and beat expectation of 11.0. Consumer Confidence was finalized at -6.5.

                                    For EU28, ESI was muted, up 0.2 to 103.8 only. That was mostly due to a strong deterioration in the largest non-euro area EU economy, the UK (-4.8).

                                    Also released, Business Climate dropped -0.12 to 0.30, below expectation of 0.40. Managers’ views on the past production, as well as export order books deteriorated sharply, as did, to a lesser extent, their assessments of overall order books, while the production expectations and appraisals of the stocks of finished products improved.

                                    Italy Salvini: Let’s see if EU will fine us EUR 3B

                                      Italian Deputy Prime Minister Matteo Salvini said today that European Commission could impose a EUR 3B penalty on the country, for breaking EU fiscal rules. This is in line with other reports that the Commission is ready to start disciplinary steps against Italy on June 5. The actions will likely be confirmed should the Commission send a warning letter to Rome this week.

                                      Salvini said, “let’s see if we get this letter where they give us a fine for debt accumulated over the past and tell us to pay 3 billion euros.” He also pledged earlier, after his far-right League party triumphed in European elections on Sunday , to use “all my energies” to fight his perceived outdated and unfair European fiscal rules.

                                      German GfK consumer confidence dropped to 10.1, downward spiral of economic outlook continued

                                        Germany GfK consumer confidence for June dropped to 10.1, down from 10.2 and missed expectation of 10.4. That’s also the lowest level in more than two years. GfK noted that following a period of stability, the consumer climate was forced to take a small hit once more.

                                        In particular, the steep downward spiral of the economic outlook has continued. The indicator dropped -1.3 to 1.7. It lost almost 32 points within just a 12-month period. GfK added, “The global cooling off of the economy, the endless discussions around Brexit, and the risk of an escalation of the trade conflict with the USA have also put a noticeable brake on the economic outlook of consumers. Persistent trade conflicts pose a particular threat to the export nation of Germany. Weak periods of economic activity have a similar effect on export markets.”

                                        Full release here.

                                        Also from Germany, import price rose 0.3% mom in April, below expectation of 0.5% mom.

                                        Swiss GDP grew 0.6% in Q1, driven by strong domestic demand

                                          Swiss GDP grew 0.6% qoq in Q1, accelerated from prior 0.3% qoq and beat expectation of 0.4% qoq. SECO noted that “Growth was driven primarily by increasing domestic demand. Foreign trade also provided positive impetus. Value added grew in most sectors.”

                                          On the positive side, private consumption grew slightly above average for the first time in six quarters, at 0.4%. The increase in consumption expenditures were also broad-based, in almost all segments. Additionally, most service sectors development positively in Q1. Manufacturing saw dynamic growth at 1.5%. Production stepped up in the pharmaceutical industry as well as in watchmaking and precision instruments.

                                          Full release here.