6/8/2018 Stocks And Euro Rise, Bonds And Dollar Slump After ECB Comments, With Italy, Trade

s, With Italy, Trade War Fading | Zero Hedge

Stocks And Euro Rise, Bonds And Dollar Slump After ECB
Comments, With Italy, Trade War Fading

by Tyler Durden
Wed, 06/06/2018 - 07:23

Global stocks, US equity futures and Treasury yields extended gains while the dollar slumped as "risk-on"
sentiment returned after the U.S. and China exchanged trade proposals meant to avoid an escalation of
economic tensions, while European bonds declined and the euro strengthened following a Bloomberg report
and hawkish comments from ECB speakers suggesting that the ECB's next, June 14 meeting will be "live" to
debate the end of QE.

Not even persisting concerns about the Italian political situation and "radical" budget of the populists,
manifesting in another early blowout in Italian yields, with 2-year yields climbing as much as 50bps despite
no news flow...

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... could dampen broader bullish sentiment with Europe's Stoxx 600 Index rising led by energy, miners and
materials stocks, though it faced a headwind as the common currency rose for a third day, hitting the
highest level since May 23, amid a short squeeze prompted by a Bloomberg report that the ECB may
announce the end of QE next week, while ECB chief economist Peter Praet on Wednesday confirmed that next
week’s gathering will be pivotal for reaching a decision on when to end the institution’s bond-buying
program.

Boosting the euro was a slew of ECB speakers following yesterday's "live meeting" report which sent the
EURUSD spiking. As a reminder, Tuesday saw the release of a Bloomberg "source" report, stating the
June meeting as “live” to discuss QE exit. In light of this and ahead of the ECB blackout period
commencing on Thursday, a slew of members came out with comments:
ECB's Praet (Dovish) said inflation expectations are increasingly consistent with their aim, post QE
forward guidance on policy rates will then have to be further specified. He further added that markets
are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion
and that it is clear that next week will need to discuss end of QE program.
ECB’s Hansson (Hawk) said the ECB could lift rates before mid-2019 due to "moderately" rising
inflation. (Newswires)
ECB's Weidmann (Hawk) said that inflation is now expected to gradually return to levels compatible
with their target, adding that market expectation of end of QE by end of 2018 is plausible.
ECB's Knot (Hawk) said it is reasonable to end QE soon inflation outlook is stable and less dependent
on stimulus. He adds that the ECB should wind down QE as soon as possible.

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Perhaps the take home message here is that as Bloomberg's Lisa Abramowicz said, "it's kind of amazing
that the ECB has to spend so much time deciding whether or not to even talk about exiting its bond-
buying program."
Still, not all was well as Italy's FTSE MIB slumped -1.0%, weighed on by Italian banks (-1.6%) following Conte
setting Italy on a collision course with the EU Tuesday, even though analyst comments pushed the
narrative that for now Italy's problem is not Europe's problem: "The problems in Italy are only Italy’s problem
again,” said Commerzbank's Esther Reichelt. "For the euro there is a small but significant difference between
a crisis in a member state that euro investors can avoid by shifting their portfolios to a different euro zone
country and a systemic crisis of the single currency."
Earlier the MSCI Asia Pacific Index climbed after China was said to offer to buy more American products and
on reports the U.S. Treasury Department favors less sweeping investment limits on the Asian nation. The
U.S. and China continued to discuss the shape of a deal to fend off an impending trade war, with China
offering to boost purchases of American goods and the U.S. finalizing a deal to allow China’s ZTE to resume
purchases from American suppliers.
“European markets will remain focused on the latest chapter of the political development, which covers the
subject of trade tariffs given that we do not have any significant data on the agenda today,” said Naeem
Aslam, chief market analyst at TF Global Markets U.K.
Meanwhile, trade "has an impact on sentiment, but doesn’t necessarily have an impact on the broader
fundamentals," Dwyfor Evans, head of Asia-Pacific macro strategy and managing director at State Street
Global Markets, told Bloomberg Television, perhaps explaining why good trade news are bullish while bad
trade news are ignored. "Looking at the fundamentals alone, it’s not a bad environment for global markets,
it’s just getting pushed from one side to the next by headlines and politics and volatility right now."
Traders are also looking ahead to the G-7 (or rather G-6 +1) meeting later this week for further
developments in the trade story.
In macro, the dollar fell against most of its peers ahead of U.S. economic data, and as Treasury yields
snapped as high as 2.96% the day after Gartman closed his TSY short. Government bonds across the euro
zone fell, led by the slide in Italian securities.

The euro climbed on ECB news and the pound was helped by the weaker dollar and the U.K. opposition
party’s softening Brexit stance. Australia’s dollar strengthened against all its 31 major peers after first-
quarter economic growth beat forecasts. The yen weakened as gains in Asian stocks reduced demand for
haven assets; USD/CHF edged higher even as Swiss inflation accelerated to the fastest since early 2011 in
May. In Emerging Markets, investors will be closely watching Brazilian assets after the real closed at the
lowest since 2016 following a failed attempt by the central bank to halt the currency’s slide.
In the latest Brexit news, UK opposition Labour party are reportedly going to announce a major shift towards
a soft Brexit, in which party leader Corbyn will table "internal market" amendment to the withdrawal bill,
customs bill and trade bill.  UK Brexit Secretary David Davis is "not backing down" in dislike of elements of
the backstop plan, according to The Times.

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In commodities, oil prices were mixed as prices come off recent highs after nursing recent losses with
overnight gains post-API, which showed a larger than expected draw in crude stockpiles. Nonetheless, the
inventory report pressured RBOB after a significant build in gasoline stockpiles, although this was then
gradually pared throughout the session. Overnight Russia’s Energy Minister Novak reiterated OPEC+
countries should consider a possible easing of oil output restrictions depending on demand conditions.
In metals, gold is trading marginally lower albeit still rangebound and currently testing USD 1295/oz to the
downside. Meanwhile, Chinese iron ore futures rose to 2-week highs amid an explosion on Tuesday at an
iron ore mine in China’s north-eastern province of Liaoning.
Today's calendar includes MBA mortgage applications and the trade balance. Brown-Forman, Five Below,
Thor Industries and Okta are among companies reporting earnings
Bulletin Headline Summary from RanSquawk
Slew of ECB speakers emerged following source reports yesterday
RBI hiked interest rate and reverse repo rate in a surprise move
Looking ahead, highlights include DoEs, and BoE’s McCafferty
Market Snapshot
S&P 500 futures up 0.2% to 2,756.75
STOXX Europe 600 up 0.08% to 387.21
MXAP up 0.4% to 175.23
MXAPJ up 0.6% to 576.55
Nikkei up 0.4% to 22,625.73
Topix up 0.2% to 1,777.59
Hang Seng Index up 0.5% to 31,259.10
Shanghai Composite up 0.03% to 3,115.18
Sensex up 0.7% to 35,147.54
Australia S&P/ASX 200 up 0.5% to 6,025.11
Kospi up 0.3% to 2,453.76
Brent futures up 0.3% to $75.64/bbl
Gold spot little changed at $1,295.44
U.S. Dollar Index down 0.2% to 93.72
German 10Y yield rose 5.3 bps to 0.422%
Euro up 0.3% to $1.1753
Italian 10Y yield rose 24.8 bps to 2.521%
Spanish 10Y yield rose 7.9 bps to 1.475%
Top Overnight News
Bunds fell and the euro climbed as European Central Bank chief economist Peter Praet confirmed that
next week’s policy meeting will be pivotal for reaching a decision on when to end the institution’s
bond-buying program
China has offered to boost purchases of American goods by about $25 billion this year to fulfill
President Donald Trump’s desire to shrink the U.S. trade deficit with the world’s second-largest
economy, according to two people familiar with the matter
The White House wants North Korean leader Kim Jong Un to commit to a timetable to surrender his
country’s nuclear arsenal when he meets President Donald Trump next week in Singapore, a high-
stakes summit that could last as long as two days -- or just minutes
Treasury Secretary Steven Mnuchin asked President Trump on Tuesday to exempt Canada from steel
and aluminum tariffs, ABC News reports, citing unidentified administration official. Mnuchin said to
favor less-sweeping investment limits for China
Italian Prime Minister Giuseppe Conte passed his first parliamentary hurdle, but alarmed markets with
a maiden speech pledging a raft of populist measures from boosting spending on the poor and the
jobless to sweeping tax cuts
The pound climbed on news that the U.K.’s main opposition party proposed a plan to effectively stay
in the European Union’s single market, a move that could nudge the country toward keeping closer to
the bloc after Brexit
China’s central bank stepped up injections of cash to the financial system, as lenders face a seasonal
liquidity squeeze complicated by an oncoming U.S. Federal Reserve rate hike.
The U.S. and China continued to haggle over the shape of a deal to fend off an impending trade war,
with China offering to boost purchases of American goods and the U.S. finalizing a deal to allow
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China’s ZTE Corp. to resume purchases from American suppliers
The hedge fund managed by billionaire Alan Howard gained about 36 percent in May, according to a
person with knowledge of the matter, burnishing a trading image dulled in recent years by poor
returns at his investment firm
India’s central bank raised its benchmark interest rate for the first time since 2014 and retained its
neutral policy stance, leading sovereign bonds to slip and the rupee to advance
Asian equity markets traded somewhat mixed after a similar performance on Wall St, where tech extended
on gains and the Nasdaq edged fresh records highs, although the DJIA underperformed amid weakness in
energy and financials. ASX 200 (+0.5%) was positive with gains led by miners after recent upside in metal
prices and with BHP also higher due to interest in its US shale assets, while better than expected GDP data
also contributed to the upbeat tone. Elsewhere, Nikkei 225 (+0.4%) eked modest gains amid a weaker
currency but with upside capped as wage data added to the recent slew of disappointing releases from
Japan, while Shanghai Comp. (flat) and Hang Seng (+0.5%) were mixed as trade uncertainty lingered.
Furthermore, the PBoC refrained from reverse repo operations and instead opted to inject via its Medium-
term Lending Facility, while there was also speculation PBoC is likely to lift rates on its lending facilities and
reverse repos should the Fed hike as expected next week. Finally, 10yr JGBs were subdued amid weakness in
USTs and modest gains in Tokyo stocks, while the BoJ Riban announcement was largely ignored as the
central bank kept purchase amounts unchanged in 1yr-10yr maturities. China may reduce RRR and increase
yields on MLF and reverse repos.
Top Asian News
Malaysia’s 1MDB Scandal Takes Down Its Central Bank Governor
Lira Fate Hangs in Balance as Turkey Rate Decision Splits Street
India Joins Emerging Market Central Banks by Raising Key Rate
Tencent’s Ma Unveils WeChat Travel Plan for China, H.K. Bay Area
Indonesia Central Bank Governor Flags More Rate Hikes If Needed
European equities are mixed (Euro stoxx 50 flat) with the energy and material sector outperforming
following higher commodity prices. FTSE 100 (+0.26%) is the leading bourse being supported by energy and
material names. FTSE MIB (-1.0%) currently underperforming bourse and being weighed on by Italian banks
(-1.6%) following Conte setting Italy on a collision course with the EU Tuesday. In individual stock news
Schindler Holding (+5.6%) is seeing positivity following an upgrade to buy at Goldman Sachs. WH Smith
(+5.67%) is also up on the day following positive earnings results. RBS (-0.75%) is down on the day following
the announcement that the UK government may further divest from the co. in September of this year.
Top European News
Barclays Hires Morgan Stanley Distressed-Debt Trader Rachidi
Italian Bonds Slide for Second Day as Fiscal Plans Rattle Market
Repsol Shows Faith in Oil’s Rally With Dividend, Spending Boost
Smurfit Gains Despite International Paper Throwing In the Towel
In FX, EUR was the biggest mover as the single currency has extended gains made late yesterday on the back
of hawkish ECB sourced reports about a live policy meeting next Thursday, as no less than 3 GC members
essentially confirm that the next stage of the exit strategy will be on the agenda. Eur/Usd has tripped stops
at 1.1755 to trade just short of 1.1770, but may be hampered by decent option expiry interest between
1.1750-60 (1 bn) and almost double that amount at the 1.1800 strike (1.8 bn). AUD: Off overnight peaks vs
its US counterpart, but firmly back above 0.7600 after Tuesday’s sharp pull-back (on a gaping Aussie
current account deficit and still neutral RBA) as Q1 GDP surpassed expectations and broad risk sentiment
improves on latest global trade reports (including China offering to buy around Usd70 bn worth of US
goods). CAD: Another relative reprieve for the Loonie after NAFTA and data disappointment amidst reports
that US Treasury Sectretary Mnuchin attempted to persuade President Trump to give Canada a steel and
aluminium pardon. Usd/Cad has retreated to the mid 1.2900 area from around 1.3065 at one stage
yesterday ahead of several releases slated for today, like trade, building permits and the Ivey PMI. CHF/JPY:
The Franc is holding off recent lows vs the Usd with some support gleaned from firmer than forecast Swiss
CPI, but Usd/Jpy has climbed above 110.00 in wake of yet more disappointing Japanese data that will keep
the BoJ in full QQE mode. DXY: Given all the above, 94.000+ status has been relinquished again and the
index is only just keeping its head above 93.500.
In Rates, ECB officials, including the more pragmatic Praet, plus hawkish Hansson, Weidmann and Knot
seem to be confirming source suggestions that next Thursday could well be another crucial policy convene
in terms of conveying to markets the next phase of policy normalisation. Hence, Bunds have come under
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renewed pressure after a fleeting rebound to a fresh Eurex peak at 161.32, which could have been BTP-
related or on more June-September rolls, and have now extended losses to 93 ticks at 160.52, while Euribor
futures are as much as 4.5 ticks in the red. Elsewhere, and in the absence of anything major on the UK front
ahead of a 2023 Gilt tap and BoE commentary, the 10 year Liffe benchmark and Short Sterling contracts are
largely following suit with the former flitting between 122.25-68 vs yesterday’s 122.84 settlement price and
the 3 month strip down 4 ticks at worst. Back to supply, German Bobls drew better demand than the 5yr
DMO tap (see headline feed for further details), but cored debt futures knee-jerked to fresh intra-day lows
amidst hedge unwinds, at 131.30 on Eurex and 122.21 on Liffe.
Commodities are mixed with Brent (+USD 0.4) and WTI (-USD 0.2) as prices come off recent highs after
nursing recent losses with overnight gains post-API, which showed a larger than expected draw in crude
stockpiles. Nonetheless, the inventory report pressured RBOB after a significant build in gasoline stockpiles,
although this was then gradually pared throughout the session. Overnight Russia’s Energy Minister Novak
reiterated OPEC+ countries should consider a possible easing of oil output restrictions depending on
demand conditions. Elsewhere, gold is trading marginally lower albeit still rangebound and currently testing
USD 1295/oz to the downside. Meanwhile, Chinese iron ore futures rose to 2-week highs amid an explosion
on Tuesday at an iron ore mine in China’s north-eastern province of Liaoning. LME base metals are
performing well with LME 3-month copper rising as much as 0.8%, its highest since late February, while LME
aluminium climbed to its highest since May 10th earlier in the session.
Looking at the day ahead now where it’s a very quiet one for data with Q1 nonfarm productivity and unit
labour costs (final revisions) and the April trade balance in the US the only releases of note. Elsewhere, the
ECB’s Praet, Knot, Hakkarainen and Angeloni as well as BoE’s McCafferty are due to speak at various stages
through the day. Meanwhile, the EU banking authority Chairman Enria and Bank of Portugal Vice Governor
Ferreira will also speak at a conference on supervision and regulation of the financial industry.
US Event Calendar
7am: MBA Mortgage Applications, prior -2.9%
8:30am: Revisions: Trade Balance
8:30am: Nonfarm Productivity, est. 0.6%, prior 0.7%
8:30am: Unit Labor Costs, est. 2.8%, prior 2.7%
8:30am: Trade Balance, est. $49.0b deficit, prior $49.0b deficit
DB's Jim Reid concludes the overnight wrap
It might be the hangover effect from last week or a bit of a lull in the calendar ahead of the Fed and ECB next
week but whatever the reason, markets haven’t really got going this week. A combination of NAFTA
headlines, the speech from new Italian Prime Minister Giuseppe Conte and some pressure on Oil prices
meant markets stalled a bit yesterday but it was hardly a run for the hills situation as the S&P 500 did still
manage to bat on to a small +0.07% gain after European bourses had faded from early highs. The Dow
finished -0.06% lower although the Nasdaq (+0.41%) and Russell 2000 (+0.68%) bourses continue to shrug
off any attempts to slow them down by climbing to yet another all-time high.
Just on those NAFTA headlines, what got a bit of airtime yesterday was White House economic advisor Larry
Kudlow’s comments in an interview with Fox News saying that President Trump’s preference was to “actually
negotiate with Mexico and Canada separately”. The read through being that the US was therefore seeking
bilateral NAFTA talks which in theory would mean leaving NAFTA. Although Kudlow was also quick to point
out that the President doesn’t plan to quit the Agreement. As DB’s Alan Ruskin noted yesterday the issue
here is the disruptive back and forth rather than the negotiating position itself. This also means trade
uncertainties have the potential to linger for a while longer if  Trump chooses to go country to country.
As for Italy and the new Prime Minister’s speech, the BTP market was already pretty weak going into Conte’s
speech but did then proceed to sell-off a little more after he spoke. By the closing bell 2y yields were
+27.7bps higher and 10y yields +26.6bps higher. To be fair it’s getting harder to judge what a ‘big’ move is
in the BTP market now given that the average daily change in basis points over the last 7 sessions for 2y
BTPs has been 65bps. In contrast 10y Bund yields were -5.1bps lower yesterday (the spread to BTPs
therefore widening 30bps and for the first time since last Tuesday). Treasuries ended -1.5bps lower at
2.929%.
In terms of the speech itself, to be honest it didn’t appear that Conte was overly controversial. Indeed there
was talk of reducing the current huge public debt burden and also focusing on economic growth pursued
within a framework of financial stability and market trust. There was no mention of the single currency or
pension reform although the nervousness in the bond market was likely more a factor of calls for a citizen’s

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income for the poor and curbs on immigration which, while not new, attracted unsurprising headlines. So
with bond markets hypersensitive at the moment that was probably enough for investors to take some
profits on the recent BTP rally. The FTSE MIB also turned an early +0.83% gain into an -1.18% loss by the end
of play, dragging the likes of the IBEX (-0.66%) lower while the DAX (+0.13%) also closed off its early highs.
The Euro spent most the session lower but bounced back to a +0.16% gain in the evening following a
Bloomberg headline suggesting that the ECB was viewing next Thursday’s monetary policy meeting as a
“live” meeting for debating the end of QE. To be fair that didn’t feel like particularly new news.
As noted at the top weakness across the Oil complex was also a factor yesterday, notwithstanding a bit of a
bounce back in the evening. Brent ended the session marginally up and just north of $75/bbl (+0.12%),
although was down as  much as -1.97% at its lows intraday. This followed the news that the US government
had supposedly asked OPEC to increase supply by 1 million barrels a day according to Bloomberg.
This morning in Asia, various trade related headlines are helping to support small gains across risk assets
with the Nikkei (+0.23%), ASX (+0.45%) and Hang Seng (+0.37%) all up. Just on those headlines, the WSJ
reported that China has offered to buy up to $70bn of US farming and energy related products if the US
abandons its tariffs plans. Later on, unnamed sources clarified to Bloomberg that much of that represent
imports China had already promised to buy, so the incremental amount is likely smaller at $25bn.
Meanwhile, Reuters reported that Chinese telecoms company (ZTE) has signed an agreement in principle
with the US that would lift the ban on buying from American suppliers. The fine is expected to be up to
US$1.4bn on ZTE. Finally Treasury Secretary Steven Mnuchin has, according to ABC News, supposedly told
President Trump to exempt Canada from tariffs on steel and aluminium. That’s helping the Canadian Dollar
to rise slightly this morning while US equity futures are also up slightly.
Coming back to politics briefly, here in the UK Sky News reported yesterday that MPs are set to vote next
Tuesday on the Lord amendments of the Brexit Withdrawal Bill. Our FX strategists’ view has been that the
amendments fail and
the crunch point as one could call it happens later with the EU customs bill where there is greater agreement
on staying in the customs union among MPs compared to the multiple amendments on the Withdrawal Bill.
Next week’s vote is worth watching however. In the meantime Sterling benefited from a decent bid yesterday
versus the Greenback (+0.60% to $1.339) after the May services PMI surprised to the upside at 54.0 (vs. 53.0
expected), which importantly meant it was up 1.2pts from April. That put the composite at 54.5 compared to
53.2 in April and so matching the high this year made back in February. So that should lend some comfort to
the BoE following disappointing data of late.
As for the other PMIs, in Europe there were no real surprises in the final May services and composite
revisions. The Eurozone services reading was confirmed at 53.8 (down 0.1pts from the flash) and the
composite at 54.1 (unchanged versus the flash). Composite prints for Germany (53.4 versus 53.1 flash) and
France (54.2 versus 54.5 flash) also saw slight revisions from the flash while as for the noncore, Spain’s
composite print surprised slightly to the upside after rising 0.5pts to 55.9 (vs. 55.6 expected), while Italy
more or less matched expectations at 52.9 but more importantly held steady versus April. Away from that
we did get some softer April retail sales data for the Euro area after sales were reported as rising just +0.1%
mom (vs. +0.5% expected), albeit offset by upward revisions to prior months.
Across the pond, in the US the services PMI was actually revised up a fairly robust 1.1pts to 56.8 which puts
the composite at 56.6 compared to 54.9 in April and the highest in over 3 years. Backing the data up was
the ISM non-manufacturing print for May which came in 2pts higher at 58.6 (vs. 57.6 expected). Notably
prices paid rose to a very solid 64.3 from 61.8, meaning its edging closer to the 2017 seven-high of 65.9.
Finally the April JOLTS data, while backward looking, still showed an increasingly tight labour market. The
number of job openings rose to a fresh record high of 6.698m (vs. 6.350m expected) with vacancies
outpacing the number of unemployed workers. Meanwhile the  quits rate remained at its cyclical high of
2.3%.
Looking at the day ahead now where it’s a very quiet one for data with Q1 nonfarm productivity and unit
labour costs (final revisions) and the April trade balance in the US the only releases of note. Elsewhere, the
ECB’s Praet, Knot, Hakkarainen and Angeloni as well as BoE’s McCafferty are due to speak at various stages
through the day. Meanwhile, the EU banking authority Chairman Enria and Bank of Portugal Vice Governor
Ferreira will also speak at a conference on supervision and regulation of the financial industry.

20798  18 

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