Sense of calm seeps back into markets

Notes/Observations

- Some calm returns. Market soothed by plans that South Korea would implement a $17B stimulus package and a pledge from Chinese president Li that he won't allow a rollercoaster ride in Chinese capital markets

- Various European officials reiterate view that no discussion with UK (informal or formal) could occur until Article 50 is invoked

 

Overnight

Asia:

- Japan Econ Min Ishihara: PM Abe has asked us to analyze real economy; need to watch markets a bit more to see trend. Had not gotten any specific order on any economic stimulus from PM Abe

- Bank of Japan (BoJ) Gov Kuroda declined to comment on any emergency BoJ meeting; no change to monetary policy

- South Korea govt cut its 2016 GDP and CPI forecasts and plans $17B fiscal stimulus. 2016 GDP forecast cut from 3.1% to 2.8% and CPI from 1.5% to 1.1%

- South Korea Presidential office: South Korea planned for over KRW20T fiscal stimulus package including KRW10T extra budget

- USD/CNY daily setting fixed at 6.6528 for lowest setting since Dec 2010

Europe:

- S&P cut UK sovereign rating to AA from AAA (2 notches); outlook negative;

- Fitch cut UK sovereign rating to AA from AA+ (1 notch); outlook negative

- Fin Min Osborne is not expected to run as a candidate for leadership of the ruling Conservative Party

- Eurogroup chief Dijsselbloem: No urgent need for a Eurogroup meeting; Brexit process will take a long time

- ECB's Draghi: the best word for UK exit from EU is 'sadness'

- Germany Chancellor Merkel: European summit on Tuesday to agree on common way forward for EU; Merkel, Hollande, and Renzi to meet again in Sept to discuss the EU [after new UK PM has been named]

 

Economic data

- (DE) Germany May Import Price Index (beat) M/M: 0.9% v 0.6%e; Y/Y: -5.5% v -5.8%e

- (FR) France Jun Consumer Confidence: 97 v 97e

- (IT) Italy Jun Consumer Confidence: 110.2 v 112.5e; Manufacturing Confidence: 102.8 v 102.1e , Economic Sentiment: 101.2 v 103.0 prior

**Fixed Income Issuance:

- (ID) Indonesia sold total IDR5.01T in 2-year, 4-year, 7-year and 15-year Project Based Sukuk (PBS)

- (IT) Italy Debt Agency (Tesoro) sold €6.0 vs. €6.0B indicated in 6-month Bills; Avg Yield: % v -0.262% prior; Bid-to-cover: x v 1.63x prior

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Index snapshot (as of 10:00 GMT)**

Indices [Stoxx50 +2.7% at 2,769, FTSE +2.1% at 6,110, DAX +2.1% at 9,466, CAC-40 +2.5% at 4,086, IBEX-35 +2.9% at 7,867, FTSE MIB +4.3% at 15,755, SMI +2.2% at 7,764, S&P 500 Futures +1.1%]

Market Focal Points/Key Themes: European equity indices are trading higher in the morning session as Brexit turmoil eases and market participants digested the Brexit outcome; Banking stocks reverse losses seen in yesterdays trading, with the financial sector leading most of the European indices; Unicredit, Intesa Sanpaolo, BNP Paribas and Deutsche Bank leading the gains in the Eurostoxx; shares of G4S leading the gains in the FTSE 100 after receiving an analyst upgrade, with shares of Legal & General also trading sharply higher after providing a balance sheet update; upcoming scheduled US earnings include Barnes & Noble Education, Carnival Corp, Factset Research Systems, and IHS.

 

Equities (as of 09:45 GMT)

- Consumer Discretionary: [Carpetright CPR.UK -10.9% (FY16 results), G4S GFS.UK +10.4% (analyst upgrade), Ocado Group OCDO.UK +11.0% (H1 results)]

- Financials: [Legal & General LGEN.UK +8.6% (provides balance sheet update), Shawbrook Group SHAW.UK -10.8% (trading update, names interim-CFO, analyst downgrades)]

- Industrials: [Rolls Royce RR.UK +1.9% (affirms outlook)]

- Technology: [Betsson BETSB.SE -22.5% (Q2 outlook)]

 

Speakers

- ECB's Draghi opening comments from ECB forum in Sintra, Portugal noted that monetary policy has inevitably created destabilizing spillovers. Depressing global inflation had been the slump in demand for energy and commodities linked to the slowdown in emerging markets. Divergent monetary policies among major central banks could create uncertainty about future policy intentions, which in turn led to higher exchange rate volatility and risk premiums

- Chancellor Osbourne stated that country was in a prolonged period of economic adjustment and would absolutely need tax hikes and spending cuts. Must await OBR revised forecasts before exact details were known with decisions on taxes and spending to come under new PM (**Note PM Cameron announced he would step down by Oct). He was not backing anyone in Leadership campaign with his role in next govt depended on who becomes the next PM

- German Chancellor Merkel policy speech on Brexit in Bundestag (Lower House) stated that she accepted Brexit vote with great regret. Reiterated viewpoint that the EU could only begin formal and informal talks after the UK elected Article 50

- Eurogroup chief Dijsselbloem: EU should not take hostile approach with UK. European banks were in much better shape; some banks have legacy issues

- EU's Juncker: UK must give clarity soon to avoid uncertainty and also reiterated view that no preliminary talks with UK before article 50 is elected

- EU's Dombrovskis: No indication that other nations sought to follow the UK out of Europe but concerned about populism in other parts of EU

- German Federal Debt Agency: To reduce planned Q3 Bubills sales by €1.0B to €12.5B citing higher tax revenues

- Czech PM Sobotka: Euro adoption is not on govt agenda

- Poland Central Bank's Hardt stated that cutting Polish interest rates would not help avoid deflation. Saw no conditions to cut the Base Rate as it would not help banking sector. He saw no negative impact of deflation over the next 2-3 quarters and was against any QE in Poland's monetary policy to increase economic growth. Slightly concerned over pro-cyclical fiscal policy

- Poland Fin Min Szalamacha stated that it would not intervene in FX market; weak PLN currency (Zloty) has had positive impact on trade balance over the past 5 months

- Japan ruling LDP party policy chief Inada reiterated viewpoint Japan should not hesitate to respond if needed. Possible action includes FX intervention. Would accelerate stimulus discussions once upper house election was over

- Bank of Korea (BOK) Jun Minutes saw one Board member note it was unclear if CPI could hit the 2% target in 2017 while another member called for attention to side effects of low interest rates

 

Currencies

- Sterling currency registered its gain since last weeks referendum results but dealers could not pin any catalyst for the rebound. GBP/USD moved above the 1.33 level after registering 31-year lows 1.3119 on Monday in the aftermath of the Brexit

- Some calm returned to FX markets with sentiment soothed by plans that South Korea would implement a $17B stimulus package and a pledge from Chinese president Li that he won't allow a rollercoaster ride in Chinese capital markets. JGBs yield dips below 0.1% first time for the whole length of the maturity curve with long-dated yields likely to sink below zero. USD/JPY was holding above the 102 level as Japanese officials continued their barrage of verbal intervention

- USD/CNY daily setting fixed at 6.6528 for lowest setting since Dec 2010 as Yuan pressured intensified

**Fixed Income:

- Bund futures trade at 166.46 down 23 ticks on some modest return of risk sentiment as equity markets rebound from recent losses. A continued move lower looks to test 166.05 followed by 165.56. To the upside a test of 167.00 could see further extension to 167.23 then 167.61.

- Gilt futures trade at 127.66 up down 41 ticks retracing off 128.33 all time high seen yesterday as Equity markets rebound whilst the UK looks to an orderly exit from the EU. A move back higher looks to retest 128.33 contract highs with a break targeting extension at 128.74. Continued retracement targets 126.44, followed by 126.28 the top of Friday's gap. Short Sterling futures trade down 3-4bp across the strip retracing slightly after a big run up in the past two days . Spreads have fallen to year lows as rate cut expectations grown as Jun17Jun18 fell to a low of 1bp a 7bp drop on the day, with a slight rebound today to 2bp.

- Tuesday's liquidity report showed Monday's excess liquidity rose to €796.1B a rise of €1.4B from €794.7B prior. This was primarily due to AFs and MonPol portfolios falling to negative €410.9B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility fell to €106M from a prior €126M.

- Corporate issuance continues to see issuers on the sidelines as the aftershocks of the Brexit continues to see global risk aversion. IG corporate spreads set new series record after uncertainty fuels flight to quality asset purchases. North American IG CDS widened by some 3.12bp to 89.8bp, just off a high 90.35bp. Issuance is expected to remain for the remainder of the week following just $2.75B of issuance seen last week, which marked the second lowest volume YTD. Volume MTD stands at $62.88B, below the $80-100B estimated by analysts.

 

Looking Ahead

- EU Leaders begin 2-day Summit in Brussels

- 05.30 (UK) Weekly John Lewis LFL sales data

- 05:30 (EU) ECB allotment in 7-day Main Financing Tender

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-month Bills

- 05:30 (UK) BOE holds 3rd ILTR liquidity operation

- 06:00 (UK) Jun CBI Retailing Reported Sales: No est v 7 prior, Total Distribution: No est v 13 prior

- 06:00 (IE) Ireland May Retail sales Volume M/M: No est v 0.8% prior; Y/Y: No est v 5.1% prior

- 06:45 (US) Daily Libor Fixing

- 07:00 (RU) Russia announces weekly OFZ bond auction

- 07:00 (BE) ECBs Praet (Belgium) at ECB conference in Sintra, Portugal

- 07:30 (BR) Brazil Central Bank (BCB) Quarterly Inflation Report

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (BR) Brazil May PPI Manufacturing M/M: No est v -0.7% prior; Y/Y: No est v 5.0% prior

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (US) Q1 Final GDP Annualized Q/Q: 1.0%e v 0.8% prelim; Personal Consumption: 2.0%e v 1.9% prelim

- 08:30 (US) Q1 Final GDP Price Index: 0.6%e v 0.6% prelim; Core PCE Q/Q: 1.9%e v 1.9% prelim

- 08:55 (US) Weekly Redbook Sales

- 09:00 (US) Apr S&P/Case-Shiller 20 City HPI M/M: 0.58%e v 0.85% prior; Y/Y: 5.46%e v 5.43% prior; House Price Index (HPI): 186.71e v 184.50 prior

- 09:00 (US) Apr S&P/Case-Shiller (overall) HPI M/M: No est v 0.09%; Y/Y: No est v 5.15% prior, House Price Index (HPI): No est v 176.91 prior

- 09:00 (EU) Weekly ECB Forex Reserves: € v € prior

- 09:00 (MX) Mexico May Unemployment Rate (Seasonally Adj): 4.0%e v 3.9% prior; Unemployment Rate NSA (Unadj): 3.9%e v 3.8% prior

- 10:00 (US) Jun Consumer Confidence: 93.6e v 92.6 prior

- 10:00 (US) Jun Richmond Fed Manufacturing Index: +3e v -1 prior

- 10:00 (MX) Mexico weekly International Reserves

- 11:30 (US) Treasury to sell 4-Week Bills

- 13:00 (CH) SNBs Zurbruegg in Hamburg

- 13:30 (BR) Brazil May Central Govt Budget Balance (BRL): -15.7Be v +9.8B prior

- 16:30 (US) Weekly API Oil Inventories

- 17:00 (KR) South Korea Jul Business Manufacturing Survey: No est v 74 prior; Non-Manufacturing Survey: No est v 73 prior

- 19:50 (JP) Japan May Retail Sales M/M: 0.0%e v 0.0% prior; Retail Trade Y/Y: -1.6%e v -0.8% prior

- 21:00 (AU) Australia May HIA New Home Sales M/M: No est v -4.7% prior

- 22:00 (KR) South Korea May Department Store Sales Y/Y: No est v 4.3% prior; Discount Store sales Y/Y: o est v 1.7% prior

- 23:00 (TH) Thailand to sell THB16B in 2025 Bonds

- 23:30 (HK) Hong Kong to sell HKD1.2B in 10-Year Bonds