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Markets

Global core bonds lose ground today with German Bunds underperforming US Treasuries. Yesterday, risk-off prevailed on markets, pushing equity markets down. A bit unusual, core bonds didn’t profit. Risk sentiment rebounded this morning as the US government announced it grants temporary reprieve from the Huawei ban. Although the move’s only goal is to limit the impact on US companies, financial markets are catching a breath. EU equities trended gradually higher throughout the day, weighing on core bonds. With an empty eco calendar, intraday volatility remained muted. The German yield curve is bear steepening with gains up to +1.5 bps (30-yr). The US eco calendar was empty, offering no guidance for US Treasuries. As US investors joined the debates, the risk relief lost some steam and core bonds opened higher again. US equities opened higher but couldn’t prevent US Treasuries to further pair some of its intraday losses. We remain cautious regarding today’s risk relief. The US yield curve is bear flattening with changes varying between +0.4 bps (30-yr) to +1.5 bps (2-yr). Italian Finance Minister Tria repeated that Italy will respect the budget commitments that were agreed with the EU last year. The Italian spread over the German 10-year yield tightens with 7 bps, outperforming other countries as Greece (-4 bps) and Portugal (-4 bps).

The dollar showed a mixed picture. USD/JPY was well bid as sentiment on risk improved. The move even can be considered as a bid ‘outsized’ given the price action in other USD cross rates and the small rise in US yields. In technical trade, the dollar initially also gained some further ground against the euro. However, the move stalled in the 1.1140/45 area, well ahead of the 1.1110 key support area. Later in the session, the pair even reversed most of this morning ‘decline’. The pair is currently again trading in the 1.1150/60 area. A rather strong intraday bid in EUR/JPY probably supported the EUR/USD price action. A substantial narrowing in intra-EMU spreads also suggest a rather positive market attitude on the region. However, we didn’t see any high profile economic or political story to explain today’s intraday swings.

Sterling rebounded today after a protracted decline of late. EUR/GBP still made some minor gains this morning, but the move stalled near the 0.8790 resistance (50% Retracement 0.9108/0.8472 move). Aside from this technical factor, UK PM May announced to unveil a new proposal which she hopes will get enough support (from labour MP’s) to get her Brexit deal through Parliament. The obstacles to get parliamentary approval for the deal remain high. Labour still wants a permanent customs union which many pro-Brexit members in PM May’s own party consider completely inacceptable. The battle within the conservative party to succeed Theresa May as party leader and PM only complicates her effort to reach a cross-party majority. Still some sterling shorts apparently considered the announcement as good enough reason to reduce some exposure. EUR/GBP dropped of the intraday top and is currently trading in the 0.8760 area. Cable also rebound from sub-1.27 levels this morning and trades currently in the 1.2740 area. PM May is expected to reveal her proposal at 4 PM London time.

News Headlines

Reuters quotes US Energy Secretary Parry as saying that the expects the House and the Senate to prepare a bill on restrictions on the companies that work on the Nord Stream 2 natural gas pipeline from Russia to Germany.

UK PM May will lay out a new customs proposal in a speech later today. She is expected to consider tighter customs ties with the EU to try to win over Labour lawmakers and find some sort of crossparty deal. She hopes to put forward a new proposal in the week of June 3rd

The pair accelerated higher in during mid-European trading to hit new 2-week high in early US session on Tuesday. Firm break above key Fibo barrier at 110.31 (38.2% of 112.40/109.02 descend) signaled bullish continuation as fresh rally penetrated rising daily cloud (base lays at 110.43) and cracked 100SMA (110.50), pressuring 20SMA (110.60) and Fibo 50% barrier (110.71). Fresh risk mode on US delay on Huawei restrictions inflate the greenback, as bulls require confirmation on daily close above broken Fibo barrier at 110.31. Extension through 110.60/71 barriers would expose pivotal points at 111.10 / 18 (Fibo 61.8%/daily cloud top. North-heading daily indicators and 5/10MA's in bullish setup and created bull-cross, support scenario, however, overbought stochastic may slow bulls.

Res: 110.60; 110.71; 111.10; 111.18
Sup: 110.31; 110.01; 109.87; 109.80

Pound jumped to session high at 1.2745 on the latest news that PM May will make a speech today (15:00GMT) and present the details of Brexit legislation before parliament vote in June.

May is expected to present her Brexit plan that was rejected three times, but with some significant changes.

Markets is focusing on PM May's speech that would provide fresh direction signals, as today's dip to new multi-month low (1.2685) was short-lived, but subsequent rally was so far limited, suggesting that the pair requires a catalyst for stronger movements.

Daily stochastic is reversing in deep oversold territory and would provide fresh bullish signal, but overall bearish structure would require stronger signal to start changing direction.

Res: 1.2761; 1.2773; 1.2798; 1.2865
Sup: 1.2685; 1.2668; 1.2629; 1.2615

Daily Pivots: (S1) 1.1152; (P) 1.1164; (R1) 1.1176; More.....

Intraday bias in EUR/USD remains mildly on the downside for retesting 1.1111. Firm break there will resume larger down trend for 100% projection of 1.1448 to 1.1183 from 1.1324 at 1.1059. Though, on the upside, above 1.1224 minor resistance will turn bias back to the upside to extend the consolidation from 1.1111 first.

In the bigger picture, down trend from 1.2555 (2018 high) is still in progress. Such decline would target 78.6% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.0813 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1448 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Daily Pivots: (S1) 1.2703; (P) 1.2736; (R1) 1.2757; More....

With today's recovery, a temporary low is possibly in place at 1.2685 in GBP/USD. Intraday bias is turned neutral for some consolidations. Recovery should be limited by 1.2865 support turned resistance to bring fall resumption. On the downside, break of 1.2685 will target 1.2391 low. Larger decline from 1.4376 might be resuming. Break of 1.2391 will target 61.8% projection of 1.4376 to 1.2391 from 1.3381 at 1.2154 next.

In the bigger picture, current development suggests that medium term decline from 1.4376 (2018 high) is not completed, and is possibly ready to resume. Decisive break of 1.2391 would target a test on 1.1946 long term bottom (2016 low). For now, we don't expect a firm break there yet. Hence focus will be on bottoming signal as it approaches 1.1946. In any case, medium term outlook will stay bearish as long as 1.3381 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.0070; (P) 1.0096; (R1) 1.0112; More...

Outlook in USD/CHF remains unchanged and intraday bias remains neutral first. With 1.0126 support turned resistance intact, another decline is mildly in favor. On the downside, break of 1.0050 will resume the fall from 1.0237 to retest 0.9879 key support. However, firm break of 1.0126 will turn bias back to the upside for 1.0237 resistance.

In the bigger picture, as long as 0.9879 support holds, medium term up trend form 0.9186 is still in progress. Break of 1.0237 will target 1.0342 resistance next. For now, we'd be cautious on strong resistance from there to limit upside, until we see medium term upside acceleration. However, decisive break of 0.9879 will be a strong sign of medium term reversal. Focus will be turned back to 0.9716 support for confirmation.

Daily Pivots: (S1) 109.81; (P) 110.06; (R1) 110.32; More...

USD/JPY's recovery form 109.02 extends higher today but outlook remains unchanged. Intraday bias stays neutral and upside should be limited by 55 day EMA (now at 110.83) to bring another fall. On the downside, below 109.81 minor support will turn bias back to the downside for 109.02. Break there will extend the decline from 112.40 to retest 104.69 low. However, sustained trading above 55 day EMA will indicate completion of the fall from 112.40 and bring retest of this high.

In the bigger picture, USD/JPY is staying inside falling channel from 118.65. Currently development suggests that rebound from 104.69 is only a corrective move. And fall from 118.65 is not completed yet. Decisive break of 104.69 will extend the down trend towards 98.97 support (2016 low). For now, we'd expect strong support above there to bring rebound.

Risk aversion eased mildly today as markets respond positive to US decision to delay the sanctions of Huawei for 90 days. After some initial hesitation, Yen sell-off is picking up momentum in early US session, because of rally in stocks and treasury yields. On the other hand, Sterling is recovering mildly, as traders takes profit on short positions. UK Prime Minister Theresa May is set to scheduled to announce her new Brexit deal at 1500GMT.

For now, we'd view the above moves as temporary. Firstly, the move by US Commerce Department was mainly for housekeeping purpose only. That is, it's for preventing sudden disruptions on the internet, telecom on the US side. It's by no means an end to US-China trade tension. More importantly, given the hard line rhetorics from both sides, we're not seeing any chance of a deal in that 90 days window. Secondly, May has repeated history of delivering nothing special on Brexit. Pound could be back under pressure should May disappoint again.

The more sustainable underlying move is in Australian Dollar. RBA Governor Philip Lowe was clear in his speech that they're going to considering cutting interest rate in June meeting. Even if RBA chooses to wait again in June, it looks inevitable that they'll still deliver the rate cut in August. The uncertainty lies only in timing. Aussie will likely stay pressured ahead.

In the currency markets, Aussie is rightly below the weakest one for today so far. Yen follows as second weakest, then New Zealand dollar. Canadian Dollar is the strongest one, followed by Sterling, and then Dollar. Technically, 55 day EMA at 110.84 is a key level to watch in USD/JPY. As long as it holds, further decline is expected and Yen will likely resume recent broad based rise sooner or later. Though sustained break would probably pull other Yen crosses higher together.

In Europe, currently, FTSE is up 0.54%. DAX is up 1.07%. CAC is up 0.61%. German 10-year yield is up strongly by 0.0176 at -0.066. Earlier in Asia, Nikkei dropped -0.14%. Hong Kong HSI dropped -0.47%. China Shanghai SSE rose 1.23% to 2905.97. Singapore Strait Times dropped -0.69%. Japan 10-year JGB yield rose 0.0027 to -0.045.

UK CBI: Investment down, stockpiling up, threat of a no-deal ever present, viable Brexit deal desperately need

UK CBI trends total orders dropped to -10 in May, down from -5 and missed expectation of -5. 23% of manufacturers reported total orders books above normal. 32% said they were below normal. The -10 balance was the worst since October 2016, but stayed broadly in line with long-run average of -13.

Anna Leach, CBI Deputy Chief Economist, said: "With investment down, stockpiling up, and the threat of a no-deal ever present, we desperately need parliament to thrash out a viable deal in the national interest. Where the cross-party talks failed, Parliament must succeed, or continued economic paralysis will see us hurtle ever closer to disaster."

ECB de Guindos: Slower growth momentum increases tail risks

ECB Vice President Luis de Guindos urged Eurozone banks to build extra capital buffers to mitigate the risk of unexpected shocks. He said "the slower growth momentum we are seeing increases the risk of tail events, in other words, shocks that are unlikely to occur, but would have a significant impact on the financial system and the economy if they did."

"The continued build-up of buffers could therefore be justified, especially in those countries where the long upturn may have led to an underestimation of credit risk or where private indebtedness is particularly high or rising."

BoJ Kuroda: Persisting US-China trade war has widespread impact of global and Japanese economies

BoJ Governor Haruhiko Kuroda warned of the impact of US-China trade war again in the parliament today. He said "if trade tensions persist, they would have a widespread impact on global and Japanese economies via business sentiment and market developments." And, "we hope the United States and China engage in constructive discussions."

Finance Minister Taro Aso also told the parliament that "we're seeing some manufacturers delaying capital expenditure plans." However, "corporate profits are high and the fundamentals supporting domestic demand remain solid."

RBA to consider cutting interest rate at June meeting

In a speech delivered today, RBA Governor Philip Lowe said the central bank will consider the case for cutting interests in the upcoming meeting in two weeks' time n June. After weak inflation reading and surge in unemployment rate in Q1, RBA might pull ahead the anticipated rate cut(s) for the second half.

Lowe said "accumulating evidence is that the Australian economy can support an unemployment rate of below 5 per cent without raising inflation concerns". Such judgement is also "consistent with the experience overseas". Meanwhile, recent flow of data suggests it's "less likely" that "current policy settings are sufficient to deliver lower unemployment."

There are few options ahead to lower unemployment rate. These include further monetary easing, additional fiscal support and structure policy changes. But he emphasized "relying on just one type of policy has limitations, so each of these is worth thinking about."

Lowe concluded the speech noting: "A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates."

More on RBA:

• Westpac Moves Rate Profile Forward to June and August
• RBA Removes Rhetoric of "No Strong Case" for Near-Term Rate Cut
• RBA Minutes Signal Easing Bias

US grants housekeeping temporary exemptions on restrictions on Huawei

The US Commerce Department announced limited exemptions on products of Chinese telecom giant Huawei. The move is seen as for keeping the house in order, so as to prevent internet, computer and cell phone systems from crashing

Under the move, Huawei and its 68 non-US affiliates will be granted 90 days temporary general license to have limited engagement in transactions involving the export, reexport, and transfer of items.

With the arrangement, "this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks". The Commerce Department said it will evaluate whether to extend the exemptions beyond 90 days.

OECD lowers global growth forecast on trade tension, but upgrades US

OECD lowered global growth forecast to 3.2% in 2019, down from March projection of 3.3%. Chief Economist Laurence Boone warned that "the fragile global economy is being destabilized by trade tensions." And, growth is stabilizing but the economy is weak and there are very serious risks on the horizon. Governments need to work harder together to ensure a return to stronger and more sustainable growth."

On US-China trade war, OECD warned that an intensification of trade restrictions would have significant costs. The new tariffs and measures announced this month could reduce GDP growth in US and China by 0.2-0.3% on average by 2021 and 2022. Under the scenarios of additional 25% tariffs on essentially all remaining bilateral trade between US and China, "the short term costs are considerably higher and broader". Global trade could be reduced by 1% by 2021. US GDP could dropped by 0.6% while China GDP could drooped by 0.8%.

However, it should also be noted that GDP growth projection was revised up by 0.2% to 2.8% in 2019 and by 0.1% to 2.3% in 2020. OECD said "in the absence of further shocks, the economy is on track to continue its solid expansion and grow
somewhat faster than the rest of the OECD on average".

Summary of new growth projections :

• 2019 global at 3.2%, down from 3.3% (March forecast)
• 2020 global at 3.4%, unchanged
• 2019 US at 2.8%, up from 2.6%
• 2020 US at 2.3% up from 2.2%.
• 2019 Eurozone at 1.2%, up from 1.0%
• 2020 Eurozone at 1.4% up from 1.2%
• 2019 Japan at 0.7%, down from 0.8%
• 2020 Japan at 0.6%, down from 0.7%
• 2019 UK at 1.2%, up fro 0.8%
• 2020 UK at 1.0%, up from 0.9%
• 2019 China at 6.2%, unchanged
• 2020 China at 6.2%, unchanged

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 109.81; (P) 110.06; (R1) 110.32; More...

USD/JPY's recovery form 109.02 extends higher today but outlook remains unchanged. Intraday bias stays neutral and upside should be limited by 55 day EMA (now at 110.83) to bring another fall. On the downside, below 109.81 minor support will turn bias back to the downside for 109.02. Break there will extend the decline from 112.40 to retest 104.69 low. However, sustained trading above 55 day EMA will indicate completion of the fall from 112.40 and bring retest of this high.

In the bigger picture, USD/JPY is staying inside falling channel from 118.65. Currently development suggests that rebound from 104.69 is only a corrective move. And fall from 118.65 is not completed yet. Decisive break of 104.69 will extend the down trend towards 98.97 support (2016 low). For now, we'd expect strong support above there to bring rebound.

Economic Indicators Update

Sterling recovers notably on short covering as UK Prime Minister Theresa May is scheduled to announce her new Brexit deal at 1500GMT.

Her spokesman said that "Cabinet discussed the new deal which the government will put before parliament in order to seek to secure the UK's exit from the European Union.

The discussions included alternative arrangements, workers' rights, environmental protections and further assurances on protecting the integrity of the UK in the unlikely event that the backstop is required.

The prime minister said that "the withdrawal agreement bill is the vehicle that gets the UK out of the European Union and it is vital to find a way to get it over the line."

And the prime minister will be setting out further details on the way forward in a speech this afternoon."

Risk markets are generally lifted by US decision to delay the sanctions of Huawei for 90 days. DOW future is currently up more than 100pts while major European indices are generally higher. China Shanghai SSE also reclaimed 2900 handle. However, it should be noted that the move was seen as for housekeeping purpose only. That is, it's for preventing sudden disruptions on the US side. It's by no means an end to US-China trade tension. More importantly, given the hard line rhetorics from both sides, we're not seeing any chance of a deal in that 90 days window. Thus, current rebound in risk markets will soon prove to be temporary.

The currency markets are responding rather well to the news. Yen and Swiss Franc are just mixed, without any clear sign of receding risk aversion. As for today, Australian Dollar is the weakest one after RBA governor Philip Lowe indicated that they will think about cutting interest rates at June meeting. New Zealand Dollar, follows as second weakest. On the other hand, Canadian Dollar is the strongest one for now, followed by Sterling.

In Europe, currently:

• FTSE is up 0.60%.
• DAX is up 0.98%.
• CAC is up 0.52%.
• German 10-year yield is up strongly by 0.0197 at -0.064.

Earlier in Asia:

• Nikkei dropped -0.14%.
• Hong Kong HSI dropped -0.47%.
• China Shanghai SSE rose 1.23% to 2905.97.
• Singapore Strait Times dropped -0.69%.
• Japan 10-year JGB yield rose 0.0027 to -0.045.