Spot values at a glance:
Asian stocks struggled for traction Monday with energy shares tumbling after oil extended its biggest drop in about a year. The euro rallied after Italy’s president rejected a candidate for finance minister who’s been sceptical of the single currency. South Korean stocks rose, as did US index futures, after President Donald Trump appeared to confirm that his June summit with North Korea’s Kim Jong Un was back on. The US dollar slipped against most peers.
Trump-Kim Summit Back on Track?
President Donald Trump appeared to confirm that his summit with Kim Jong Un was back on, 3 days after he abruptly called off the historic meeting in an sharply worded letter to the North Korean leader. “Our United States team has arrived in North Korea to make arrangements for the Summit between Kim Jong Un and myself,” Trump said in tweet on Sunday afternoon, making no reference to his recent decision to pull out of the meeting.
The State Department earlier confirmed reports that a US delegation is meeting with North Korean officials to prepare for the summit, which had been set for Singapore on June 12.
Italian Political Turmoil:
Italy sank deeper into political uncertainty as populist leaders pulled the plug on their attempt to form a government after the president rejected their choice of a euro-skeptic, Germany-bashing candidate as finance minister.
The anti-establishment Five Star Movement said it was considering proposing impeachment of President Sergio Mattarella, while anti-immigrant League leader Matteo Salvini hinted at a conspiracy and made a thinly veiled call for fresh elections. The euro rallied against the dollar.
Mattarella said he rejected the populists’ choice of Paolo Savona for finance minister for the good of the country and the financial “savings of families” that had been endangered by rising bond spreads and market concerns.
Five Star leaders are discussing a possible attempt to seek Mattarella’s impeachment, invoking a constitutional clause which says the president is not responsible for actions carried out as part of his office, except for high treason or for violating the constitution, a Five Star official said. Mattarella’s office declined to comment on the report.
China Industrial Profit Growth Accelerates:
Profit growth at Chinese industrial companies accelerated, snapping a streak of slowing expansion since October, as factory output remained robust. Industrial profits advanced 21.9% in April from a year earlier, versus a 3.1% increase in March and 16.1% in January and February combined. Total profits for the month were 576.03 billion yuan ($90.1 billion), the National Bureau of Statistics said Sunday.
The acceleration was bolstered by higher output, rebounding factory inflation and improved profit margins particularly in the steel, chemical and auto industries, the bureau said in a separate statement. Industrial output climbed 7% last month, exceeding forecasts, though decelerating investment and retail sales signal a looming economic slowdown.
Oil Output May Rise:
Saudi Arabia and Russia announced a new policy to revive oil production last week. With oil supplies tightening and prices soaring, the two countries agreed to restore some of the output they halted as part of an accord with 22 other producers, drawn from the Organization of Petroleum Exporting Countries and beyond. Officials from several producers, both inside OPEC and outside, said they disapproved of the proposal to raise output and saw difficulties in reaching a consensus when they meet in Vienna next month. OPEC and its allies concluded in a meeting last week that the long-sought goal of eliminating the global glut was reached at the end of April. That may give support to the Saudi-Russian proposal to start boosting output.
China-US Yield Gap Narrows:
China’s 10yr bonds yield has narrowed to just 65 basis points more than Treasuries, near the smallest premium since 2016. The PBOC in April described a 90 basis-point gap as “comfortable”, and noted that an 80-100 basis point spread had persisted between the sovereign curves even as the Federal Reserve raises rates.
That raises the question of whether there’s still room to reduce lenders’ reserve requirement ratios, given the last cut in April spurred the biggest drop in China’s 10yr yield since December 2016. Wang Yifeng, a researcher at China Minsheng Bank in Beijing, says the yuan holds the answer. Its resilience means the PBOC will be relaxed about RRR cuts, he says.
USDSGD declined below 1.3400 Monday amid broad USD weakness. From a longer-term perspective, the momentum continues to remain to the upside, with the pair’s 200-day moving average at 1.3370 now serving as a line of support. The next resistance of 1.3540 may be tested soon.
AUDUSD opened the week higher earlier today, following positive investor sentiment after news filtered through that the Trump-Kim summit scheduled for 12th June in Singapore is back on the cards.
The year-to-date downtrend remains intact although a recovery back above 0.7700 may signal a break in trend. With the 0.7600 handle holding off Aussie bulls, the AUDUSD may soon revert back to its longer-term trend and retest the lows near 0.7400.
USDCAD traded near a 2-month high, just short of its 1.3000 handle following a slump in crude oil prices on Friday, which saw WTI futures decline to a 2-1/2 week low of near $69/bbl. A break above the recent high in March of 1.3125 may drive the currency pair back near 1.3500.
USDCNH has been capped below its key 6.4000 psychological handle in recent weeks, despite continued broad USD strength. A break out above could signal a reversal of the currency pair’s downtrend which has lasted for about a year.
Onshore yuan dropped for a sixth consecutive session Monday against a the Bloomberg replica of the CFET RMB Index, which tracks the yuan against 24 currencies, extending its longest run of declines since November as the central bank keeps the daily reference rates weak.
USDJPY was little changed from its decline last week, trading around 109.40 earlier today. The pair had pared earlier gains which saw the pair rise to an intraday high of 109.83. The yen could potential reverse previous week gains after Trump appeared to confirm that his summit with Kim Jon Un was back on. USJPY’s key support resides around 107.80.
GBPUSD is trading up softly from last Friday’s weak close of 1.3309, ahead of an UK holiday on Monday. With Brexit and monetary policy uncertainty already weighing on the pound, sterling volatility could be set to pick up again soon. In addition, now Scottish independence may be back on the list of worries for pound investors, after the Scottish government recently publishing a paper on reopening the case for independence.
Over the longer-term, the bias remains to the downside with the pair’s 200-day moving average and previous key support of 1.3450 broken.