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Sunrise Market Commentary

• Rates: Investors side-lined ahead of key US releases tomorrow and on Friday?
  Today's market remains well-filled. We mainly focus EMU inflation. Risks, if any, are on the downside of consensus, but markets should be prepared after the slightly larger setbacks in German and Spanish inflation yesterday. We hold a rather neutral view with investors probably side-lined ahead of key US eco releases tomorrow and on Friday.
• Currencies: Sterling remains in the defensive as election uncertainty mounts
  The dollar and the euro are captured in some kind of balance of mutual softness. A soft EMU inflation figure might be slightly negative for the euro, but probably won't change the broader picture. Sterling might remain under pressure as opinion polls indicate that it isn't 100% sure that PM May's conservative party will secure a majority in the June election

The Sunrise Headlines

• US stock markets ended up to 0.25% lower. Main indices flat-lined after a softer opening. Overnight, most Asian bourses eke out small gains with Japan underperforming.
• Federal Reserve Governor Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and US growth looks poised to rebound.
• Growth in activity at China's manufacturers was unchanged in May, with the official PMI remaining at the lowest level since September (51.2), but defying expectations of a drop. The non-manufacturing PMI rose from 54 to 54.5.
• British PM May's Conservative Party risks falling short of winning an overall majority of seats in parliament in a national election on June 8, The Times newspaper said, quoting research by polling firm YouGov.
• The Reserve Bank of New Zealand said risks at home and abroad to the country's financial system had receded in recent months, but it remained wary of any rise in house prices or global protectionism.
• The Pentagon conducted a successful test of a system designed to shoot down an intercontinental ballistic missile, US defence officials said, a demonstration that came amid rising tensions over North Korea's nuclear weapons program.
• Today's eco calendar heats up containing EMU CPI, EMU unemployment rate, Chicago PMI and US pending home sales. ECB governors Coeure, Visco, Lautenschlaeger and Fed Kaplan speak. The Fed releases its Beige Book.

Currencies: Sterling Remains In The Defensive As Election Uncertainty Mounts

Euro and dollar feel mutual softness

Different themes guided trading in the major FX cross rate yesterday. Eeuro weakness prevailed early in the session as markets pondered whether EMU political risk (Italy/Greece) would again become an issue for trading. However, the euro found its composure even as EMU data were slightly softer than expected. US data were also mixed to slightly softer than expected, putting the dollar again in the defensive later in US dealings. EUR/USD closed the session at 1.1186. USD/JPY even finished the day below the 111 mark (110.85).

Overnight, Asian markets show again a diffuse picture. Chinese equities opened strong as investors return after holidays. Early gains were supported by better than expected China PMI's, but the gains are evaporating. Japan underperforms. USD/JPY is holds in the 111 area. End of month USD buying from US importers is said to prevent a further decline, for now. EUR/USD drifts south in tight 1.1190/65 range.

The eco calendar is again well filled today. The EMU headline CPI is expected to decline from 1.9% Y/Y to 1.5% Y/Y in May. The core measure is expected to soften to 1.0%. The EMU unemployment rate is expected to decline further from 9.5% to 9.4. In the US, the volatile Chicago PMI (expected 57.0 from 58.3) and the pending home sales will be published.

Over the previous days, the dollar and the euro were captured by a balance of mutual weakens. US eco data couldn't convince. Fed speakers confirmed the case for a June rate hike, but further rate hikes might be delayed if inflation eases further. On the EMU side of the story, the ECB also maintains a soft tone. The ECB's case is supported by soft EMU inflation data. EMU political event risk lingers in the background. We don't expect today's data to be a game-changer for EUR/USD trading. If anything, a below consensus EMU CPI might be slightly negative for the euro. For now, corrections on the equity markets remain modest, but if sentiment turns risk-off, we think that it will also be a slightly euro negative (via EUR/JPY). In a daily perspective, we assume that the 1.1205/1.1268 area will be tough resistance for the euro

Of late, the dollar traded soft. US data were a bit disappointing, markets turned more cautious on Trump's pro-growth agenda and US yields declined, keeping the dollar in the defensive. At the same time, the euro profited of reduced political risk on the region.

Last week, there were tentative signs that the dollar decline could slow. Is enough USD softness discounted? This week's payrolls and manufacturing ISM might be important in this assessment. At the same time the euro positive momentum is also fading.

Technical picture

The USD/JPY rebound ran into resistance early May. A mini-sell-off pushed the pair back below the 112.20 previous top and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.

Earlier this month, it looked that EUR/USD could revisit 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north of the 1.1023 range top. The pair reached a short-term correction top at 1.1268. The correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tough. A return below 1.1023 would indicate that the upside momentum has eased.

EUR/USD: markets await key US eco data later this week

EUR/GBP

Growing uncertainty on a May victory weighs on sterling

Sterling selling eased (temporary) yesterday morning, digesting recent substantial losses after opinion polls indicated that that the lead of the conservative party in parliamentary election could be much smaller than assumed of late. EUR/GBP dropped to the 0.8655 area. Cable touched an intraday top in the 1.2885/90 area. However, sterling momentum dwindled again during the US trading session as political uncertainty lingered. There were no important eco data in the UK yesterday. EUR/GBP closed the session at 0.8699. Cable finished the day at 1.2859.

Overnight, a YouGov poll suggested that the conservative party is at risk to lose its majority in Parliament. Cable dropped to the 1.28 area. EUR/GBP rebounded well north of 0.87. GFK consumer confidence unexpectedly improved from -7 to -5, but this hardly helped sterling. Later today, the UK money Supply and lending data will be published, but they will be of second tier importance for sterling trading. The focus will remain on politics. The YouGov poll has a big margin of error, but won't go unnoticed on European/UK markets this morning. Yesterday, it looked that the EUR/GBP rally was ripe for a pause as selling pressure on sterling eased and as the euro was in the defensive. One day later, fortunes have changed again. A retest of the 0.8750 correction top might be on the cards, especially if uncertainty on the outcome of the June 8 election grows further. There is no reason to row against the sterling negative tide. Next resistance comes is 0.8788

EUR/GBP nears recent highs as election uncertainty grows

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Daily Pivots: (S1) 0.7430; (P) 0.7450; (R1) 0.7483; More...

AUD/USD is staying in tight range between 0.7405/7516 and intraday bias remains neutral first. Again, as long as 0.7555 resistance holds, fall from 0.7748 is still expected to continue. Below 0.7405 minor support will turn bias to the downside for 0.7382. Break there will target 0.7144/7158 support zone. However, firm break of 0.7555 will argue that fall from 0.7748 is completed and turn bias back to the upside.

In the bigger picture, we're still treating price actions from 0.6826 low as a corrective pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8115) and above.

Daily Pivots: (S1) 1.3435; (P) 1.3471; (R1) 1.3494; More....

USD/CAD is staying in consolidation above 1.3387 temporary low and intraday bias remains neutral first. Upside of recovery should be limited by 1.3570 resistance and bring fall resumption. At this point, we're still favoring the case that rise from 1.2968 has completed. And the larger rise from 1.2460 could have finished too. Below 1.3387 will target 1.3222 support first. Break of 1.3222 will affirm our bearish view and target 1.2968 key support level for confirmation. However, break of 1.3570 will turn focus back to 1.3793 high instead.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and could have completed at 1.3793, ahead of 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should indicate the start of the third leg while further break of 1.2968 should confirm. Nonetheless, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

Daily Pivots: (S1) 1.1127; (P) 1.1166 (R1) 1.1223; More....

Intraday bias in EUR/USD remains neutral for the moment as consolidation from 1.1267 continues. Overall, we remain cautious on strong resistance from 1.1245/98 (138.2% projection of 1.0339 to 1.0828 from 1.0569 at 1.1245) to limit upside and bring reversal. But another rise is still mildly in favor as long as 1.1020 resistance turned support holds. Decisive break of 1.1298 will carry larger bullish implication and target 1.1615 resistance next. On the downside, break of 1.1020 will indicate rejection from 1.1245/98 and turn bias to the downside for 1.0838 support.

In the bigger picture, the case for medium term reversal continues to build up with EUR/USD staying far above 55 week EMA (now at 1.0888). Also, bullish convergence condition is seen in weekly MACD. Focus will now be on 1.1298 key resistance. Rejection from there will maintain medium term bearishness and would extend the whole down trend from 1.6039 (2008 high). However, firm break of 1.1298 will indicate reversal. In such case, further rally would be seen back to 1.2042 support turned resistance next.

Daily Pivots: (S1) 1.2804; (P) 1.2846; (R1) 1.2898; More...

GBP/USD is staying in consolidation above 1.2774 temporary low and intraday bias remains neutral for the moment. We're holding on to view that rise from 1.2108 is completed. Hence, upside of current recovery should be limited by 1.2926 minor resistance and bring another decline. Below 1.2774 will target 1.2614 resistance turned support next. Break there should also indicate completion of whole consolidation pattern from 1.1946 and target a retest on this low. Meanwhile, above 1.2926 minor resistance will turn focus back to 1.3047 high instead.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. The rejection from 55 week EMA is maintaining bearishness in the pair. Also, at this point, as long as 1.3444 resistance holds, fall from 1.7190 is still expected to continue. Break of above mentioned 1.2614 support will affirm this bearish case.

Daily Pivots: (S1) 0.9718; (P) 0.9763; (R1) 0.9789; More.....

No change in USD/CHF's outlook as the consolidation pattern from 0.9691 is still in progress. Intraday bias remains neutral first. In case of another rise, upside should be limited by 0.9858 support turned resistance and bring fall resumption. Whole decline from 1.0342 is still in progress and below 0.9691 will target 100% projection of 1.0342 to 0.9860 from 1.0099 at 0.9617. We'll start to look for reversal signal below there.

In the bigger picture, USD/CHF is bounded in medium term range of 0.9443/1.0342 for the moment. Consolidative trading would likely continue and medium term outlook remains neutral. Break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. Meanwhile, downside attempts should be contained by 0.9443 key support level.

US Session Highlights

(US) APR PERSONAL INCOME: 0.4% V 0.4%E ; PERSONAL SPENDING: 0.4% V 0.4%E

(US) APR PCE CORE M/M: 0.2% V 0.1%E ; Y/Y: 1.5% V 1.5%E

(US) APR PCE DEFLATOR M/M: 0.2% V 0.2%E; Y/Y: 1.7% V 1.7%E

(US) MAR S&P / CASE-SHILLER 20-CITY M/M: 0.87% V 0.90%E; Y/Y: 5.89% V 5.61%E; HOUSE PRICE INDEX (HPI): 195.39 V 193.50 PRIOR

(US) MAY CONSUMER CONFIDENCE: 117.9 V 119.5E

(US) MAY DALLAS FED MANUFACTURING ACTIVITY: 17.2 V 15.0E

(US) Dallas Fed Kaplan (moderate; voter): we should begin the process of bringing down the balance sheet soon; base case remains for two more hikes this year

(US) Fed's Brainard (dove, voter): expects to begin shrinking bond portfolio before too long, perhaps this year; soft inflation is a source of concern; Another US rate hike is likely appropriate soon - comments in NY

US investors saw the markets resume amid a swath of US data releases and more tweets from President Trump. The President showed no inclination of calming the rhetoric that escalated between him and Germany's Merkel coming out of the G7 meeting, while the latest economic figures suggest the Fed could still be on a course to raise rates next month. Crude prices remained heavy, having a hard time holding close to $50 in the WTI. The Dollar index has tried to consolidate just above 97, but the stabilization feels tenuous. The Euro is bumping up against 112 as focus has continued to shift towards the June ECB meeting and the cover the next round of staff projections may give officials to begin reshaping expectations. Stocks drifted lower on both sides of the pond, while US Treasury markets outperformed that of European fixed income.

US markets on close: Dow -0.2%, S&P500 -0.1%, Nasdaq -0.1%

Best Sector in S&P500: Telecom

Worst Sector in S&P500: Energy

Biggest gainers: FSLR +7.2%; BWA +3.3%; MU +3.2%

Biggest losers: KMI -4.3%; SWN -3.9%; DVN -3.7%

At the close: VIX 10.4 (+0.6pts); Treasuries: 2-yr 1.30% (+1bp), 10-yr 2.22% (-3bps), 30-yr 2.89% (-3bps)

US movers afterhours

EXAS: Strength attributed to circulation of notice from UnitedHealth Group indicating it will cover Cologuard effective 7/1; +8.1% afterhours

NX: Reports Q2 $0.11 adj v $0.06e, R$209.1M v $206Me; affirms outlook; +4.9% afterhours

MNK: Reportedly has hired advisers to explore sale of generic drug division; could be worth up to $2B - press; +2.1% afterhours

Politics

(UK) YouGov/Times general election poll: UK Conservative Party would fall short of outright majority by 16 seats

(US) Former National Security Adviser Flynn to provide some documents to the Senate Intelligence Panel – US press

Key economic data

(CN) CHINA MAY MANUFACTURING PMI (GOVT OFFICIAL): 51.2 (matches 7-month low; 10th month of expansion) V 51.0E; NON-MANUFACTURING PMI: 54.5 V 54.0 PRIOR

(JP) JAPAN APR PRELIMINARY INDUSTRIAL PRODUCTION M/M: 4.0% V 4.2%E (rises at the fastest pace since June 2011); Y/Y: 5.7% V 6.1%E

(AU) AUSTRALIA APR PRIVATE SECTOR CREDIT M/M: 0.4% V 0.4%E; Y/Y: 4.9% V 4.9%E

(NZ) NEW ZEALAND MAY ANZ BUSINESS CONFIDENCE: 14.9 (3-month high) V 11.0 PRIOR; ACTIVITY OUTLOOK 38.3 v 37.7 PRIOR

Asia Session Notable Observations, Speakers and Press

Asian indices traded mixed following modest declines in US markets, where multi-month low in annualized Core PCE inflation was balanced by commitment to near-term tightening from Fed's Brainard and Kaplan. Probabilities for June rate hike are now around 88%, even as the outlook for a total of 3 hikes this year are still just below 50%. Yield curve is also flatter with a bid in Treasuries on the long end - spread on the 10-2-yr maturities has fallen to lowest level since Oct of last year.

China markets returned from a 2-day holiday and rallied as much as 1% in the morning session before giving it all back heading into the break. Official PMIs, which saw steady declines over the past couple of months, found some footing but still not giving much hope for Q2. April manufacturing PMI beat consensus with 10th straight month of expansion, but also matched a 7-month low. New Export Orders remained steady, but Employment contracted for 2nd straight month and Input Price gauge was at the weakest level in over a year. AUD/USD initially rallied on the results to session highs but then reversed its gains. Also of note in China, the latest Yuan fix was set firmer, and CNY hits its best level in the offshore market since early Feb around 6.803.

In other FX majors, GBP/USD fell abruptly after YouGov/Times general election study showed that based on latest pols, the Conservative Party would fall as many as 16 seats short of outright majority. Recall the April announcement of snap election was predicated on expectation of more broad support as PM May leads UK into Brexit negotiations, but her poor execution during the election season continues to backfire and cloud UK political landscape. Elsewhere, NZD rallied above $0.71 for the first time since early March after the release of ANZ business confidence, and its inflation outlook component for New Zealand was revised higher to 2.0% from 1.8%.

China

(CN) China National Stats Bureau (NBS): PMI shows external and domestic demand keep improving; Expect services sector to keep steady and fast growth

(CN) China may face liquidity issues in June amid higher Fed interest rates and mid-year inspections of banks – China Securities Journal

Japan

(JP) Japan may cut the settlement period for JGBs from May 2018 – Japanese Press

Australia/New Zealand

(NZ) New Zealand RBNZ Semiannual Financial Stability Report: financial system is sound but facing risks

(NZ) RBNZ Gov Wheeler: Very pleased house price inflation has slowed - press

Korea

(KR) South Korea to try and approve extra budget in June - Korean press

Asian Equity Indices/Futures (00:00ET)

Nikkei -0.1%, Hang Seng -0.1%, Shanghai Composite +0.1%, ASX200 +0.3%, Kospi +0.1%

Equity Futures: S&P500 flat; Nasdaq +0.1%, Dax flat, FTSE100 +0.1%

FX ranges/Commodities/Fixed Income (00:00ET)

EUR 1.1170-1.1195; JPY 110.75-111.20; AUD 0.7445-0.7475; NZD 0.7080-0.7115

June Gold -0.2% at 1,260/oz; July Crude Oil -0.6% at $49.37/brl; July Copper +0.1% at $2.57/lb

(CN) PBOC SETS YUAN MID POINT AT 6.8633 V 6.8698 PRIOR; Strongest Yuan fix since May 18th

(CN) PBOC to inject combined CNY210B v CNY40B prior

(HK) Overnight CNY HIBOR 21.0793% (highest level since Jan 6th)

(AU) Australia sells A$800M in 2.25% 2028 bonds; avg yield 2.4978%; bid-to-cover 2.83x

Asia equities notable movers

Australia

Shaver Shop (SSG) +2.3%; Guides FY17

Japan

NTT Docomo (9437) -1.1%; Cut at Goldman

Toshiba (6502) -4.0%; Working with auditor to file full earnings report by June 30th deadline; Also: signs agreement to split off three core businesses on July 1st - press

Hong Kong

Lenovo (992) +5.8%; CEO Yang denies press speculation that the company will go private

Yue Yuen (551) +0.5%; To continue to expand its capacity, product development and research

CRRC (1766) -0.8%; In final stage talks to acquire Skoda Transportation for CZK30B

Daily Pivots: (S1) 110.56; (P) 110.93; (R1) 111.22; More...

At this point, intraday bias in USD/JPY remains mildly on the downside for 110.23. Break will resume the fall from 114.36 to 108.12 and below. Note again that decline from 118.65 is seen as a correction. In that bearish case, we'll look for bottoming signal again at 61.8% retracement of 98.97 to 118.65 at 106.48. On the upside, above 111.46 minor resistance will turn intraday bias neutral again first.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It's uncertain whether it's completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Key Points:

• PBOC changes the fixing process for the Renminbi.
• Move has stabilised the Renminbi and may lead to appreciation.
• USDCNY has fallen to the lowest level since early 2017.

In a move that is likely to please the Trump administration, the Chinese government has taken action to revalue the Renminbi and subsequently sent the USDCNY pair tumbling. Last week saw the Peoples Bank of China (PBOC) adding some additional factors into the model which determines the Yuan’s daily fixing rate with the ultimately aim of further stabilising the currency. This is likely to be seen as a welcome move from the central bank given the sharp selloff in the Yuan over the past year.

However, there are some negatives to the move with many market participants criticizing the lack of a free market driven valuation and suggesting that the latest move simply again pushes towards full government control. Subsequently, although the fixing alteration certainly takes immediate moves to stabilise the currency it does so in an artificial way, especially for a currency which has recently been added to the reserve basket of currencies.

The reality is that the changing of the fixing factors is largely strategic with the currently depressed value of the greenback providing a unique opportunity to add a “cushion” for when the USD roars again. In addition, the domestic slowdown in China has largely meant that currency outflows have reduced significantly and might help to increase expectations around an appreciation in the value of the Yuan. Subsequently, the timing shouldn’t really be of surprise to anyone given that the depressed state of the greenback provided the central bank with a very unique window of opportunity.

Ultimately, the move is likely to further relive the PBOC of the pressures of capital outflows and might help to actually reduce the political pressure on the nation to not be seen as a “currency manipulator”. However, this comes at the risk of the Renminbi being seen as government controlled rather than market driven which is a strange situation for a reserve currency to be in. Regardless, the move is likely to stabilise the Yuan in the medium term and we might actually see some appreciation over the coming month.

Daily Pivots: (S1) 141.84; (P) 142.46; (R1) 143.12; More....

GBP/JPY is losing some downside momentum as seen in 4 hour MACD. But intraday bias stays on the downside with 143.36 minor resistance intact. Fall from 148.09 is expected to extend to 61.8% retracement of 135.58 to 148.09 at 140.35. At this point, we'd still expect rebound from 122.36 to resume later. Hence, we'd look for strong support below 140.35 to contain downside and bring rebound. On the upside, above 143.36 minor resistance will turn bias back to the upside. However, sustained trading below 140.35 will dampen our bullish view and turn focus back to 135.58 key near term support instead.

In the bigger picture, rise from 122.36 medium term bottom is still expected to extend to of 195.86 to 122.36 at 150.42. And decisive break there could pave the way to 61.8% retracement at 167.78. However, as the cross is starting to lose upside momentum, rejection below 150.42 and break of 135.58 support will indicate reversal and bring deeper fall back to retest 122.36 instead.