Even Ominous Reductions of Uncertainty Bring Market Relief

June 1, 2018

Share prices in Europe have rallied 2.6% in Italy, 2.0% in Greece, 1.8% in Spain, 1.4% in Switzerland, 1.2% in France, 0.9% in Germany, and 0.7% in Great Britain. A higher stock market open is indicated in the United States. Overnight results in the Pacific Rim were mixed, with stocks rising 0.7% in South Korea and Taiwan but falling 0.7% in Singapore and China. Japan’s Nikkei edged 0.1% lower.

Ten-year sovereign debt yields converged further in Europe, with German bunds and British gilts climbing six basis points apiece and those in The Netherlands advancing by 5 bps, while yields fell 24 bps in Italy, 15 bps in Portugal, 13 bps in Spain and 12 bps in Greece. The Japanese 10-year JGB yield edged up a basis point, and the 10-year U.S. Treasury yield in futures trading climbed 3 bps back to 2.89%.

Oil and gold prices are slightly softer.

The dollar is narrowly mixed, firming overnight by 0.3% against the yen, 0.2% relative to the Australian dollar and 0.1% vis-a-vis the kiwi but sliding 0.3% against sterling, 0.2% versus the peso and euro, and 0.1% against the loonie. The Swiss franc and yuan are steady.

On the geopolitical front:

Spanish Prime Minister Rajoy, embattled by alleged corruption in his cabinet, lost a vote of no confidence and has been replaced by Pedro Sanchez of the Socialist Party. Sanchez is honoring the existing Spanish budget and does not plan early snap elections.

The anti-Europe, anti-immigration coalition in Italy of the Five Star Movement and the right-wing League succeeded in designing an acceptable governing coalition whose cabinet includes the leaders of the coalition partners and the originally rejected nominee for economy minister, the anti-euro Savona only not in the economy ministerial post. Look for fiscal policy to become a lot more stimulative in Italy, an economy that from the monetary union’s perspective is seemingly too big to fail.

Group of Seven finance ministers and central bank leaders have convened for talks at the Whistler resort in British Columbia, Canada. The conference appears to mark the end of the prior tactic of appeasing Trump in hopes that his bark is worse than his bite. If a trade war is what the U.S. president wants, the mood of the rest of the world is bring it on. If the rest of the world can present a united front — and that’s far from certain — the United States will have a great deal more to lose from this fight than it possibly could gain.

U.S. Commerce Secretary Ross is off to China for more trade talks, as the world’s two largest economies slip closer to a commercial war.

On today’s data menu are a slew of manufacturing purchasing manager surveys and the U.S. Labor Department’s monthly jobs report.

Euroland’s manufacturing PMI in May was confirmed at the preliminary estimate of 55.5, a 15-month low and down from 60.6 at the end of 2017. A stronger euro and numerous holidays during the month were factors in the drop.

Among individual euro-using economies, the PMIs dropped to an 18-month low in Italy, a 15-month low in Germany, a 14-month low in Austria, a 9-month low in Spain and an 8-month low in The Netherlands. Ireland, France and Greece were the only members to experience faster factory growth in May than in April.

The Swiss and Norwegian manufacturing PMIs of 62.4 and 55.8 in May were each lower than April readings but higher than those from March.

Sweden’s manufacturing PMI rose to a 2-month high of 55.8, but Denmark’s index plunged 8.4 points to a 70-month low of 47.5. Readings of 50 separate expansion from contraction on these diffusion indices.

In Eastern Europe, the Czech PMI (56.5) was at a 9-month low. So was Poland’s PMI, which printed at 53.3. Russia’s PMI sank 1.5 points to a 22-month low of 49.8 and was below 50 for the first time since July 2016.

The South African PMI also printed at 48.9 after touching an 11-month high in April of 50.9.

In the two largest Asian markets, Japan’s manufacturing PMI dropped 1.0 to a 7-month low of 52.8, its joint-weakest reading since last October. China’s manufacturing PMI of 51.1 conveyed tepid activity but was at least no lower than the April result.

Thailand’s PMI was also 51.1, its second highest reading since the last month of 2015, and the Filipino and South Korean PMIs of 53.7 and 48.9 represented 5- and 2-month highs. Vietnam’s PMI, 53.9 in May, signified the fastest growth since April 2017, but the Taiwanese PMI of 53.4 was at an 11-month low.

India’s manufacturing PMI dipped to a 2-month low of 51.2 and was accompanied by evidence of accelerating cost inflation.

Turkey’s PMI fell from a 15-month low in April of 48.9 to 46.4 in May, which indicates the fastest contraction of factory activity since at least 2012 there.

There were two manufacturing PMIs reported for Australia. The one compiled by AIG slipped to a 3-month low of 57.5, while that from CBA slumped to a 21-month low of 53.5.

In other reported data overnight, Italy’s GDP growth rate last quarter was confirmed to be 0.3% from the fourth quarter of 2017 and 1.4% compared to a year earlier. Net exports exerted a drag. Czech GDP rose 0.4% versus 4Q17 and 4.4% on year, down from 5.5% between 4Q16 and 4Q17. South Korean GDP rose 1.0% on quarter and 2.8% on year.

Besides U.S. non-farm payroll jobs, the unemployment rate, and average hourly earnings data, U.S. construction spending and new car sales data get reported today.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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