Italy Consumer Confidence hits a 2-year low; G7 meets with differences on trade and climate change

Notes/Observations

- Poll suggest that UK June 8th Parliamentary election could be more closely contested than previously thought; Conservative hold 5-point lead over Labour and might foreshadow a messier Brexit

- G7 meets in Italy with differences on trade and climate change issues

Overnight:

Asia:

- Japan National CPI rose for the 4th straight month and at a 3-month high (Y/Y: 0.4% v 0.4%e); Core CPI hit a 2-year high (Y/Y: 0.3% v 0.4%e)

- Moody's commented following recent sovereign downgrade of China: Country might no longer get A1 rating if there were signs that debt kept rising and debt exceeds expectations

Europe:

- UK YouGov/Times ElectionPoll: Conservatives 43%(-1) Labour 38%(+3); 5 % ;lead smallest since Apr 2016 (**Note: Taken after Manchester bombing)

- EU draft negotiating paper: Brexit negotiators to demand UK agree to pay a fixed percentage of outstanding obligations on the day it leaves the EU

Americas:

- Fed's Brainard (dove, voter): Risk balance has shifted due to a brighter global outlook; China's issues pose medium-term downside risk to the global economy

- Fed's Williams (moderate, non-voter) reiterated own view that 3 interest rate hikes are appropriate in 2017; Fed to release details of balance sheet plan in coming months

- Fed's Bullard (non-voter, dovish): Prices have started to deviate noticeably from 2% inflation path; Lagging price level is worrisome. Fed should start reducing balance sheet to increase policy flexibility.

Energy:

- OPEC/non-OPEC ministers agreed to extend production cuts by 9 months at current levels (as speculated). OPEC did considered 6, 9 and 12-month oil reduction scenarios and consideration to deeper production cuts

Economic Data

- (TR) Turkey May Economic Confidence: 100.5 v 99.5 prior

- (HU) Hungary Apr Unemployment Rate: 4.6% v 4.4%e

- (CN) Weekly Shanghai copper inventories (SHFE): 198.6K v 196.4K tons prior

- (TW) Taiwan Q1 Final GDP Y/Y: 2.6% v 2.6%e

- (IT) Italy May Consumer Confidence Index: 105.4 v 107.3e (lowest reading since Jan 2015); Manufacturing Confidence: 106.9 v 108.0e; Economic Sentiment: 106.2 v 107.4 prior

**Fixed Income Issuance:

- (IN) India sold total INR150B vs. INR150B indicated in 2024, 2027, 2034 and 2046 bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 -0.7% at 3559, FTSE +0.1% at 7524, DAX -0.4% at 12568, CAC-40 -0.7% at 5298, IBEX-35 -1.0% at 10831, FTSE MIB -1.0% at 21083, SMI -0.2% at 9019, S&P 500 Futures -0.1%]

Market Focal Points/Key Themes European Indices trade mostly lower led by the FTSE MIB and French CAC, with the FTSE100 outperforming having traded new all time highs. Corporate news flow has been relatively quiet, Restaurant Group shares are outperforming up over 10% following a trading update and Spirax-Sparco trades sharply higher after the acquisition of Chromalox for $415M. RBS shares trade lower after the termination of settlement talks over 2008 rights issue, and Petrofac continues to fall following analyst downgrades. Alfa Financial Services saw strong demand after its IPO this morning with shares higher by ~30%. On the US earnings docket, Big Lots expected to report in a quiet day for scheduled corporate news ahead of the long weekend.

Equities

- Consumer discretionary [Restaurant Group [RTN.UK] +8.7% (Trading update), Intertek Grp [ITRK.UK] -1.0% (Earnings), Britvic [BVIC.UK] -2.8% (Pepsi sells 11.8M shares at 695p/shr)]

- Industrials: [Spirax-Sparco [SPX.UK] +6.7% (Acquisition)

- Financials: [RBS [RBS.UK] -1.8% (Termination of settlement talks over 2008 rights issue), Alfa Finl Services [ALFA.UK] +30% (IPO priced at 325p/shr)]

- Energy: [Petrofac [PFC.UK] -4.2% (Follow through, analyst downgrade)

Speakers

- EU President Tusk opening remarks at G7 in Italy noted that the Summit would be one of the more challenging one in years as leaders had different views on trade and climate. Expected unity to be expressed on Ukraine; nothing showing that sanctions should be lifted against Russia

- EU's Juncker: President Trump was not aggressive at all on German trade (refute earlier press reports). (**Note: German press reported that President Trump complained about the Germany's trade surplus, Trump conversation to EU officials about Germans were "bad, very bad" because the country sold more cars to the US than it imported)

- IMF's Rice: confident that a deal to ease the Greek debt burden can be reached in the next few months

- IMF Mission Statement on Ukraine: Decisive implementation of reforms remains critical for Ukraine to achieve stronger and sustainable growth

- Portugal Debt Agency (IGCP): Early repayment of an additional portion of the IMF loan will be made over the next 30 months

- China PBoC said to consider changing methodology around daily Yuan mid-point fixing. Said to add "counter-cyclical adjustment factor" that may reduce the impact of market swings. Under new formula, institutions said to provide quotes for the fixing taking into account the previous day's official closing price (occurs at 16:30 local time). No further details of the new formula provided

- China's Dagong credit agency: China's downside economic risks are controllable

Currencies

- GBP was softer and at 2-month lows after a poll showed a narrowing lead for British PM May over her opposition ahead of elections next month. assumption that a landslide election win for May would strengthen her hand over hard-line Brexiteers in her ruling party and allow her to negotiate a smoother departure from the European Union, had been a source of support for sterling. GBP/USD lower by 0.5% around 1.2870 just ahead of the NY morning. The pair has had much difficulty sustaining moves above 1.30 in prior sessions.

- JPY currency was firmer in the aftermath of Japan's Apr CPI data. Overall the data trend did provide some light at the end of the tunnel as core CPI inflation rate accelerated to two-year high but still well below the BOJ target. Some analysts expect higher inflation in Japan in coming months due to a tightening labor market and a recovery in energy prices

Fixed Income

- Bund futures trade at 161.59 up 21 ticks, recovering losses from the earlier part of the week to end up slightly higher on the week. Key resistance lies between the 161.70 to 162.00 range, 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 128.97 higher by 9 ticks after tentatively breaking the May 18th high of 128.94. Major resistance remains the 129.14 April 18th high. If we see another leg higher, upside may target the 132.80 level. Key support lies at the 128.52 support level. An acceleration lower could test the 127.43 region.

- Friday's liquidity report showed Thursday's excess liquidity declined to €1.6255T a drop of €2.5B from €1.6280T prior. Use of the marginal lending facility rose to €204M from €186M prior.

- Corporate issuance saw $350M come to market via one issue with American Financial Group Inc's senior unsecured offering This week's issuance is at $36.25B, ahead of the analysts' issuance target to come in around $35B. For the week ending May 24th Lipper US fund flows reported IG funds net inflows $2.1B bringing YTD inflows to $56.98B, High yield funds reported outflows of $0.57B bringing YTD outflows to $6.01B.

Looking Ahead

- (IT) G7 Leaders begin 2-day meeting in Taormina, Sicily

- (BR) Brazil May CNI Consumer Confidence: No est v 103.4 prior

- 06:00 (UK) DMO to sell combined £2.0B in 1-month, 3-month and 6-month bills (£0.5B, £0.5B and £1.0B respectively)

- 06:45 (US) Daily Libor Fixing - 07:00 (BR) Brazil May FGV Construction Costs M/M: +0.1%e v -0.1% prior

- 07:30 (IN) India Weekly Forex Reserves

- 08:00 (BR) Brazil Apr PPI Manufacturing M/M: No est v 0.0% prior; Y/Y: No est v 1.7% prior

- 08:00 (ES) Spain Debt Agency (Tesoro) announces upcoming Bond issuance

- 08:15 (UK) Baltic Dry Bulk Index

- 08:30 (US) Q1 Preliminary GDP Annualized Q/Q: 0.9%e v 0.7% advance; Personal Consumption: 0.4%e v 0.3% advance

- 08:30 (US) Q1 Preliminary GDP Price Index: 2.3%e v 2.3% advance; Core PCE Q/Q: 2.0%e v 2.0% advance

- 08:30 (US) Apr Preliminary Durable Goods Orders: -1.5%e v +0.9% prior; Durables Ex Transportation: 0.4%e v 0.0% prior; Capital Goods Orders (Non-defense ex aircraft): 0.5%e v 0.5% prior; Capital Goods Shipments (Non-defense/ex-aircraft): 0.5%e v 0.3% prior (revised from 0.3%); Durables Ex-Defense: No est v 0.5% prior

- 09:00 (MX) Mexico Apr Unemployment Rate (Seasonally adj): 3.5%e v 3.5% prior; Unemployment Rate (unadj): 3.3%e v 3.2% prior

- 09:30 (BR) Brazil Primary Budget Balance (BRL): +6.7Be v -11.0B prior; Nominal Budget Balance: -26.3Be v -54.3B prior; Net Debt to GDP Ratio: 48.1%e v 47.8% prior

- 10:00 (US) May Final University of Michigan Confidence: 97.5e v 97.7 prelim

- 11:00 Potential sovereign ratings

- (KR) Kuwait Sovereign Debt to be rated by Moody's

- (QA) Qatar Sovereign Debt to be rated by Moody's

- 13:00 (US) Weekly Baker Hughes Rig Count data

- 15:00 - (CO) Colombia Central bank Interest Rate Decision: Expected to cut Overnight Lending Rate by 25bps to 6.25%