OPEC poised for 9-month extension of production cuts at current levels; UK Q1 GDP revised slightly lower

Notes/Observations

- OPEC, non-OPEC set for new oil cut, eye longer duration with 9-months likely

- UK Q1 GDP (2nd reading) revised lower (QoQ: 0.2% v 0.3% advance reading)

- Fed dialed down market's hawkish policy expectations

 

Overnight:

Asia:

- Bank of Korea (BOK) left its Repo Rate unchanged at 1.25% (as expected) for its 11th consecutive hold in the current easing cycle; turns optimistic on growth outlook

- BOJ's Deputy Gov Iwata: BoJ will manage exit from QE so there is no sudden spike in yields

- Bank of Japan (BOJ) Sakurai: underlying inflation remains moderate, crucial for BoJ to maintain monetary easing. Won't be able to achieve 2% inflation sustainable if policymakers try to forcefully stimulate short term demand-

- China Securities Regulatory Commission (CSRC): Considering allowing foreign investors into futures market; Will not allow innovation in futures to bypass regulation

- Fitch Analyst Fennell: China's finance and track record underpin A+ sovereign rating

- US Navy destroyer conducted navigation operation in the South China Sea, within 12 nautical miles of Mischief Reef, which is claimed by China

Europe:

- UK PM May plans to cut short her visit to the G7 meeting in Sicily after the terror threat level was raise din Britain to critical following a suicide bombing in Manchester

- UK political parties will resume campaigning on Friday following a 3 day suspension after Manchester Arena bombing earlier in week

Americas:

- FOMC May 3rd Minutes: Most participants viewed March soft inflation as transitory; Staff presented phased in balance sheet run-off plan. Agreed details on balance sheet plan should be announced soon; operations should get underway this year. Prudent to wait for more evidence that recent weak economic data were transient to raise rates again

- Fed's Kaplan (moderate, voter): Expect rate hikes to be more gradual than once per quarter; Fed should not be in a rush and remove accommodation gradually.

- Fed's Evans (dove, voter): Reiterates it's key to try harder to hit inflation goal sooner

- Treasury Sec Mnuchin:Urged Congress to pass a clean debt ceiling before the August break; Preference is for congress to pass a clean debt ceiling increase

- OMB Director Mulvaney: Tax revenues are coming in slower than expected; may have to move up debt limit date

 

Economic Data

- (ES) Spain Q1 Final GDP Q/Q: 0.8% v 0.8%e; Y/Y: 3.0% v 3.0%e

- (PL) Poland Apr Unemployment Rate: 7.7% v 7.7%e v 8.1% prior

- (UK) Q1 Preliminary GDP Q/Q: 0.2% v 0.3%e; Y/Y: 2.0% v 2.1%e

- (UK) Q1 Preliminary Private Consumption Q/Q: 0.3% v 0.3%e; Government Spending Q/Q: 0.8% v 0.4%e; Gross Fixed Capital Formation Q/Q: +1.2% v -0.2%e; Exports Q/Q: -1.6% v +0.5%e; Imports Q/Q: +2.7% v +0.9%e

- (UK) Q1 Preliminary Total Business Investment Q/Q: 0.6% v 0.3%e; Y/Y: +0.8% v -0.9% prior

- (UK) Apr BBA Loans for House Purchase: 40.8K v 40.8Ke

- (HK) Hong Kong Apr Trade Balance (HKD): -34.1B v -39.2Be; Exports Y/Y: +7.1% v +12.5%e; Imports Y/Y: +7.3% v +13.5%e

**Fixed Income Issuance:

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 -0.2% at 3579, FTSE -0.1% at 7507, DAX -0.5% at 12578, CAC-40 -0.2% at 5332, IBEX-35 +0.2% at 10931, FTSE MIB -0.6% at 21233, SMI -0.3% at 9035, S&P 500 Futures +0.2%]

Market Focal Points/Key Themes European indices have reversed earlier gains to trade largely lower across the board, led bu the FTSE MIB and Dax which trade lower by over 0.5%. US indices did close at new record highs with futures continuing course this morning after the FOMC minutes yesterday. In the corporate front Petrofac trades lower by over 25% following a probe by the SFO, and the suspension of its COO. Elsewhere WizzAir is outperforming after strong 2018 guidance, whilst Daily Mail Group trades shapely lower after a decline in earnings. Looking ahead notable US earnings scheduled this morning from Medtronics, Genesco, Dollar Tree

 

Equities

- Consumer discretionary [WizzAir [WIZZ.UK] +8.5% (Earnings, FY18 outlook), Daily Mail & General TST [DMGT.UK] -8.7% (Earnings), Halfords [HFD.UK] +2.2% (Earnings), Henry Boot [BOOT.UK] +5% (Trading update)

- Consumer Staples [Tate and Lyle [TATE.UK] -1.7% (earnings)

- Industrials: [Qinetiq Grp [QQ.UK] +1.3% (Earnings), Vedanta [VED.UK] +1.9% (Chairman: No tie up with Anglo American)

- Financials: [Intermediate Capital Grp [ICP.UK] +9.5% (Earnings)

- Energy: [Petrofac [PFC.UK] -33% (SFO investigation, COO suspension), Amec Foster Wheeler [AMFW.UK] -4% (With Petrofac)]

 

Speakers

- Russia Central Bank (CBR) Gov Nabiullina: Russia was in no hurry to replenish FX reserves

- China Academy of Social Sciences (CASS) researcher Jin Bei: China GDP growth to slow until 2020 as potential economic growth rate will be lower than 6%

- China Defense Ministry urged US to correct wrong behavior regarding disturbing peace and stability in South China Sea (**Note: comments made after a US Navy destroyer conducted navigation operation in the South China Sea, within 12 nautical miles of Mischief Reef, which is claimed by China)

Various OPEC ministers comment ahead of its bi-annual meeting in Vienna:

- Saudi Arabia Energy Min Al Falih: OPEC likely to extend cuts for 9-months; could be prolonged further if needed; likely to rule on same level. Many countries had indicated flexibility on cuts. Saw oil inventories at 5-year average in Q1 2018; re-balancing would happen sooner rather than later. Nigeria, Libya exempt from production deal (were exempt at Nov OPEC meeting). US Shale oil production would not derail what OPEC was doing. Saudi Arabia has no plans to expand capacity beyond 12.5M bpd

- Kuwait Oil Min Almarzooq: Expected 9-month extension of OPEC/Non-OPEC oil cuts.Did not expect meeting to discuss deeper cuts . Market had already absorbed rise in shale oil production

- Iran Oil Min Zanganeh: No objection to 12-month extension; will respect and comply with OPEC decision of either 3,6, 9 or 12 months. Wanted oil prices between $55-60/barrel. Did not have oil in floating storage and was currently exporting 2.1-2.2M bpd

- Iraq Oil Min Min Al-Luaibi: Supported all options on output agreement. Supported 9 month extension with same level of cuts; there was a proposal for an extension with deeper cuts. Country's oil production at 4.465M bpd; exports at 3.79M bpd (includes Kirkuk)

- UAE Oil Min Mazrouei: Sought a 6-month production cut and not concerned about US shale oil production

- Venezuela Oil Min Del Pino: Deal most likely to be extended by 9-months but 6-months is also an option

- Ecuador Energy Min Perez: Supported 9-month extension of OPEC deal

- Nigeria Oil Min Kachikwu stated that he supported 9-month extension of oil production cuts; OPEC members largely on-board with this view

 

Currencies

- USD remained on the defensive as the Fed dialed down market's hawkish policy expectations. Fed members noted that it was prudent to wait for more evidence that recent weak economic data were transient before raising rates again.

- EUR/USD was higher and nearing the mid-1.12 area (just off recent 6-month high) while GBP/USD continue to probe the 1.30 level.

- GBP/USD was above the 1.30 level just ahead of Q1 GDP reading and drifted lower afetr the data was revised lower in its 2nd reading.

- USD/JPY bucked the trend and was higher as several BOJ officials

- Price action in oil was choppy as various OPEC ministers spoke ahead of the bi-annual meeting. WTI crude drops to session lows near $51/barrel after Saudi Oil Min Al-Falih noted that deeper production cuts not needed at this time. WTI was above $52/barrel at 5-week highs before the numerous OPEC ministers spoke

 

Fixed Income

- Bund futures trade at 161.37 up 31 ticks, surging as stocks slide. Gains took out the 161.32 (May 23rd high) resistance level. Further resistance lies near the April 27th high of 162.01 level followed by 163.68. A break of 160.01 support level could see lows target 159.01 followed by 157.50.

- Gilt futures trade at 128.82 higher by 29 ticks and approaching last week's high of 128.95 following disappointing UK GDP and BBA loans data. Last week's rally respected both the 129.00 handle and the 129.14 April 18th high. Price is now tentatively above the 128.51 level and finds key support at the 127.52 support level. An acceleration lower could test the 126.74 region. Resistance stands at 129.14 followed by 132.80.

- Thursday's liquidity report showed Wednesday's excess liquidity rose to €1.628T a slight gain of €0.8B from €1.6272T prior. Use of the marginal lending facility rose to €186M from €130M prior.

- Corporate issuance saw over $2.75B come to market via 2 issues headlined by Home Depot $2B in an 3-part senior unsecured offering and High Grade Pipeline $750M in 7-year notes

 

Looking Ahead

- OPEC bi-annual meeting in Vienna (currently underway)

- (EU) NATO Leaders Meet in Brussels

- (EU) EU President Tusk and EU's Juncker meet with US President Trump in Brussels

- 05:30 (ZA) South Africa Apr PPI M/M: 0.5%e v 0.3% prior; Y/Y: 4.9%e v 5.2% prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell Bonds (3 tranches)

- 05:45 (IT) Italy Fin Min Podoan at conference

- 06:00 (IL) Israel Mar Manufacturing Production M/M: No est v -2.3% prior

- 06:00 (CZ) Czech Republic to sell 3-month Bills; Avg Yield: % v -1.25% prior

- 06:00 (RO) Romania to sell 5.95% Mar 2021 Bonds; Yield: % v 2.46% prior; bid-to-cover: x v2.9x prior

- 06:30 (AU) RBA's Debelle participates on panel in London

- 07:00 (UR) Ukraine Central Bank Interest Rate Decision: Expected to cut Key Rate by 50bps to 12.50%

- 08:15 (UK) Baltic Dry Bulk Index

- 08:30 (US) Apr Advance Goods Trade Balance: -$64.5Be v -$64.2B prior (revised from 64.8B)

- 08:30 (US) Initial Jobless Claims: 238Ke v 232K prior; Continuing Claims: 1.93Me v 1.898M prior

- 08:30 (US) Apr Preliminary Wholesale Inventories M/M: 0.2%e v 0.2% prior; Retail Inventories M/M: No est v 0.4% prior

- 08:30 (US) Weekly USDA Net Export Sales

- 09:00 (RU) Russia Gold and Forex Reserve w/e May 19th: No est v $399.7B prior

- 09:00 (MX) Mexico Apr Trade Balance: -$1.6Be v -$0.2B prior

- 09:00 (ZA) South Africa Central Bank (SARB) Interest Rate Decision: Expected to leave Interest Rates unchanged 7.00%

- 09:30 (BZ) Brazil Apr Total Outstanding Loans (BRL): No est v 3.077T prior; M/M: No est v 0.2% prior; Personal Loan Default Rate: No est v 5.9% prior

- 10:00 (US) Fed's Brainard (voter, dove) participates on panel

- 10:00 (MX) Mexico Q1 Current Account Balance: -$6.5Be v -$3.4B prior

- 10:30 (US) Weekly EIA Natural Gas Inventories

- 11:00 (US) May Kansas City Fed Manufacturing Activity: 10e v 7 prior

- 11:00 (BR) Brazil to sell Fixed Rate 2023 and 2027 Bonds

- 11:00 (BR) Brazil to sell 2017, 2019 and 2020 LTN Bills

- 12:00 (CA) Canada to sell 5-Year Bonds

- 13:00 (US) Treasury to sell 7-Year Notes

- 13:30 (BR) Brazil Apr Central Govt Budget Balance (BRL): +7.3Be v -11.1B prior