EU bond fragmentation severe enough to grab ECB attention but not enough to trigger response

Notes/observations

- Little fresh news during EU session amid a shortened trading week due to Juneteenth holiday on Wed. Stocks were positive at the open but rotated lower to relatively flat levels.

- Theme follows on from Friday, with French political instability taking focus for traders. Right-wing Le Pen’s National Rally Party polling at 35% (short of absolute majority), Left-wing alliance Popular Front polling at second place at 26% while Pres Macron's Renaissance party polling only third at 19%; France/Germany 10-year spread remains at stressed levels ~80bps as CAC-40 bounces modestly after its sell off last week. Fragmentation across EU bond market appearing to get attention from ECB members. A report overnight suggested council has not discussed activating TPI (Transmission Protection Instrument) yet. Reminder TPI has never been used and relies on council judgement.

- Asia closed lower with Nikkei225 underperforming -2.0%. EU indices are -0.1% to +0.9%. US futures are -0.2% to +0.1%. Gold -0.5%, DXY 0.0%; Commodity: Brent +0.3%, WTI +0.3%; Crypto: BTC -0.2%, ETH -0.2%.

Asia

- China PBoC left the 1-year Medium-Term Lending Facility (MLF) rate unchanged at 2.50%. Operation had a net drain of CNY55B (injected CNY182B vs. CNY237B maturing).

- China May Retail Sales Y/Y: 3.7% v 3.0%e.

- China May Industrial Production Y/Y: 5.6% v 6.2%e.

- China May YTD Fixed Urban Assets Y/Y: 4.0% v 4.2%e.

- China May Surveyed Jobless Rate: 5.0% v 5.0%e.

Europe

- ECB said to be in no rush to discuss France bond rescue; officials had not discussed activating the Transmission Protection Instrument (TPI).

- National Rally leader Marine Le Pen stated that she was "ready to work alongside Pres Macron" in France. Would not try to push out President Macron.

Americas

- Fed’s Kashkari said reasonable that a rate cut could come in Dec 2024.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.09% at 510.60, FTSE -0.03% at 8,144.25, DAX -0.03% at 18,014.35, CAC-40 +0.15% at 7,514.34, IBEX-35 -0.31% at 10,958.23, FTSE MIB +0.35% at 32,780.00, SMI -0.36% at 11,999.81, S&P 500 Futures -0.07%].

Market focal points/key themes

European indices open higher but cut most of gains through the early part of the session amid continuing political uncertainty in France; among sectors leading the way higher are Travel & Leisure and Technology; lagging sectors include Basic Resources; European banking sector remains under pressure following amid widening French-German bond yields spread; on corporate front, Carl Zeiss Meditec cut outlook citing restrictive investment climate among key customer groups, particularly in North America; ING shares trade few percent higher in Amsterdam after it provided FY27 targets; On M&A front, TopDanmark to be acquired by Sampo in all-stock DKK33B deal; Lennar Corp earnings expected after the upcoming US session.

Equities

- Consumer discretionary: Amadeus IT [AMS.ES] +1.0% (mid-term targets).

- Consumer staples: Carl Zeiss Meditec [AFX.DE] -5.0% (cuts outlook).

- Financials: ING Groep [INGA.NL] +2.5% (FY27 targets), TopDanmark [TOP.DK] +21.0%, Technology: ASML Holding [SAMAS.FI] -2.5% (to be acquired by Sampo at ~DKK366.38/shr in all-stock DKK33B deal) - Healthcare: Essity [ESSITY.SE] -2.0% (financial targets and SEK3.0B buyback).

- Technology: ASML Holding [ASML.NL] +2.5% (TSMC said to raise prices for 3nm manufacturing by 5% and also for CoWoS advanced packaging by 10-20% from 2025).

Speakers

- ECB's Lane (Ireland, chief economist) stated that its goal was to hit 2% inflation target in medium term. Still was seeing significant wage increases in some countries.

- ECB’s Vujcic (Croatia): Inflation must improve for a Sept rate cut; keeping special eye on services inflation.

- Swiss KOF Institute Summer Economic Forecast maintained 2024 GDP growth at 1.2% while cutting 2025 GDP forecast from 1.8% to 1.7%. KOF cut the 2024 CPI forecast from 1.5% to 1.4% while maintaining the 2025 CPI outlook at 1.1% (Both years below the SNB 2% inflation target).

- Ukraine and creditors committee reportedly failed to agree on debt restructuring; to continue constructive dialogue. Ukraine govt stated that creditor proposals breached IMF targets.

- BOJ Gov Ueda reiterated watching FX and import prices carefully during Parliamentary testimony.

- Japan PM Kishida testified in Parliament and reiterated stance to closely work with BOJ. Govt and BOJ to guide policy flexibly to put an end to deflation and achieve sustainable economic growth. Govt had no plans to instruct or request GPIF pension fund to buy BOJ ETF holdings.

Currencies/fixed income

- USD holding steady in quiet trade as the week began. Fed officials continued to dial back on rate cut expectations. Over the weekend Fed’s Kashkari noted t was reasonable that rate cut could come in Dec 2024.
The upcoming week has a plethora of rate decisions (RBA, SNB and BOE among them).

- EUR/USD holding around the 1.07 level. Dealers noted that the upcoming French elections would greatly impact its price action. EU yields took a breather after France Far right leader Le Pen stated that she was "ready to work alongside Pres Macron" in France and not try to him push out . France 10-year bond yield steady at 3.13% and its spread to Germany holding below 80bps.

- GBP/USD at 1.2675 ahead of key events this week. Wed sees the release of May inflation data and Thursday’s BOE rate decision. Dealers expect the BOE to provide a ‘wait-and-see’ stance on potential rate cuts.

- USD/JPY holding above 157 as Japanese officials reiterates stance of watch forex markets carefully.

Economic data

- (DK) Denmark May PPI M/M: -1.0% v -0.9% prior.

- (NO) Norway May Trade Balance (NOK): 58.7B v 65.8B prior.

- (ES) Spain Q1 Labour Costs Y/Y: 3.9% v 5.0% prior.

- (CZ) Czech May PPI Industrial M/M: -1.2% v -0.2%e; Y/Y: 1.0% v 2.0%e.

- (ES) Spain Apr Trade Balance: -€4.7B v -€2.0B prior.

- (CH) Swiss weekly Total Sight Deposits (CHF): 453.5B v 459.8B prior; Domestic Sight Deposits: 445.3B v 450.1B prior.

- (IT) Italy May Final CPI M/M: 0.2% v 0.2% prelim; Y/Y: 0.8% v 0.8% prelim.

- (IT) Italy May Final CPI EU Harmonized M/M: 0.2% v 0.2% prelim; Y/Y: 0.8% v 0.8% prelim; CPI (ex-tobacco index): h v 119.3 prior.

- (EU) Euro Zone Q1 Final Labour Costs Y/Y: 5.1% v 4.9% prelim.

Fixed income issuance

- (NO) Norway sold NOK6.0B vs. NOK6.0B indicated in 12-month Bills; Avg Yield: 4.40% v 4.40% prior; bid-to-cover: 1.50x v 1.44x prior.

- (SK) Slovakia Debt Agency (Ardal) sold total €582M in 2026, 2033, 2034 and 2035 Bonds.

Looking ahead

- 05:30 (DE) Germany to sell €3.0B in 12-month BuBill.

- 05:30 (NL) Netherlands Debt Agency (DSTA) to sell €1.5-3.0B in 3-month and 6-month bills.

- 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays).

- 06:00 (IL) Israel Q1 Current Account Balance: No est v $10.5B prior.

- 06:00 (IE) Ireland Apr Trade Balance: No est v €6.5B prior.

- 06:00 (BE) Belgium Debt Agency (BDA) to sell €2.0-2.5B in 2029 and 2034 OLO Bonds.

- 06:00 (RO) Romania to sell combined RON800M in 2028 and 2038 bonds.

- 06:00 (IL) Israel to sell combined ILS2.90B in 2027, 2028, 2029, 2033, 2034 and 2052 bonds.

- 07:00 (BR) Brazil Jun FGV Inflation IGP-10 M/M: 0.8%e v 1.1% prior.

- 07:25 (BR) Brazil Central Bank Weekly Economists Survey.

- 07:30 (ES) ECB's De Guindos (Spain).

- 08:00 (PL) Poland May CPI Core M/M: 0.2%e v 0.7% prior; Y/Y: 3.9%e v 4.1% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (IN) India announces details of upcoming bond sale (held on Fridays).

- 08:00 (ES) Spain Debt Agency (Tesoro) size announcement on upcoming issuance.

- 08:15 (CA) Canada May Annualized Housing Starts: 245.1Ke v 240.2K prior.

- 08:30 (US) Jun Empire Manufacturing: -11.3e v -15.6 prior.

- 08:30 (CA) Canada Apr Int'l Securities Transactions (CAD): No est v 14.4B prior.

- 09:00 (CA) Canada May Existing Home Sales M/M: -1.0%e v -1.7% prior.

- 09:00 (FR) France Debt Agency (AFT) to sell €5.8-7.4B in 3-month, 6-month and 12-month bills (4 tranches).

- 11:00 (PE) Peru May Unemployment Rate: 7.4%e v 7.7% prior.

- 11:30 (US) Treasury to sell 13-Week and 26-Week Bills.

- 16:00 (US) Weekly Crop Progress Report.

- 19:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: No est v 77.0 prior.

- 20:30 (SG) Singapore May Non-Oil Domestic Exports M/M: 1.8%e v 7.6% prior; Y/Y: -1.1%e v -9.3% prior; Electronic Exports Y/Y: No est v 3.3% prior.

- 21:00 (US) Fed’s Cook.