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Free AccessMNI EUROPEAN OPEN: Resolve
EXECUTIVE SUMMARY
- FED LIKELY TO CONSIDER 0.75-PERCENTAGE-POINT RATE RISE THIS WEEK (WSJ)
- ECB IS RESOLVED TO FACE DOWN BOND STRESS WITHOUT DIVULGING PLANS (BBG)
- EU POISED TO TAKE LEGAL ACTION AGAINST UK OVER PROTOCOL BILL (Guardian)
- BOJ STEPS UP BOND BUYING IN DEFENCE OF YIELD TARGET
Fig. 1: Japan 10-/30-Year Yield Spread (bp)
Source: MNI - Market News/Bloomberg
UK
BREXIT: Boris Johnson on Monday defied a chorus of criticism and published legislation to rip up his 2020 Brexit deal with the EU, insisting there was “no other way” of protecting the peace process in Northern Ireland. Johnson published the government’s legal position claiming he faced a “genuinely exceptional situation” and that the Northern Ireland protocol was causing “peril” to social and political conditions in the region. Citing the “doctrine of necessity”, the paper said the “essential interests” of the UK would be harmed unless a law was passed to override the compromise Johnson struck with Brussels over the region only two years ago. (FT)
BREXIT: The EU is poised to launch legal action against the UK after ministers controversially claimed an emergency loophole allowed them to scrap post-Brexit checks and standards in Northern Ireland. In a surprising admission, the UK government accepted that its new Northern Ireland protocol bill would mean it did not meet its obligations under international law. (Guardian)
BREXIT/POLITICS: Boris Johnson will on Tuesday nervously await any signals from a meeting of three lawyers who form the “star chamber” of the hardline pro-Brexit wing of his Conservative parliamentary party. Convened by veteran Eurosceptic MP Sir Bill Cash and attended by lawyers Martin Howe and Barney Reynolds, the trio are expected to dissect the prime minister’s proposal to unilaterally override the contentious Northern Ireland section of his Brexit deal with the EU that angers both anti-EU MPs and unionist politicians in Belfast. An endorsement from the influential European Research Group of Tory MPs will be vital in giving the prime minister sufficient support to pass his bill. Without ERG support, he will struggle. (FT)
EUROPE
ECB: European Central Bank officials are increasingly determined not to divulge its plans to fight bond market stress, according to people familiar with the matter. Officials from across the spectrum of the Governing Council are convinced that there are few benefits in preemptively revealing a specific crisis tool and fear it could spur investors to test any measure, the people said, asking not to be identified because the discussions are private. Policy makers have indicated they’d rather wait until a specific threat materializes, in which case there’d be a strong will to act if needed. (BBG)
GERMANY: Berlin is putting together a multibillion-euro rescue package for Gazprom Germania, the subsidiary of the Russian gas giant that was taken over by the German authorities last month, according to people familiar with the matter. As part of the bailout, Germany’s state-owned development bank KfW would provide Gazprom Germania with a €5bn-€10bn loan, the people said, while emphasising that talks were ongoing. (FT)
GERMANY: Chancellor Olaf Scholz is silent on the reports about a joint trip to Kiev with French President Emmanuel Macron and Italy’s Prime Minister Mario Draghi in the next few days. "I think the government spokesman has already said everything we can say on these issues now," said the SPD politician after a meeting with East German premiers on the island of Riems near Greifswald when asked about his visit plans to Ukraine. (Spiegel)
UKRAINE: The European Commission will recommend granting Ukraine official status as an EU candidate country, according to several officials familiar with deliberations that took place during a debate among commissioners on Monday. (Politico)
UKRAINE: The EU should focus on providing immediate help to Ukraine rather than engaging in “legal debates” about whether to designate the country as a candidate for membership, according to Portugal’s prime minister. António Costa said in an interview that candidate status — the beginning of an accession process that would take many years — would not solve Ukraine’s urgent problems and risked creating “false expectations”. He feared the EU would only display its divisions over the issue, handing a gift to Russian president Vladimir Putin. (FT)
UKRAINE: Slovak Prime Minister Eduard Heger urged Olaf Scholz during a visit to Berlin to support Ukraine, Georgia and Moldova as EU membership candidates, while also calling on the German leader to see the horrors of war with his “own eyes.” Heger visited the German capital Monday to lobby Scholz on behalf of the three countries ahead of a European Council summit next week where EU leaders are expected to discuss their membership bids. (Politico)
UKRAINE: The war in Ukraine has turned into a grinding artillery contest where Russia is steadily gaining ground thanks to its overwhelming advantage in firepower. As the U.S. and allies gather Wednesday to discuss fresh military aid to Kyiv, Ukraine’s fate will largely depend on how fast and in what quantities these heavy weapons arrive. Without a broad and rapid increase in military assistance, Ukraine faces a defeat in the eastern Donbas region, Ukrainian officials warn. That would pave the way for Russia to pursue its offensive to Odessa and Kharkiv after regrouping in coming months, they say, and potentially all the way back to the capital, Kyiv, after that. (WSJ)
UKRAINE: Ukrainian President Volodymyr Zelenskiy asked Olaf Scholz to show full-throated support for Kyiv, charging the German Chancellor with being too concerned about the repercussions that would have for Berlin's ties with Moscow. Zelenskiy's comments, made in an interview with German public broadcaster ZDF, come amid speculation that Scholz could make his first trip to Kyiv since the start of the war on Thursday. (RTRS)
UKRAINE: NBC reporter Michael Pegram tweets the following: “The Biden administration’s next announcement of military aid package for Ukraine could come as early as this week, according to a defense official and an administration official.” (MNI)
ENERGY: For decades, European industry relied on Russia to supply low-cost oil and natural gas that kept the continent’s factories humming. Now Europe’s industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling manufacturers’ ability to compete in the global marketplace. Factories are scrambling to find alternatives to Russian energy under threat that Moscow could abruptly turn off the gas spigot, bringing production to a halt. (WSJ)
U.S.
FED: A string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week. Before officials began their pre-meeting quiet period on June 4, they had signaled they were prepared to raise interest rates by a half percentage point this week and again at their meeting in July. But they also had said their outlook depended on the economy evolving as they expected. Last week's inflation report from the Labor Department showed a bigger jump in prices in May than officials had anticipated. Two consumer surveys have also shown households' expectations of future inflation have increased in recent days. That data could alarm Fed officials because they believe such expectations can be self-fulfilling. (WSJ)
POLITICS: Former President Trump, advised by Rudy Giuliani, agreed to falsely declare victory in the 2020 election when it "was far too early to be making any calls like that," Trump advisers testified during the second public hearing into the Jan. 6 insurrection. Driving the news: "The mayor was definitely intoxicated," Jason Miller, Trump’s former spokesperson, said of Giuliani. (Axios)
GAS: The White House is showing signs that it is more seriously considering a federal gas tax holiday, sources tell The Hill. President Biden’s economic team has discussed the gas tax holiday recently and is expected to meet later this week for further talks. “It’s definitely an option on the table,” said one Democrat close to the White House. (Hill)
OTHER
U.S./CHINA: Congress is pressing ahead with legislation that could rewrite the rules for American companies investing abroad, proposing the screening of investments in countries like China seen as adversaries to protect U.S. technologies and rebuild critical supply chains. The measure, part of broader legislation to bolster U.S. competitiveness with China, would require American companies and investors to disclose certain new outbound investments and authorize the executive branch to form a new interagency panel to review and block investments on national security grounds, according to congressional aides and a revised draft of the bill reviewed Monday by The Wall Street Journal. (WSJ)
U.S./CHINA: National security adviser Jake Sullivan met with China’s top diplomat, Yang Jiechi, on Monday to discuss a range of security challenges facing the countries’ bilateral relationship, including Russia’s war in Ukraine and North Korea’s string of ballistic missile tests. A senior administration official described the talks, which were held in Luxembourg, as “candid, in-depth, substantive and productive.” The official, who spoke on condition of anonymity, said the meeting lasted nearly five hours and follows a May phone call between Sullivan and Yang. The two last met in person in Rome on March 14 in what was later described as “intense” talks that spanned at least seven hours. (CNBC)
NATO: NATO Secretary-General Jens Stoltenberg said Monday that the Swedish government is prepared "to address Turkey's concerns" as part of its bid for NATO membership. Stoltenberg would not say whether the matter would be resolved before the NATO summit in Madrid on June 28 or prior to Sweden's parliamentary election on September 11. He did however say that NATO allies have provided security assurances to Sweden while it applies for full membership in the alliance. If attacked, Stoltenberg vowed that it is "unthinkable that NATO allies would not react." (Deutsche Welle)
NATO: Finland’s President Sauli Niinisto voiced his frustration with Turkey over lack of progress in a dispute that’s preventing the accession of Finland and Sweden into defense alliance NATO. The process “is so stuck that it’s really no wonder nothing has been said publicly about progress, because there’s been none,” Niinisto said in an interview on Monday on Finland’s YLE TV1. Still, “that shouldn’t really be taken as bad news, given there’s a sense of playing time here,” he said. (BBG)
SOUTH KOREA: South Korea's central bank said Tuesday it plans to "actively" take steps to stabilize the financial market hit hard by fears about the Federal Reserve's more aggressive rate hikes than previously thought. "As volatility in South Korea's financial markets is expected to sharply increase, the Bank of Korea (BOK) will closely monitor the situation and take active steps to stabilize the market, when needed," Lee Seung-heon, senior deputy governor of the BOK, said at an emergency financial meeting. (Yonhap)
SOUTH KOREA: South Korean shippers urged striking truckers Tuesday to end their protest and resume negotiations over the disputed freight rate system, stressing that smaller export and import traders could take the brunt of the prolonged cargo disruptions. (Yonhap)
NORTH KOREA: The United States will maintain pressure on North Korea until Pyongyang changes course, U.S. Secretary of State Antony Blinken said on Monday, while his South Korean counterpart urged China to persuade the North not to resume nuclear testing. (RTRS)
RUSSIA: Russia's main goal of its military operation in Ukraine is to protect the Donetsk and Luhansk people's republics, the Kremlin said on Monday, after the leader of one of the separatist regions asked for additional forces from Moscow. (RTRS)
MIDDLE EAST: NBC reporter Michael Pegram tweets the following: “3 sources with knowledge of the planning tell NBC News that the U.S. and Saudi Arabia will announce tomorrow that Pres. Biden will go to Saudi Arabia on July 15th and 16th. The first day of his visit will be for bilateral talks, including with Crown Prince Muhammad bin Salman.” (MNI)
MIDDLE EAST: Lebanon is preparing to offer a compromise to U.S. energy envoy Amos Hochstein to resolve a dispute with Israel over maritime gas resources, three Lebanese officials with knowledge of the negotiations told Reuters. Hochstein landed in Beirut on Monday at the invitation of the Lebanese government, which had objected to the arrival of a vessel operated by London-based Energean off the Mediterranean coast on June 5 to develop a gas field known as Karish. (RTRS)
TURKEY: Turkey's president hailed on Monday the start of the construction of an underwater pipeline to tap a Black Sea natural gas field that the government hopes will help wean the country off its dependence on energy imports. He said the Sakarya gas field could produce 10 million cubic metres (353 million cubic feet) by the first quarter of 2023. The Sakarya gas field, 170 kilometres out to sea, was discovered in August 2020. (New Arab)
ISRAEL: Yamina MK Nir Orbach announced Monday that he was no longer part of the coalition, again dropping the ruling bloc to minority status in the Knesset with just 59 seats, and prompting Prime Minister Naftali Bennett to acknowledge that his government may be on the way out. (Times of Israel)
CHINA
PBOC: The People’s Bank of China still have sufficient room for monetary easing including cuts to the reserve requirement ratio and interest rates, as domestic inflation pressure is controllable and the spillover effect of the Fed rate hike cycle has passed its peak, the China Securities Journal reported in the front-page citing analysts. The medium-term lending facility rate may be lowered slightly once in H2, the newspaper said citing Huang Wentao, chief economist of CSC Financial. Mid-year or year-end could be a suitable timing for RRR cuts to meet the liquidity gap of large-scale issuance of government bonds and the maturity of MLF, the newspaper said citing Ming Ming, chief economist of CITIC Securities. (MNI
PBOC: The PBOC is more likely to lower the five-year Loan Prime Rate while keeping the one-year LPR stable, to help stimulating residential mortgage demand and boosting the housing market, the 21st Century Business Herald reported citing Ming Ming, chief economist of CITIC Securities. There is room for 15 bps cut in the five-year LPR, as the growth of new residential medium and long-term loans in May were still over CNY300 billion short of that in last May, repairing at a relatively slow pace, the newspaper said citing Li Chao, chief economist of Zheshang Securities. Any rate cut may come in June or July when core first- and second-tier cities such as Beijing, Shanghai, Shenzhen and Hangzhou are likely to loosen real estate regulations, the newspaper said citing Xiong Yuan, chief economist of Guosheng Securities. (MNI)
ECONOMY: Local governments should curb the increase in implicit debt and reasonably control the debt scale, according to a statement released by Office of the State Council on the gov website on Monday. Local governments should resolve debt risks by increasing revenue and cutting expenditure, and cashing in assets, so to effectively reducing the debt repayment burden of cities and counties, the statement said. Any illegal borrowing should be punished, the statement added. (MNI)
CORONAVIRUS/ECONOMY: The sheer cost of China’s mass coronavirus-testing campaign since April is expected to exceed the full-year gross domestic product (GDP) of nations such as Iceland and Cambodia, while giving China’s economy a much-needed shot in the arm, according to analysts. An estimated 10.8 billion Covid-19 tests will be carried out in China during the April-June period, at a total cost of 174.6 billion yuan (US$26 billion), researchers with Soochow Securities said in a note on Sunday. And that spending is likely to boost the nation’s economic growth rate by 0.62 percentage points in the year’s second quarter, while also helping to offset the impact of shrinking household consumption on the quarterly GDP, they said. (SCMP)
CHINA MARKETS
PBOC INJECTS CNY10 BILLION VIA OMOS, LIQUIDITY UNCHANGED
The People's Bank of China (PBOC) injected CNY10 billion via 7-day reverse repos with the rate unchanged at 2.1% on Tuesday. This keeps the liquidity unchanged after offsetting the maturity of CNY10 billion repos today, according to Wind Information.
- The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.
- The 7-day weighted average interbank repo rate for depository institutions (DR007) rose to 1.8123% at 9:41 am local time from the close of 1.5970% on Monday.
- The CFETS-NEX money-market sentiment index closed at 42 on Monday vs 43 on Friday.
PBOC SETS YUAN CENTRAL PARITY AT 6.7482 TUES VS 6.7182
The People's Bank of China (PBOC) set the dollar-yuan central parity rate higher at 6.7482 on Tuesday, compared with 6.7182 set on Monday.
OVERNIGHT DATA
JAPAN APR, F INDUSTRIAL OUTPUT -4.9% Y/Y; FLASH -4.8%
JAPAN APR, F INDUSTRIAL OUTPUT -1.5% M/M; FLASH -1.3%
JAPAN APR CAPACITY UTILIZATION 0.0% Y/Y; MAR -1.6%
AUSTRALIA MAY NAB BUSINESS CONFIDENCE 6; APR 10
AUSTRALIA MAY NAB BUSINESS CONDITIONS 16; APR 19
Business confidence and conditions both eased in May but conditions remain strong alongside forward orders. Conditions fell 2pts as profitability and trading conditions edged down from very high levels, the employment index picked up. Overall conditions remain well above average at +16 index points. The fall in confidence was more material but still leaves confidence just above its long-run average at +6 index points. Moreover, the outlook remains positive with capacity utilisation at 85% – almost equalling the record high seen pre-Delta – and forward orders also elevated. Conditions remain strong across industries and states, with soft conditions in construction the only standout as profitability in the sector comes under increasing pressure. Overall, the May survey saw a slight easing in input cost growth following the record highs reported in April, with labour cost growth of 2.5% (down from 3.0%) and purchase cost growth at 3.8% (down from 4.5%) in quarterly terms. Still, output price inflation remains elevated with final product prices tracking at 1.8% and retail price growth jumping back up to 3.1%, in quarterly terms. As such, another strong CPI read in Q2 remains likely. Overall, the survey indicates the economy has maintained its momentum into Q2 and most businesses are in a strong position despite the inflation headwinds, with the lift-off in official interest rates and global growth risks yet to significantly impact Australia’s economic trajectory.
AUSTRALIA MAY CBA HOUSEHOLD SPENDING +7.9% Y/Y; APR +5.2%
AUSTRALIA MAY CBA HOUSEHOLD SPENDING +2.9% M/M; APR -3.8%
NEW ZEALAND MAY FOOD PRICE INDEX +0.7% M/M; APR +0.1%
MARKETS
SNAPSHOT: Resolve
Below gives key levels of markets in the second half of the Asia-Pac session:
- Nikkei 225 down 474.92 points at 26512.52
- ASX 200 down 301.979 points at 6630
- Shanghai Comp. down 51.93 points at 3203.621
- JGB 10-Yr future down 80 ticks at 147.7, yield up 0.1bp at 0.258%
- Aussie 10-Yr future down 21.4 ticks at 96.008, yield up 32.7bp at 4.001%
- U.S. 10-Yr future -0-01+ at 115-07+, US 10-Yr yield up 0.19bp at 3.362%
- WTI crude down $0.14 at $120.79, Gold up $4.93 at $1824.18
- USD/JPY up 15 pips at Y134.58
- FED LIKELY TO CONSIDER 0.75-PERCENTAGE-POINT RATE RISE THIS WEEK (WSJ)
- ECB IS RESOLVED TO FACE DOWN BOND STRESS WITHOUT DIVULGING PLANS (BBG)
- EU POISED TO TAKE LEGAL ACTION AGAINST UK OVER PROTOCOL BILL (Guardian)
- BOJ STEPS UP BOND BUYING IN DEFENCE OF YIELD TARGET
US TSYS: T-Notes Stabilise, Cash Curve Flattens Tad More
T-Notes stabilised in Asia, trading sideways within a 0-12 range through the Tokyo session, as the dust settled after a sharp sell-off Monday on the back of hawkish Fed repricing. TYU2 last deals -0-02 at 115-07, with Eurodollar futures running -26.0 to +1.5 ticks through the reds.
- Cash Tsy curve flattened slightly further, with yields last seen -1.2bp to +3.3bp. Inversion in the 2-/10-Year & 5-/30-Year sectors deepened.
- Fed pricing stabilised, with fed funds futures almost fully pricing a 75bp rate rise on Wednesday, with several sell-side desks turning more hawkish.
- The U.S. docket is headlined by monthly PPI report today, the final data signal surrounding inflation ahead of Wednesday's rate decision from the FOMC.
JGBS: Steepening Gets Unwound As BoJ Boosts Bond-Buying But Futures Pare Gains
The BoJ demonstrated its commitment to ultra-easy policy and used bond-buying operations to enforce its yield target. The Bank unexpectedly raised the size of 5- to 10-Year JGB purchases to Y800bn from the planned Y500bn to reinforce its impact on benchmark 10-Year yield, which on Monday breached the 0.25% cap. While the yield on 10-Year JGBs remained virtually flat in anticipation of the operation, the super-long end of the curve witnessed heavy selling, with the 10-/30-Year JGB yield spread widening to more than 100bp. With speculation re: potential action on the super-long end doing the rounds, the Bank followed up by tweaking its Rinban plan for Wednesday, increasing the sizes of scheduled purchases across 1-3, 3-5 & 5-10 Year baskets and adding operations covering 10-25 & 25+ Year JGBs. In a final step, the Bank offered to buy 10-25 & 25+ Year JGBs in an unscheduled operation in a bid to rein in rising super-long yields.
- Action to enforce the YCC framework comes ahead of Friday's BoJ monetary policy meeting, lending support to expectations that officials will keep the main policy parameters unchanged, sticking with their ultra-loose stance.
- JGB futures crept higher from the off, as participants awaited BoJ reaction to 10-Year yield testing the ceiling of the Bank's tolerance band. JBU2 ran as high as to 148.39, but then staged a firm pullback in the wake of the BoJ's final bond-purchase announcements. It last trades at 147.90, 60 ticks below previous settlement.
- Powerful use of bond-buying proved only partially effective, with initial steepening largely unwound. 10-/30-Year JGB yield spread is back from highs (101.4) and last sits at 93.3bp as super-long yields pared gains.
- Still, the curve remains higher, 10-Year yield still sits above 0.25% and futures pulled back sharply from session highs after the BoJ announcements, suggesting that the market is yet to be convinced.
- Domestic data and an auction for off-the-run JGBs with 15.5-39 Years until maturity were overshadowed by BoJ action.
JGBS AUCTION: Japanese MOF sells Y2.2648tn 6-Month Bills:
The Japanese Ministry of Finance (MOF) sells Y2.2648tn 6-Month Bills:
- Average Yield -0.0996% (prev. -0.0946%)
- Average Price 100.050 (prev. 100.048)
- High Yield: -0.0897% (prev. -0.0867%)
- Low Price 100.045 (prev. 100.044)
- % Allotted At High Yield: 3.6740% (prev. 7.4513%)
- Bid/Cover: 3.922x (prev. 4.905x)
JGBS AUCTION: Japanese MOF sells Y499.3bn of 15.5-39 Year JGBs in liquidity enhancement auction:
The Japanese Ministry of Finance (MOF) sells Y499.3bn of 15.5-39 Year JGBs in a liquidity enhancement auction:
- Average Spread: +0.084% (prev. -0.009%)
- High Spread: +0.099% (prev. +0.019%)
- % Allotted At High Spread: 13.5446% (prev. 51.6666%)
- Bid/Cover: 1.952x (prev. 2.041x)
BOJ: BoJ Boosts Size Of Additional Bond-Buying Operation
The Bank of Japan has offered to buy Y800bn of 5- to 10-Year JGBs today in an unscheduled bond-purchase operation.
- The operation was announced on Monday as benchmark 10-Year yield breached the 0.25% ceiling.
- The size of the operation was larger than the previously announced Y500bn as global bond markets remain under pressure.
BOJ: BoJ Offers To Buy Super-Long JGBs In Unscheduled Operation
The BoJ offers to buy a total of Y150bn worth of JGBs from the market in an unscheduled operation:
- Y100bn worth of JGBs with 10-25 Years until maturity
- Y50bn worth of JGBs with 25+ Years until maturity
BOJ: Wednesday Bond-Purchase Operation Sizes Boosted Across Five Baskets
The BoJ tweaks debt-buying operation plan for Wednesday, boosting purchases across five maturity baskets. It will now offer to buy a total of Y2.45tn of JGBs from the market:
- Y625bn worth of JGBs with 1-3 Years until maturity (prev. Y475bn)
- Y625bn worth of JGBs with 3-5 Years until maturity (prev. Y475bn)
- Y800bn worth of JGBs with 5-10 Years until maturity (prev. Y500bn)
- Y250bn worth of JGBs with 10-25 Years until maturity (additional operation)
- Y150bn worth of JGBs with 25+ Years until maturity
AUSSIE BONDS: ACGBs Catch Up With Global Bond Rout
Aussie bonds got hammered on return from holidays, playing catch-up with sharp sell-off in U.S. Tsys inspired by aggressive hawkish Fed repricing.
- Cash ACGB curve bear flattened, with yields last seen 21.0-37.0bp higher, as the rate-sensitive 3-Year debt leads losses. 10-Year yield showed above 4% for the first time in eight years before trimming gains.
- Cheapening impetus crept into Aussie bond futures. YM last -25.6 & XM -21.4, with bills running 36-42 ticks lower through the reds.
- The AOFM sold A$100mn of 20 Sep '30 inflation-indexed bond, drawing bid/cover ratio of 1.76x.
- Domestic data failed to move the space, as NAB Business Conditions rose to a 10-month high in May and CBA household spending grew 2.9% M/M over the same period.
AUSSIE BONDS: The AOFM sells A$100mn of the 2.50% 20 Sep ‘30 I/L Bond, issue #CAIN408:
The Australian Office of Financial Management (AOFM) sells A$100mn of the 2.50% 20 September 2030 I/L Bond, issue #CAIN408:
- Average Yield: 1.4944% (prev. 0.0775%)
- High Yield: 1.5200% (prev. 0.0850%)
- Bid/Cover: 1.7600x (prev. 2.4800x)
- Amount allotted at highest accepted yield as percentage of amount bid at that yield 72.7% (prev. 48.2%)
- Bidders 42 (prev. 27), successful 22 (prev. 15), allocated in full 20 (prev. 11)
EQUITIES: Still In The Red
The majority of Asia Pacific equity markets are in the red. For the major indices losses are between 1-2%, if not slightly larger. Australian markets are down close to 5%, reflecting catch up from yesterday's holiday. Bitcoin's 10% fall added to the risk off mood. Only a couple of South East Asian markets are managing to print higher within the region.
- In China, the CSI 300 has dipped 2%, while CHINEXT is down 3% at the time of writing. Infrastructure related names are doing better after the PBoC urged banks to boost loans for major water infrastructure projects under the 800bn yuan quota. Onshore covid trends are moving unfavorably though, which could weigh on the domestic rebound.
- The HSI is off by a more modest 1%, but tech shares are underperforming, down by over 2%. The China Golden Dragon index fell by close to 7% overnight and is now back below the 100 day MA.
- Japan benchmarks are down by 1.5 to 2%. Earlier comments on FX markets haven't had much follow through. USD/JPY is back above NY closing levels to 134.50. The BoJ remains committed to its yield target. The weaker yen may aid equities in the afternoon session.
- Australian equities have fallen by close to 5%, reflecting some catch up from yesterday's holiday. Materials, which are linked to commodities and the global outlook, have fallen sharply (-5.9%), while local bank stocks (financials -4.7%) have also been under pressure.
- US equity futures have tracked higher for most of the session, with the S&P500 up by around 0.60%, tech slightly better.
OIL: Holding Up
Brent crude dips sub $122/bbl are still being supported for now. Tight supply and firm demand out of Asia are being cited as supportive factors.
- Libyan supply is being curtailed by on-going domestic political turmoil. Daily output is reportedly down to 100k barrels per day, compared to 1.2mln last year.
- S&P Global Vice Chairman Daniel Yergin stated that the oil market could withstand a recessionary hit, describing the supply situation as razor thin.
- Fears around a delayed China rebound have yet to dent sentiment, with Covid cases delaying the re-opening of schools and restaurants (for in-person dining) in Beijing and Shanghai.
- Demand from Asian countries for August oil delivery reportedly remains strong though, which is providing some offset from a sentiment point of view to the China headwinds.
- US President Biden will visit Saudi Arabia on July 15th and 16th. No doubt oil prices will form part of the discussion, with the US side pushing for relief as quickly as possible.
GOLD: Recovers Some Ground
Gold has recovered some ground following the 2.8% drop to start the week. We are back at $1826, around 0.35% higher than NY close under $1820.
- The weaker USD trend has likely aided gold's rebound today. The DXY has edged back below 105.00 as the session has progressed.
- Regional equities have also been downbeat, likely aiding demand from a safe haven standpoint. However, US equity futures have firmed, back above 1% for both the S&P and Nasdaq at the time of writing, following strong sell-offs in recent sessions.
- US yields remain firm, particularly at the front end, although the 2/10s curve has inverted, which can also be construed as a negative risk signal and therefore supportive of gold.
- US real yields have surged back to 2019 highs though, with a number of banks now expecting a 75bps hike from the Fed this week.
- Arguably we should struggle to get ahead of the 200 MA, which comes in at $1843.3, ahead of the FOMC this week. The mid-May low of just below $1800 may come into play on further USD strength.
FOREX: Yen Dips As BoJ Steps Up YCC Enforcement, Aussie Gains On Risk Stabilisation
The greenback lost steam after the BBDXY index rallied to its best levels in more than two years on Monday on the back of aggressive hawkish Fed repricing. Fed funds futures are almost fully pricing a 75bp rate rise at the upcoming monetary policy meeting, with a growing number of sell-side analysts tweaking their calls accordingly. Yet, the U.S. dollar slipped against most of its major peers, amid broader stabilisation across G10 FX space.
- The yen was the only major currency to underperform the greenback and it was BoJ's fault again. Spot USD/JPY popped higher alongside other JPY crosses as the Bank stepped up bond-buying planned for Wednesday and added operations covering longer-dated tenors to enforce its YCC policy. The move was interpreted as a sign of the BoJ's unwavering commitment to stick with its ultra-loose policy stance as we approach Friday's monetary policy meeting.
- Continued attempts by Japanese FinMin Suzuki to jaw-bone the yen proved ineffective, despite veiled threats of an FX intervention ("we'll continue to closely communicate with major currency authorities abroad, and will respond with appropriate measures if necessary").
- The Aussie outperformed, ready to snap its four-day losing streak against the U.S. dollar, as domestic financial markets re-opened after a long weekend. Stabilisation of risk lent support to the Antipodean currency, as U.S. e-minis edged higher, highlighting a modicum of reprieve for the equity space, even as regional indices fell on a negative lead from Wall Street.
- German ZEW Survey & final CPI, UK jobs data & Swedish CPI are due in European hours. Later in the day, U.S. PPI will provide the final insights on inflation dynamics ahead of Wednesday's FOMC meeting. The central bank speaker slate features ECB's Schnabel.
FOREX OPTIONS: Expiries for Jun14 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0413-25(E3.2bln), $1.0430-40(E930mln), $1.0635-50(E1.0bln)
- USD/JPY: Y131.00($850mln), Y132.30-50($796mln)
- GBP/USD: $1.2200-05(Gbp518mln)
- AUD/USD: $0.7130-40(A$688mln)
- USD/CNY: Cny6.7500($688mln)
UP TODAY (Times GMT/Local)
Date | GMT/Local | Impact | Flag | Country | Event |
14/06/2022 | 0600/0700 | *** | ![]() | UK | Labour Market Survey |
14/06/2022 | 0600/0800 | *** | ![]() | DE | HICP (f) |
14/06/2022 | 0600/0800 | *** | ![]() | SE | Inflation report |
14/06/2022 | 0600/0800 | * | ![]() | DE | Wholesale Prices |
14/06/2022 | 0900/1100 | *** | ![]() | DE | ZEW Current Expectations Index |
14/06/2022 | 0900/1100 | *** | ![]() | DE | ZEW Current Conditions Index |
14/06/2022 | 1000/0600 | ** | ![]() | US | NFIB Small Business Optimism Index |
14/06/2022 | 1230/0830 | *** | ![]() | US | PPI |
14/06/2022 | 1255/0855 | ** | ![]() | US | Redbook Retail Sales Index |
14/06/2022 | 1400/1000 | ** | ![]() | US | IBD/TIPP Optimism Index |
14/06/2022 | 1530/1130 | ** | ![]() | US | US Treasury Auction Result for 52 Week Bill |
14/06/2022 | 1700/1900 | ![]() | EU | ECB Schnabel on Euro Bond Market Fragmentation |
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