Morning Report: 5 June 2018

June 5, 2018

GBP. Sterling’s mini-rally seen in the back-end of last week stuttered yesterday, despite positive data from the construction sector in the morning. Data from the Purchasing Managers Index showed a 52.5 reading- with any number above 50.0 indicating an expanding sector- marking the sixth time in the past seven months the reading has been positive, and suggesting construction output is starting to rebound after the huge 2.7% QoQ decline in Q1 2018, which had been blamed partly on adverse weather. Despite this, there was a flurry of sterling negative news points over the course of the afternoon and evening, beginning with Bank of England Monetary Policy Committee member Silvana Tenreyro re-iterating that the UK can afford to leave interest rates on hold for the time being. Overnight, senior government officials then said that Theresa May had benched her 150-page “white paper”, which outlines the future of the UK-EU relationship post-Brexit, until after the European Council meeting on June 28-29th, further prolonging the uncertainty over the governments post-Brexit trade aims- something that business leaders have heavily criticised the government for. Lastly, Chancellor Philip Hammond has come under fire after the government decided to sell 7.7% of its stake in the bank RBS, at a £2.2bn loss relatively to the initial purchase price. The government still owns over 60% over the bank, and Hammond defended the sale as part of a longer-term strategy. On a brighter note for sterling, this morning we have already seen UK Services PMI data for May, which posted a strong 54.0 uptick against a 52.9 forecast.

EUR. Euro initially rallied but came under pressure later in the afternoon, which made the trading day a bit of a mixed bag with gains against USD, GBP and JPY, but losses against AUD, NOK and SEK. Yesterday, Eurozone wide Producer Price Index was released at 10:00 BST, posting no growth in April, the lowest MoM reading in nearly a year. On a YoY basis, the average change in prices received by producers for their goods fell from 2.1% to 2.0%, with the reading undercutting forecast by 0.4%. With inflation moderating in the Eurozone, further clarification of output prices failing to pressure headline inflation doesn’t bode well for an overly hawkish European Central Bank decision at the end of the year. Today, at 09:00 BST, Markit’s Eurozone wide composite PMI is released for May with April’s Retail sales at 10:00.

USD. The dollar steadily weakened throughout the day yesterday in what seemed like an unwind of the recent risk-on sentiment, as traditional haven currencies like JPY and CHF did not fare that well either. The risk on move was further clarified by yields of US 10-year and 2-year treasuries rising yesterday, as participants pulled out of holding the “safer” US fixed income securities. This morning it is reported that the meeting between Donald Trump and Kim Jong Un is back on in Singapore on the 12th June, with a meeting time of 09:00 local time being announced. This follows previous pessimistic rhetoric from both camps over the meeting, with Trump announcing the meeting was off on the 24th May. Today at 15:00 BST the ISM Non-Manufacturing PMI will be published, giving us the latest updates on developments in the US services sector.

CAD. The loonie advanced yesterday, as the broad US dollar strength seen on Friday began to unwind. Overnight USDCAD continued to fall, despite the greenback finding good support elsewhere. Thursday’s G-7 summit remains the main focus for markets after last week’s steel tariffs from the Trump administration were met with condemnation from the US’s major allies including Canada. Today at 13:30 BST Labour Productivity data will be released by Statistics Canada.

FX Elsewhere. The Mexican peso reached its weakest point versus the US dollar yesterday since March 2017 as fears about NAFTA and further trade relations with the US are still ongoing. Additionally, López Abrador, seen as a market unfriendly candidate, is polling at more than 50% of the votes for the Mexican elections at the first of July. As many business leaders have spoken out against Abrador as a President, his potential election puts further pressure on the Mexican peso.

UK news

  • Financial Times: UK government takes £2.1bn loss with RBS stake sale. The UK government has completed its first sale of Royal Bank of Scotland shares in three years, marking a further step in its quest of returning the bank to private hands but incurring a large paper loss to taxpayers who bailed out the lender in the depths of the financial crisis.
  • Reuters: UK services see recovery, but Brexit worries remain. Companies in Britain’s dominant services sector grew more quickly than expected in May after a winter slump in early 2018, but the approach of Brexit held back many companies, a survey showed on Tuesday.
  • Bloomberg: Conte Takes First Step Onto High Wire of Italy Populist Rule. Italian Premier Giuseppe Conte’s maiden speech to Parliament Tuesday will be the first public test of his ability to navigate between the contrasting demands of the populist leaders who got him appointed.

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