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Notes/Observations

Brexit negotiations begin under a complicated UK political landscape

Overnight

Asia:

Japan May Trade Balance registers its first deficit in 4 months (-¥203B v + ¥43Be); components mixed (exports missed expectations while imports beat)

IMF annual economic article IV consultation: Japan should avoid withdrawing fiscal policy stimulus and to keep monetary policy accommodative through 2018 to accelerate growth and achieve higher inflation

Japan PM Abe intends to refresh his cabinet in Aug/Sept amid approval rating decline but expected to keep Fin Min Aso and top spokesman Suga

RBA Gov Lowe: Economy was capable of stronger growth and Australia would fall behind without sharp focus on reforms

China annualized property price growth continued to slow; Prices rise in 56 out of cities vs. 58 prior

Europe:

Brexit Min Davis statement heading into Brussels talks: We are leaving the European Union, and delivering on that historic referendum result; approaching talks in a constructive way, knows there will be difficult points

Senior Conservative party lawmakers said to have threatened a leadership challenge to PM May if she softens her stance on Brexit terms; PM May has 10 days to save her premiership after she was put on notice to "shape up" and show she is fit to lead. Amber Rudd (interior Min) likely candidate to replace May; David Davis tipped to become next conservative leader by Boris Johnson's allies

President Macron's "En Marche" party (with centrist ally) said to take 361 out of the 577 seats in the National Assembly following 2nd round of parliamentary elections (**Insight: France's National Assembly has 577 seats (289 seats needed for majority). Le Pen said her National Front party to win at least 6-7 seats; Le Pen said to win in the northern Henin-Beaumont district with ~59% of the vote.

BOE's Financial Policy Committee (FPC) said to discuss ending Term Funding Scheme at a meeting this week. Move could pave the way for a rise in interest rates as soon as August

Canadian ratings agency DBRS affirmed UK sovereign rating at AAA with Stable trend

Americas:

Fed's Kaplan (moderate, voter): will be patient about making another rate hike

White House: President Trump to appoint James Clinger as chief of Federal Deposit Insurance Corporation (FDIC)

Trump personal lawyer: Trump not under investigation in probe into alleged Russian meddling in 2016 US Presidential race

Energy:

Saudi Oil Min Al-Falih: Market fundamentals are going in the right direction, the market just needs time to rebalance

Economic Data

No major data seen in session

Fixed Income Issuance:

(NO) Norway sold NOK4.0B vs. NOK4.0B indicated in 6-month Bills; Avg Yield: 0.39% v 0.40% prior; Bid-to-cover: 2.44x v 3.01x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx 600 +0.75% at 391.5, FTSE +0.6% at 7510, DAX +1.0% at 12875, CAC-40 +1.0% at 5316, IBEX-35 +0.9% at 10859, FTSE MIB +0.2% at 20989, SMI +0.3% at 8994, S&P 500 Futures +0.3%]

Market Focal Points/Key Themes European Indies trade sharply higher this morning with the French CAC slightly outperforming after a comprehensive victory for French President Emmanuel Macrons party in the parliamentary elections, with shares of Airbus and Schneider Electric leading gains. In corporate new shares of Lemminkainen trades sharply higher after announcing an all share combination with YIT Corp, while shares of Philips trade over 5% higher after reports from the UK press that Third point were looking to build a stake. Ocado shares are outperforming in the UK following WholeFoods acquisition by Amazon, with potential takeover cited.

Equities

Consumer discretionary [Europcar [EUCAR.FR] +3.0% (To acquire Goldcar for EV €550M), Ocado [OCDO.UK] +9% (Analyst upgrade, M&A speculation)

Materials: [CropEnergies [CE2.DE] +3.7% (Prelim Q1, Raised outlook)]

Industrials: [Lemminkainen [LEM1S.FI] +40%, YiT Corp [YTY1V.FI] +4.5% (Lemminkainen to merge into YIT in all stock transaction), Rolls Royce [RR.UK] +1.4%, Airbus [AIR.FR] +1.7% (Paris airshow comments)

Healthcare: [Philps [PHIA.NL] +6% (Shares targeted by activist investor), Quantum Genomics [ALQGC.FR] -13% (Details positive results from its Phase IIa trial of QGC001 for the treatment of arterial hypertension)]

Speakers

ECB's Smets (Belgium): ECB to decide on QE before the end of 2017. Needed to see inflation expectations re-anchored and would look very closely at wage growth. Start of Brexit negotiations is a sad day; process will hurt the UK more than the Euro Area

EU Barnier commented as formal negotiations began that must first address uncertainties caused by the Brexit process. Hoped to agree on a time-table and agree on priorities at today's talks

UK Brexit Min Davis: Interested in a good deal for all citizens

UK Foreign Min Johnson: Realistic prospect that our friends and partners would want to do this Brexit deal. There was much more goodwill from our European friends and partners than you might pick up from the debate in the UK

Euro Working Group (EWG) chief Wieser: Greece could return to the markets between autumn this year and spring 2018 subject to proper handling and good

Slovakia Finance Ministry updated its economic outlook which maintained 2017 GDP at 3.3% and raised 2018 GDP growth forecast from 4.0% to 4.2% and 2019 growth forecast from 3.9% to 4.4%

Turkey said to be considering hedging requirement for private companies that have more than $15M in FX debt

Czech Central Bank Vice Gov Tomsik: CZK currency (Koruna) appreciation reduced the need for rate hikes. Stronger CZK currency might deliver a bigger part of tightening and possible delay a rate hike from Q3 to Q4 period

Japan PM Abe: To continue to place the economy as the top priority

Currencies

GBP was firmer against the major pairs as BoE turned increasingly hawkish in recent days and less willing to look through rising inflation. BOE's Financial Policy Committee (FPC) said to discuss ending Term Funding Scheme at a meeting this week. Move could pave the way for a rise in interest rates as soon as August. GBP/USD probing the 1.28 level just as Brexit negotiations began.

USD/JPY was higher and holding above the 111 level. The price action a part of follow-through from last week's Fed statement and apartly also attributed to some political uncertainty in Japan. Reports that PM Abe intended to refresh his cabinet in Aug/Sept amid approval rating decline but was expected to keep Fin Min Aso and top spokesman Suga. Analyst noted that the current 49% approval rating in the Nikkei poll was not the Cabinet's lowest rating since Abe was elected. (Note: rating fell to about 40% in the summer of 2015 and above the 40% seen as the baseline for stable governance)

Fixed Income

Bund futures trade at 164.70 down 5 ticks and in a relatively tight range so far in the session. Resistance lies near the 164.60 level, followed by 165.52. A break of the 163.89 support level could see lows target 162.05 followed by 160.30.

Gilt futures trade at 129.13 down 7 ticks after weekend press reported the BOE is considering ending the term funding scheme. Price is continuing its declines from middle of last week. If price remains under pressure and drops below the noted 129.14 level and initial support lies 128.27 level, with key support at the 127.96 support level. An acceleration lower could test the 127.43 region. Resistance lies at the 129.80 level followed by 132.65.

Monday's liquidity report showed Friday's excess liquidity fell to €1.653T a decline of €9B from €1.662T prior. Use of the marginal lending facility dropped to €339M from €226M prior.

Corporate issuance saw $14B issued last week, below of last week's forecast of $20B. For the week ahead, analysts eye issuance to come in around $20B.

Political/In the Papers:

US military on Sunday shot down a Syrian Air Force fighter jet over the weekend

Iran fired missiles on Sunday into eastern Syria, aiming at the bases of militant groups it holds responsible for attacks in Tehran

Spain Socialist leader Sanchez launch a new bid to build an alliance with other opposition forces to challenge the conservative minority government

Looking Ahead

(UR) Ukraine Q1 Final Q/Q: No est v -0.3% prelim; Y/Y: 2.0%e v 2.4% prior

(IL) Israel Jun CPI 12-month Forecast: No est v 0.7% prior

(SA) Saudi Arabia May Oil production - Jodi

05:30 (BE) Belgium Debt Agency (BDA) to sell €2.7-3.2B in 2024, 2027 and 2047 OLO bonds

05:30 (NL) Netherlands Debt Agency (DSTA) to sell €2.0-4.0B in 3-Month and 6-Month Bills

06:45 (US) Daily Libor Fixing - 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)

07:00 (BR) Brazil Jun IGP-M Inflation (2nd Preview): -0.6%e v -0.5% prior

07:25 (BR) Brazil Central Bank Weekly Economists Survey

08:00 (PL) Poland May Employment M/M: 0.1%e v 0.2% prior; Y/Y: 4.6%e v 4.6% prior, Average Gross Wages M/M: -2.6%e v -1.9% prior; Y/Y: 4.9%e v 4.1% prior

08:00 (US) Fed's Dudley (dove, FOMC voter)

08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming auctions (Bills on Tues)

08:15 (UK) Baltic Dry Bulk Index

08:50 (FR) France Debt Agency (AFT) to sell combined €5.0-6.2B in 3-month, 6-month and 12-month BTF Bills

09:30 (DE) German Chancellor Merkel in G20 discussion in Hamburg

09:30 (EU) ECB announces Covered-Bond Purchases

09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

11:30 (US) Treasury to sell 3-Month and 6-Month Bills

12:00 (UK) EU's Barnier with UK Brexit Min Davis

16:00 (US) Weekly Crop Progress Report

19:00 (US) Fed's Evans speaks in New York

GOLD Monitoring uptrend channel.

Goldis now monitoring the lower bound of the uptrend channel. Hourly support is located at 1249 (intraday low). Stronger support is given at 1214 (09/05/2017 low). Expected to show renewed upside pressures.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

SILVER Selling pressures continues.

Silver declines. Closest support is given at 16.44 (18/05/2017 low). Strong support is given at 16.06 (09/05/2017 low). Key resistance is given at a distance at 19.00 (09/11/2017 high). The road seems wide open for further decline.

In the long-term, the death cross indicates that further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

CRUDE OIL Heading to support at 43.76

Crude Oilis finally continuing its decline since the recent collapse from $52. Support is given at a distance 43.76 (05/05/2017 low). Expected to show further decline.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. Strong support lies at 24.82 (13/11/2002) while resistance can now be found at 55.24 (03/01/2017 high).

EUR/JPY Monitoring symmetrical triangle

EUR/JPY has bounced back after breaking hourly support given at 122.56 (18/05/2017 low) has been broken. Hourly resistance can be found at 125.82 (16/05/2017 high). Major support is given at 114.90 (18/04/2017 low). Expected to push higher.

In the longer term, the technical structure validates a medium-term succession of lower highs and lower lows. As a result, the resistance at 149.78 (08/12/2014 high) has likely marked the end of the rise that started in July 2012. Strong support at 94.12 (24/07/2012 low) looks nonetheless far away.

EUR/GBP Bearish pressures increase.

EUR/GBP is back below former support given at 0.8787 (13/03/2017 high). Other support can be found at 0.8652 (08/06/2017 low). Expected to further decline.

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 psychological level.

EUR/CHF Failing to hold above 1.0900.

EUR/CHF's bearish pressures are back. Yet, we believe that the medium-term pattern suggests us to see continued bearish pressures towards hourly support that can be found at 1.0792 (03/05/2017 low).

In the longer term, the technical structure is mixed. Resistance can be found at 1.1200 (04/02/2015 high). Yet,the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

USD/JPY Consolidating.

USD/JPY is trading sideways after short-term surge. Hourly support can be found at 108.89 (14/06/2017 high). Strong support is located at 108.13 (17/04/2017 low). Hourly resistance given at 110.81 (09/06/2017 high) has been broken. Other key supports lie at a distance 106.04 (11/11/2016 low). Expected to show continued increase towards resistance given at 112.13 (24/05/2017 high

We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CAD Trading sideways.

USD/CAD has strongly declined and is now consolidating. Hourly support lies at 1.3165 (14/06/2017 high). Expected to show continued weakness towards support given at 1.3010 (16/02/2017 low)

In the longer term, the pair lies in a bullish channel since a year. Strong resistance is given at 1.4690 (22/01/2016 high). Long-term support can be found at 1.2461 (16/03/2015 low).

AUD/USD Profit-taking.

AUD/USD is pushing higher since the pair has failed to reach hourly support given at 0.7329 (09/05/2017 low). The technical structure is clearly positive and the pair should head towards resistance at 0.7750 (21/03/2017 high).

In the long-term, we are waiting for further signs that the current downtrend is ending. Key supports stand at 0.6009 (31/10/2008 low) . A break of the key resistance at 0.8295 (15/01/2015 high) is needed to invalidate our long-term bearish view.

EUR/USD Holding below 1.1200.

EUR/USD is trading lower. The pair is still trading below strong resistance given at 1.1300 (09/11/2017 high). Hourly support can be found at 1.1076 (18/05/2017 low). Stronger support lies at 1.0842 (11/05/2017 low). Expected to show renewed bullish pressures.

In the longer term, the momentum is clearly negative. We favour a continued bearish bias towards parity. Key resistance holds at 1.1714 (24/08/2015 high) while strong support lies at 1.0341 (03/01/2017 low).

GBP/USD Short-term strength.

GBP/USD is trading higher above former hourly support given at 1.2757 (21/04/2017 low). Hourly resistance lies at 1.3046 (18/05/2017 high). Expected to show continued short-term increase.

The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY Consolidating.

USD/JPY is trading sideways after short-term surge. Hourly support can be found at 108.89 (14/06/2017 high). Strong support is located at 108.13 (17/04/2017 low). Hourly resistance given at 110.81 (09/06/2017 high) has been broken. Other key supports lie at a distance 106.04 (11/11/2016 low). Expected to show continued increase towards resistance given at 112.13 (24/05/2017 high

We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

The pair is probing above 111.00 barrier again after falling to 110.71 in early Asia. Near-term action remains supported by 200SMA for the second day, which underpins for renewed upside attempts, following Friday’s upside rejection.

On the other side, Doji candle with long upper shadow which was left on Friday after recovery extension was capped by daily Kijun-sen at 111.41, weighs on near-term action. Repeated scenario today would signal strong hesitation at pivotal 110.93 barrier (Fibo 38.2% of 114.36/108.80 downleg) and increase downside risk. Overbought slow stochastic on daily chart supports the notion and may put the pair under fresh pressure on bearish signal on reversal.

Such scenario requires close below 200SMA (20/200SMA death cross is also forming) to signal top and open way for fresh downside.

Conversely, sustained break above 110.93/111.00 (Fibo 38.2% / 55SMA) would signal fresh upside which requires break through falling Kijun-sen (111.32) for extension towards 111.85 barrier (100SMA).

Res: 111.00, 111.32, 111.41, 111.85
Sup: 110.71, 110.41, 110.11, 109.80

The British Pound displayed early signs of volatility during trading on Monday with prices popping above 1.2800 as anticipation mounted ahead of formal Brexit talks this afternoon. Brexit Secretary David Davis will be in the spotlight as he marches with a cavalry of nine-strong negotiators to Brussels calling for a 'deal like no other deal in history'. Although much will be discussed in the talks ranging from the status of expats, the UK's mammoth divorce bill, and Northern Ireland's borders, investors may be more interested in the tone and stance of the European negotiators.

Today could offer a rare opportunity for participants to gain further insight into the overall aim of European negotiators and if they plan to play hardball.

With political instability in Westminster placing the UK in a vulnerable position and Conservatives in a weaker position following the election, the outcome of the Brexit talks may heavily depend on what Europe wants. Although the prospect of a soft Brexit has the ability to support Sterling, I feel the currency remains vulnerable to further downside amid the confusion and ongoing uncertainty that Brexit presents.

With Phillip Hammond sharing his concerns over the impact of having no deal, or even worse, a deal that drains the lifeblood of the UK economy, it will be interesting to see on what terms Britain will leave the European Union.

From a technical standpoint, the GBPUSD still remains under pressure on the daily charts. Repeated weakness below the pivotal 1.2775 should encourage bears to target 1.2600.

Dollar bulls seeking inspiration

The Greenback stabilized against a basket of currencies on Monday after tumbling on disappointing US economic data last week. Price action currently suggests that Dollar bullish investors may be in need of inspiration to support the currency as the effect of June's hawkish surprise wears off. This is a week packed with comments by top Federal Reserve officials and participants may use this opportunity to seek for further clues on future rate hikes.

Although the central bank remains optimistic over the health of the US economy, there seems to be a growing disconnect between what the markets think and what the Fed is signaling. If economic data from the States fails to stabilize and a period of economic softness proves more than just 'transitory', the Dollar could find itself under renewed selling pressure.

Gold struggles below $1260

Gold bulls were missing in action last week with bears making a guest appearance on Monday as the Dollar stabilized. The Fed hawks still have a grip on the zero-yielding metal with the prospect of higher US interest rates this year enforcing downside pressures. If the Dollar continues to stabilize and Federal Reserve officials adopt a hawkish stance this week, Gold could be instore for further punishment.

While the uncertainty surrounding Brexit negotiations and ongoing US political instability is likely to support safe haven assets such as Gold in the medium term, short term bears remain in control below $1260. From a technical standpoint, the GBPUSD is pressured on the daily charts and support around $12260 should transform into a dynamic resistance that opens a path towards $1240.

Commodity spotlight – WTI Oil

Oil prices were slightly pressured on Monday as the continued expansion in US Shale was seen as obstructing OPEC's efforts to stabilize the saturated markets. A stabilizing US Dollar complimented the downside with sellers sending prices towards $44.50. The tale of OPEC vs US Shale is starting to feel like an ongoing battle of attrition with the champion taking the spoils. From a technical standpoint, WTI Crude remains in the bears' territory on the daily charts and a break below $44 should entice sellers to target $43.

Today marks the beginning of the Brexit negotiations. Even though there is the likelihood for sterling to be headline-driven, we believe that over the next few days, market attention is likely to remain primarily on UK domestic politics. The deal between the Tories and the DUP is not finalized yet, while it still remains to be seen whether the Queen's speech will pass through Parliament. As such, it is not certain whether Theresa May will even have a seat on the negotiating table in a few weeks, and with what kind of mandate the UK will approach these talks.

On Sunday, Chancellor Philip Hammond noted that he wants to push for a 'jobs first' Brexit, and also rejected the government's previous mantra that 'no deal is better than a bad deal'. We consider these as preliminary indications that the Conservatives' stance to Brexit may have started to soften up. If more government or Tory officials echo similar remarks, then speculation regarding a smoother Brexit could resurface. Combined with a potential Tory-DUP deal that allows May to keep her position, these factors could prove positive for sterling, as political uncertainty dissipates somewhat. The Queen's Speech on Wednesday has the potential to lift some more of this uncertainty (see below). Even though Parliament will not vote on the Speech until next week, we will probably get some fresh indications on what May's government hopes to achieve in the Brexit talks.

GBP/USD traded in a consolidative manner on Friday, staying slightly below the resistance line of 1.2815 (R1). The pair continues to lie above the longer-term upside support line drawn from the low of the 7th of October, and also above the prior downside resistance line taken from the peak of the 6th of December. Nevertheless, it still trades below the key hurdle of 1.2850 (R2) and the short-term downside resistance line taken from the peak of the 18th of May. Therefore, we prefer to wait for a clear break above these key obstacles before we start getting confident that the pair may appreciate in the near term.

RBA June meeting minutes in focus

During the Asian morning Tuesday, the RBA will release the minutes of its June gathering, where it kept its policy unchanged, and maintained a balanced tone overall. Even though policymakers offered very little new information regarding the next move in interest rates, they did appear slightly more upbeat on the labor market, a sector of the economy they had previously expressed concerns about. Market focus may revolve around their views on this topic again, given that the last two employment reports from Australia have been stellar. Even though this may not be reflected in these minutes, as the latest jobs report was released after the June RBA meeting, we think that the Bank is likely to sound more upbeat with regards to the labor market when it meets again, on the 4th of July.

AUD/USD has been trading in a short-term uptrend since the 2nd of June. On Friday, the pair rebounded from near the 0.7565 (S1) support zone and during the early European Monday, it appears ready to challenge the 0.7635 (R1) resistance, marked by the peak of the 14th of June. A decisive break above that hurdle would confirm a forthcoming higher high on the 4-hour chart and is likely to aim for our next resistance of 0.7675 (R2). One the other hand, a rejection from near 0.7635 (R1) and a dip below the uptrend line taken from the low of the 2nd of June could see scope for a test near 0.7565 (S1). A break below that barrier could signal the completion of a double top and perhaps bring a short-term trend reversal.

Today's highlights:

The economic calendar is relatively empty today. We only have two speakers on the agenda: New York Fed President William Dudley and ECB Governing Council member Jens Weidmann.

As for the rest of the week:

On Tuesday, as we outlined above, we get the minutes from the RBA June meeting. On Wednesday, market focus turns back to the UK, where the Queen's Speech takes place. The Queen will outline a list of laws that the government wants to get approved over the coming year and Parliament will spend the next six days debating these plans, before holding a vote. If Theresa May secures the support of the DUP lawmakers, or if other parties support her policies, she keeps her place as PM. On Thursday, during the Asian morning, the RBNZ rate decision will be in the spotlight. We see the case for a more cautious tone by policymakers. During the European day, the Norges Bank will also announce its decision. On Friday, we get preliminary manufacturing and services PMIs for June from several European nations and the Eurozone as a whole. Canada's CPI data for May are also due out.

GBP/USD

Support: 1.2700 (S1), 1.2635 (S2), 1.2515 (S3)

Resistance: 1.2815 (R1), 1.2850 (R2), 1.2910 (R3)

AUD/USD

Support: 0.7565 (S1), 0.7515 (S2), 0.7500 (S3)

Resistance: 0.7635 (R1), 0.7675 (R2), 0.7700 (R3)

The bullion is set to fall below the 1,245 mark at some time during Monday's trading session. That is being indicated from a technical perspective by the fact that the commodity price has passed the strong support level of the monthly pivot point, which is located at the 1,253 mark. The support of the monthly PP held the bullion from falling below the 1,250 mark more than 40 hours. It is most likely that the commodity price will decline below the 1,245 level, as until that mark there are no notable support levels, which could hinder the fall. Meanwhile, it has to be noted that the commodity price is approaching the support of a long term pattern. The lower trend line of the dominant pattern on Monday morning was located just above the 1,240 mark.

Even though the USD/JPY currency pair remained relatively unchanged on Friday, the bullish momentum seems to be intact. A new trend-line is supporting the pair’s exchange rate, but is unlikely to last long due to its sharp angle. Nevertheless, the Buck is likely to appreciate again today, as there are no significant bearish signals. The recovery could well last until the 111.80 level is reached, where the monthly pivot point rests. Resistance here could be sufficient to reverse momentum, as the Greenback was forced to edge lower in a similar situation in the beginning of the month. A successful breach of the monthly PP, on the other hand, should open the door for a much stronger recovery, with the main target being the 114.40 handle, namely the May’s high.