Storm clouds on the European periphery prompts massive safe-haven flows into core bonds

Notes/Observations

- European consumer confidence data missing expectations (France, Italy, Sweden all missing consensus)

- Political uncertainties remain elevated in peripheral Europe; big question was whether events would impact ECB’s potential normalization plans

- Recent comments from OPEC and Russia suggesting rising oil supply has pushed crude oil to its lowest level in two weeks

- Speculation of RRR cut in China to prevent liquidity shortages during summer months

Asia:

- China might face liquidity shortage in June and July period which could cause the PBOC to cut the RRR

- Japan Apr Jobless Rate 2.5% v 2.5% prior

Europe:

- Italy's Five Star leader Di Maio calling for demonstration in Rome on June 2nd against arrogance of the institutions

- Spain parliament fixes date for debate and vote of confidence in Spanish PM Mariano Rajoy for May 31st or June 1st

Americas:

- US to hold off on new sanctions on North Korea ahead of summit with US President Trump

 

Economic Data:

- (FI) Finland Apr House Price Index M/M: +0.9% v -0.4% prior; Y/Y: -0.1% v -0.9% prior

- (CH) Swiss Apr Trade Balance (CHF): 2.3B v 1.7B prior; Real Exports M/M: 0.0% v -0.1% prior; Real Imports M/M: -0.4% v 4.2% prior

- (SE) Sweden May Consumer Confidence: 98.5 v 100.5e; Manufacturing Confidence: 118.6 v 117.0e, Economic Tendency Survey: 108.8 v 108.6e

- (HU) Hungary Apr Unemployment Rate: 3.8% v 3.8%e

- (SE) Sweden Apr Household Lending Y/Y: 6.8% v 6.8%e

- (EU) Euro Zone Apr M3 Money Supply Y/Y: 3.9% v 3.9%e

- (IT) Italy May Consumer Confidence: 113.7 v 116.5e; Manufacturing Confidence: 107.7 v 107.1e, Economic Sentiment: 104.7 v 105.0 prior

- (FR) France May Consumer Confidence: 100 v 101e

- (IS) Iceland May CPI M/M: -0.1% v 0.0% prior; Y/Y: 2.0% v 2.3% prior

Fixed Income Issuance:

-(IT) Italy Debt Agency (Tesoro)sold €5.5B vs. €5.5B indicated in 6-month bills; Avg Yield: +1.213% (highest since Feb 2013) v -0.426% prior; Bid-to-cover: 1.19x (technically uncovered) v 1.65x prior

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -1.8% at 3,424, FTSE -1.4% at 7,623, DAX -1.5% at 12,666, CAC-40 -1.6% at 5,421; IBEX-35 -2.2% at 9,543, FTSE MIB -2.4% at 21,423, SMI -1.2% at 8,669 , S&P 500 Futures -0.7%]

Market Focal Points/Key Themes: European indices open down across the board and continued trend as session progressed; FTSE MIB started the session down 1.6%, with political concerns impacting performance; Spain also under pressure from political concerns; financial sector under pressure following concerns in periphery; UK markets catching uph after holiday closure yesterday; energy stocks supported by oil prices; upcoming earnings in the US session include Booz Allen, Salesforce and HP

 

Equities

- Consumer discretionary: Dixons Carphone DC.UK -20.5%(results, outlook), Elior ELIOR.FR -1.6% (results), Grammer GMM.DE +2.8% (takeover offer), International Workplace IWG.UK +1.7% (rejects takeover offer), Remy Cointreau RCO.FR -2.6% (analyst a ction)

- Industrials: Volkerwessels KVE.NL -2.1% (investigation)

- Materials: Lanxess LXS.DE +1.8% (analyst acton), Vedanta Resources VED.UK +4.0% (plant closure in India)

- Technology: Smiths Group SMIN.UK +2.9% (potential merger of unit)

- Telecom: SES SESG.FR +3.3% (analyst action)

 

Speakers

- ECB's Visco (Italy): No short cuts for cutting debt; country (Italy) only a few steps away from losing international trust

- BOE Spokesman: refuted suggestions of a rift between the central bank and the UK

- Sweden Central Bank (Riksbank) Dep Gov Ohlsson (dissenter): With inflation on target there were new challenges for the central bank

- Germany financial regulator (Bafin): Always a risk of contagion

- Sweden Think Tank NIER: 12-month inflation forecast raised from 2.9% to 3.1%

- Italy Democratic Party Leader Martina: League and Five Star had a plan to leave the euro

- Moody's: Italy's political crisis escalates and now saw Autumn elections as likely (** Reminder: Over the weekend Moodys place Italy's Baa2 sovereign rating on downgrade review)

- Fed’s Bullard (dove, non-voter) reiterated that US policy was possibly at neutral mean, Fed should be cautious with additional rate increases

- New Zealand Fin Min Robertson: No evidence of systemic problems in upcoming financial stability review

- Norway Oil Min Soviknes: Return to $100/barrel for crude oil far from unlikely

 

Currencies

- Safe-haven flows favored the USD, CHF and JPY currencies in the session. USD Index at 6 1/2 month highs - Continued stress in the periphery sends Italian, Spanish and Portuguese yield higher and caused the EUR/USD to test below the 1.1535 area for its lowest level since Nov. With political uncertainties remaining elevated in peripheral Europe the big question begged whether events would impact ECB’s potential normalization. The Italian 10-year yield heading towards the 3.5% neighborhood as fears abounded that the appointment of a technocratic government in Italy could backfire and make the populists even more popular and with more power when fresh elections are held

- The yen currency was firmer with USD/JPY testing below 108.50 and EUR/JPY registering its largest decline in 4 month as the cross tested the lower area of the 125 handle.

 

Fixed Income

- Bund Futures trade 172 ticks higher at 163.69 as the yield on the German 10-year Bund continues to plummet as the Italian crisis continues to drive safe-haven demand. Upside targets 164.75 followed by 165.50, while a return lower targets the 162.25 level.

- Gilt futures trade at 124.83, higher by 138 ticks as analysts turn bullish on gilts, given their view that UK inflation is headed back below 2%. Support continues stands at 124.75 then 123.75, with upside resistance at 125.85 then 127.35.

- Tuesday’s liquidity report showed Monday’s excess liquidity rose from €1.845T to €1.8T. Use of the marginal lending facility decreased from €221M to €194M.

- Corporate issuance saw $23.1B priced in the primary market last week

 

Looking Ahead

- (BR) Brazil Apr Central Govt Budget Balance (BRL): No est v -24.8B prior

- (BR) Brazil May CNI Consumer Confidence: No est v 102.2 prior

- 05:30 (LX) ECB’s Mersch (Luxembourg)

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

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

- 05:30 (ZA) South Africa to sell ZAR2.4B in 2026, 2035 and 2044 bonds

- 6:00 (IL) Israel to sell bonds

- 06:45 (US) Daily Libor Fixing

- 07:00 (BR) Brazil May FGV Inflation IGPM M/M: 1.3%e v 0.6% prior; Y/Y: 4.1%e v 1.9% prior

- 07:00 (ES) Spain Apr YTD Budget Balance: No est v -€4.5B prior

- 08:00 (BR) Brazil Apr National Unemployment Rate: 13.0%e v 13.1% prior

- 08:00 (BR) Brazil Apr PPI Manufacturing M/M: No est v 0.9% prior; Y/Y: No est v 5.7% prior

- 08:00 (DE) German Fin Min Scholtz

- 08:05 (UK) Baltic Dry Bulk Index

- 09:00 (US) Mar S&P/ Case-Shiller 20-City M/M: 0.70%e v 0.83% prior; Y/Y: 6.40%e v 6.80% prior; House Price Index (HPI): No est v 206.67 prior

- 09:00 (US) Mar S&P Case-Shiller (overall) HPI Y/Y: No est v 6.34% prior, Overall HPI Index: No est v 197.01 prior

- 09:00 (EU) Weekly ECB Forex Reserves

- 10:00 (US) May Consumer Confidence: 128.0e v 128.7 prior

- 10:30 (US) May Dallas Fed Manufacturing Activity: 23.0e v 21.8 prior

- 10:30 (CA) Canada to sell 3-month, 6-month and 12-month bills

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

- 11:30 (US) Treasury to sell 3-Month and 6-Month Bills

- 11:30 (DE) ECB’s Lautenschlaeger (Germany)

- 12:00 (FR) ECB’s Villerory and Coeure in Paris