Funda-FX wrap: plenty of fat to chew on, setting a market precedent

Monetary policy normalisation was a theme on Tuesday with a Bloomberg report hinting at the ECB on the verge of making an announcement as to when the Central Bank intends to stop buying bonds. ECB Board member Lautenschlaeger said in May that June could be the month to decide “once and for all” to gradually conclude net asset purchases by the end of this year.

"President Mario Draghi’s Governing Council is likely to treat the June 14 gathering in Latvia as an opportunity to debate winding down bond-buying, said the officials, who asked not to be named because such matters are confidential. Purchases are currently intended to run until at least September," - Bloomberg

In other news, trade wars took another turn on Tuesday when Republican Senate foreign relations chair, Corker, said that both Republican and Democratic Senators are about to introduce a bill to force Trump to obtain congressional approval for imposing tariffs on national security grounds. This follows weekend talks with China where they attempted to negotiate their way out from the punitive tariffs on US$50 billion of Chinese imports and restrictions on investment in the American hi-tech industry. China had offered to purchase close to $70 billion worth of US goods over the next year if the Trump administration backs off proposed tariffs, which would help alleviate some of the trade tensions between the Trump administration and China. However, there have been no responses from the White House as of yet and Chinese officials have already said publicly that any agreements would be void if the United States continued with plans to impose tariffs and other restrictions. The White House press secretary, Sarah Sanders, would not comment on whether the Chinese proposal would be accepted by Trump, saying on Tuesday that “we’re in the negotiation process” and that “our focus is to make sure we get good deals.”

Further, White House economic adviser Larry Kudlow was speaking to Fox News today and said that Trump has been considering whether to split the Nafta talks into separate negotiations with Mexico and Canada. However, Sen. John Cornyn, R-Texas, said the deadline for congressional approval of a new trade deal had likely run out. This points to there not being a Nafta 2.0 until 2019. The point is, it will take months to get a any kind of a deal implemented and given the Mexican presidential election is on July 1 and the U.S. midterm elections are in November, there simply is not the stable political foundations to bring anything together in time. 

Meanwhile, across the Atlantic, the UK continued to print data beats that shifted BoE rate expectations. The OIS is now pricing in 7bpts of tightening for August and 17bpts by November. In Italy, the new prime minister, Giuseppe Conte, outlined the new government’s policy priorities today, vowing for radical change. The euro was shaken up on the back of them given that they challenge the EU's budget. Such topics of introducing universal income and addressing immigration lead to a rise in Italian bond yields, ( Italian 10-year yields were up 23 basis points to 2.77%).

US data:

The Markit services purchasing managers index for the U.S. in May rose to 56.8 from 54.6. The ISM nonmanufacturing index for the same month rose to 58.6, compared with MarketWatch consensus estimates of 58. Job openings for April stood at 6.7 million, up from 6.6 million previously.

UK data:

• EU Markit Serv Final PMI, 53.8, 53.9 forecast, 53.9 prev
• EU Markit Comp Final PMI, 54.1, 54.1 forecast, 54.1 prev
• FR Budget Balance, -54.34 bln, -33.10 bln prev
• FR Markit Serv PMI, 54.3, 54.3 forecast, 54.3 prev
• FR Markit Comp PMI, 54.2, 54.5 forecast, 54.5 prev
• DE Markit Services PMI, 52.1, 52.1 forecast, 52.1 prev
• DE Markit Comp Final PMI, 53.4, 53.1 f'cast, 53.1 prev
• GB BRC Retail Sales YY, 2.80%, -4.20% prev
• GB Markit/CIPS Serv PMI, 54, 53 forecast, 52.8 prev

Closing changes:

• Italy MIB -0.8%
• UK FTSE 100 -0.6%
• French CAC +0.1%
• German DAX +0.2%
• Spain Ibex -0.3%

The Nasdaq advanced 31.40 points, or 0.4%, at 7,637.86. The Dow Jones Industrial Average DJIA, -0.06%  ended down 13.71 points, or less than 0.1%, to 24,799.98. The S&P 500 rose 1.92 points, or less than 0.1%, at 2,748.79, with consumer-staples stocks down 0.5% and financials off 0.4%.

Key headlines from US session

• ECB's Weidmann: Italy market turmoil shows currency union not yet crisis proof
• UK: Labour about to announce major shift towards soft Brexit - The Times
• Canadian govt official: NAFTA is a trilateral agreement
• Senior EU official: EU has "extremely low" expectations for the G7 summit - Reuters
• ECB to debate QE exit in June 14 meeting - Bloomberg
• Mexican EconMin Guajardo: In favor of maintaining trilateral NAFTA agreement
• US: Number of job openings was little changed at 6.7 mln on last business day of April
• US: Non-manufacturing PMI improves to 58.6 in May from 56.8 in April - ISM
• US: Services business activity growth accelerates to fastest since Apr 2015 - Markit
• ECB: 17th annual review of the international role of the euro
• White House Econ. Advisor Kudlow: Pres. Trump is ‘seriously considering’ splitting NAFTA talks