- Global stocks rally during Monday’s U.S. holiday with focus on trade and politics
- Sterling falls as poor Conservative Party showing in EU election may boost chances for no-deal Brexit
- U.S. weekly focus
Global stocks rally during Monday’s U.S. holiday with focus on trade and politics — Global stocks closed mostly higher on Monday during the U.S. holiday. The Shanghai Composite index on Monday closed sharply higher by +1.38% on (1) the rally in the Chinese yuan to a 1-1/2 week high against the dollar, and (2) hopes for more stimulus to offset trade woes. The Chinese yuan rallied to a 1-1/2 week high against the dollar after the head of China’s banking and insurance regulator, Guo Shuqing, warned traders of a “huge loss” if they short the yuan. The yuan and Chinese stocks tend to move together in fairly close correlation.
The Chinese markets on Monday were able to shake off President Trump’s statement on Monday in Japan that the U.S. is “not ready” to make a trade deal with China, although he added that he expects a “great trade deal” sometime in the future.
On the positive side for Asian trade tensions, President Trump at his weekend summit in Japan agreed that the U.S. would wait to finalize a trade deal until after Japanese elections in July, thus giving the markets some breathing room. As part of the weekend summit, USTR Lighthizer and Japanese Economy Minister Motegi met on Saturday to discuss a US/Japanese trade agreement. They reportedly did not get into the more difficult issues such as Japanese auto exports or a currency deal although they did discuss agriculture. Japan is refusing to make any agricultural concessions to the U.S. beyond what was contained in the Trans-Pacific Partnership.
In Europe, there was relief on Monday that populists failed to live up to expectations in the EU Parliamentary elections that were held on Thursday through Sunday. The Euro Stoxx 50 index on Monday rallied by 0.40%. EUR/USD edged to a 1-1/2 week high but then fell back to close the day slightly lower by -0.08%. Italy’s League Party did very well but in most other European countries the populists didn’t gain much ground against the center/establishment parties. The center/establishment parties will therefore be able to retain their grip on the EU Parliament although with more obstacles thrown up by populists. The markets were pleased that Ms. Merkel’s coalition government looks as though it will hold together in the wake of the EU elections.
EU politics will remain in the news early this week. The EU today will hold a summit in the wake of the EU Parliamentary elections with a key topic being the beginning of serious discussions about who will hold senior positions in the European Commission and who will be the ECB president when Mr. Draghi’s 8-year term expires this October.
The markets are also watching a new EU showdown with Italy on its budget after Deputy Prime Minister Salvini on Monday said that he is expecting a letter from the EU about exceeding EU budget and national debt limits. The markets are also watching to see if Mr. Salvini makes any moves for a snap election to boost his power in Parliament, which could cause serious problems with Parliament trying to produce a 2020 budget on time.
Sterling falls as poor Conservative Party showing in EU election may boost chances for no-deal Brexit — Sterling on Monday fell by -0.28% although it remained above last Thursday’s 4-3/4 month low. Sterling was undercut by the success of Nigel Farage’s Brexit Party in last Thursday’s UK election for EU Parliament, which increased the pressure on Conservatives to elect a hard-line Brexiteer as the new Prime Minister to get the UK out of the EU by the October 31 deadline, even by a no-deal Brexit as a last resort.
In last Thursday’s election, the newly-formed Brexit Party took first place with 32% of the vote, followed by the pro-EU Liberal Democrats at 20%, Labour at 14%, anti-Brexit Greens at 12%, and Conservatives at 9%. The campaign among Conservative Party leaders to become the new Prime Minister will now move into full swing. Prime Minister May is staying on as the caretaker until a new Prime Minister is in place, likely by the end of July. The new PM will then have only three months to find a way to pull the UK out of the EU before the Brexit deadline of October 31.
U.S. weekly focus — The U.S. markets face a busy week. Today’s March home price reports are expected to show a continued climb in home prices with the Composite 20 index expected up +0.5% m/m and the FHFA index up +0.2% m/m. Today’s Conference Board May U.S. consumer confidence index is expected to show a +0.8 point increase to 130.0, adding to April’s solid +5.0 point advance to 129.2. The Treasury today will sell $40 billion of 2-year T-notes and $41 billion of 5-year T-notes.
Wednesday’s news includes the May Richmond Fed manufacturing index (expected +3 to 6 after April’s -7 to 3) and the Treasury’s auction of $18 billion of 2-year floating rate notes and $32 billion of 7-year T-notes. Thursday brings (1) initial unemployment claims (expected +3,000), (2) the Q1 GDP revision (expected +3.1% vs +3.2%), (3) April pending home sales (expected +0.5% m/m after March’s +3.8%), and (4) comments by Fed Vice Chair Clarida at the Economic Club of New York.
Friday brings (1) the April PCE deflator (expected +0.3% m/m and +1.6% y/y, a little higher than March’s +0.2% m/m and +1.5% y/y), (2) April personal spending and income (expected +0.2% and +0.3% respectively), (3) May Chicago PMI (expected +1.4 to 54.4 after April’s sharp -6.1 point drop to 52.6), and (4) the final-May University of Michigan U.S. consumer sentiment index (expected -1.1 to 101.3, which would reduce the preliminary increase of +5.2 points).
