Market movers today

It has been an ext remely busy week but it is not over yet ! The most important event today is whether Trump is going to publish the full list of the Chinese tech products (USD50bn) being hit by 25% tariffs or not. And perhaps more importantly, how will China then react over the weekend? Risk of an escalation has increased.

In the US, we will keep an eye on the Empire manufacturing index and the preliminary consumer confidence index from University of Michigan. Especially the former will be interest ing, as we have mixed signals from the manufacturing sector at the moment .

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We expect the Russian central bank to cut its policy rate from 7.25% to 7.00% today.

Selected market news

The ECB announced its formal end to QE at its monetary policy meeting yesterday, saying that it will buy bonds unt il the end of the year with a purchase rate of EUR15bn per month in Q4. At the same time, the ECB stepped up its forward guidance on rates and said interest rates will remain at their present levels at least through the summer of 2019. This means that we expect the first ‘live’ meeting t o be in Sept ember 2019. While timing of the announcement was somewhat of a surprise as we expected the ECB to change its communicat ion in July and not in June, the announcement was as we expected and we maintain our call on the first ECB rate hike being by 20bp in December 2019.

Overall, Mario Draghi struck a dovish tone throughout the ECB press conference and markets took the introductory statement and Q&A as dovish: the euro weakened and European fixed income markets rallied significantly. There remain a lot of ‘ifs’ in the statement (i.e. ‘st ate dependency’), making the further reduct ion of QE in Q4 and first hike timing still dependent on incoming data on economic/inflation developments. We still think the ECB will continue to be dovish, at least in the near term. See ECB Review: End of APP – but stronger on rate guidance.

The Bank of Japan (BoJ) kept i ts monetary policy unchanged with an 8-1 vote as widely expected. The BoJ downgraded its assessment of inflation and now sees the CPI inflation in a range of 0.5-1% which indicates that the BoJ might revise down its inflation out look when it releases its quarterly forecast update in July. Hence, the BoJ is not in the normalisation camp with central banks like the Fed and ECB. We expect the BoJ to keep its current yield curve control unchanged for the next 12 months. USD/JPY trades slightly higher after the announcement and has generally been supported by a const ruct ive risk sent iment overnight .

Political uncertainty remains high in the UK, as the Conservat ive Party remains ext remely divided on how to proceed with the Brexit negot iat ions and not least what a “meaningful vote” in the UK parliament means in practice. A couple of days ago, it seemed likely that PM Theresa May would pass her EU withdrawal bill, but the development yesterday suggests that she might lose the vote when the bill returns to the House of Commons next week (House of Lords vote on Monday). May thinks she has the numbers to avoid a defeat to the Conservative anti – Brexiteers and soft Brexiteers. Overall, do not expect much to be agreed upon at the EU summit on 28-29 June, making the EU summit in October even more important.

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