Trading with point and figure

DAX @ 1.30, been some nice moves today

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- UK Election, ECB meeting & Comey testimony in focus; as UK RICS survey,
Japan GDP revision, China Trade and German Production are digested;
Middle East tensions, Eurozone banks provide overarching themes

- China Trade: better than expected Exports and Imports underline soft
April data id not signal sharp deterioration in domestic demand;
commodity import shifts due to any array of sector specifics

- Japan GDP revision: downward revision almost wholly due to inventories

- ECB meeting: focus on revisions to statement on rates and risks to
economic outlook; bank sector woes likely to feature at press
conference

- UK Election: UK FX & asset markets largely dismissive of close outcome,
large increase in Tory majority required to avoid leadership challenge


..........................................................................

********************
** EVENTS PREVIEW **
********************

So this week's peak 'event risk' day arrives, though with the situation in the GCC/Qatar stand-off intensifying and the terro attack in Teheran yesterday, there would appear to be a lot 'in play' than the trifecta of the UK Election, ECB council meeting and Comey testimony. Indeed the data schedule is not without its highlights, starting with the overnight China Trade readings, revised Japan Q1 GDP and Economy Watchers' Survey, German Production and French Trade, while ahead lie final Eurozone Q1 GDP, which is quite likely to see an upward revision to 0.6% q/q from the expected/provisional 0.5% q/q, while the afternoon brings US weekly jobless claims and some fresh data on the beleaguered Canadian housing sector. Ireland will also auction 10 and 30 yr debt, with the BoC's Canada Financial System Review offering a further focal point. As for Comey's testimony, this has been touted as a potential trigger for a move that could trigger Trump’s impeachment, but as with so much that has gone before, that suggestion should be clearly labelled as 'shrill hyperbole'. Indeed it may prove to be a rather dull affair (especially given the already published written testimony), and it looks to be very clear that documentary evidence, rather than 'hearsay' is clearly not to hand, otherwise it would have been long deployed. As NSA director Rogers noted yesterday, he is not willing to discuss 'theoreticals' or specifics of conversations with Trump, and there is not likely to be anyone else either. In respect of the China Trade data, a comfortable beat on exports and imports, both in USD and CNY terms, should offer some comfort that the dip in April was due to transitory factors, and that domestic demand is not slowing sharply, this applies particularly to the bounce in copper and iron ore imports. In the detail, the surge in crude oil imports to a new record needs to be treated with care, in so far as the surge was primarily due to demand from 'teapot' refineries, who in many cases appear to have largely used up their import quotas for the whole of 2017, i.e. imparting the risk of a significant slowdown later in the year. The drop in Coal imports owes much to a narrowing in price differentials between domestic coal and foreign (i.e. Australian) imported coal prices, and indeed to weaker domestic demand. As for the downward revision to Japan's Q1 GDP, this was almost entirely down to a rundown in oil inventories, due to refinery closures, with overall inventories now estimate to have deducted 0.1 ppt from Q1 as against a prior estimate of a 0.1 ppt addition.

** Eurozone - ECB Council meeting **
- Today's meeting is all about the ECB's forecast update and how it pitches the short to medium-term policy outlook, with comments since the last meeting underlining considerable divisions on the council about the timing and path for policy changes. The reversal in core CPI in May underlines that the ECB is under no particular pressure to outline its plans for 2018, even though the problematic of bond scarcity on the one hand, and the likely widening of intra-govt bond spreads as it tapers highlight that it does not have the sort of room for manoeuvre that the Fed had. In terms of its forecasts, it seems likely that it will shade 2017 and 2018 CPI forecasts lower by 0.1 ppt to 1.6% and 1.5% respectively. The key issue is what happens to the 2019 forecast (currently 1.7%), which it could maintain to signal that it will be tapering, but will not announce details until September. It could also shade it lower (0.1 ppt), but upgrade its GDP and Unemployment forecasts, and drop its easing bias, which would require some careful communication in so far as the medium-term policy signal would be somewhat confusing. Yesterday's ostensible 'leak' on the staff forecast would appear to have been an exercise in market expectations management, and suggests that they are/were concerned that markets might see the outcome as 'more dovish' than expected. The council will doubtless underline that various depts have been tasked with exploring the best options and methods for winding down its current programme, though without pre-committing itself to outlining its 2018 plans at the September meeting. Eminently the other hot topic of the moment will be the Santander takeover of Banco Popular, and the accompanying 'bail-in', and the implications for still very pressing bank balance sheet resolutions, not just in Italy (most obviously), but in the broader Eurozone. As a reminder the two key sentences which may be changed in the 12.45 BST statement are "The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases" and "If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration." While the key passage in the 13.30 Draghi statement is "The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors."

** U.K. - General Election **
- To say that this has been a very peculiar election is indubitably an understatement, just as much as observation that the Conservative party's personality based campaign around PM May and its election manifesto will likely go down as exemplary in the height of fecklessness stakes, even if, as still seems likely, they win. At least the enormous divergence in the opinion polls, above all in recent weeks, has advised markets not to be overly complacent, even if UK assets and indeed the GBP can hardly be said to be discounting any risk of a surprise. Eminently a hung parliament would create considerable volatility across all asset classes. But barring a surprise the key question is how large the Conservative majority might be, with anything below 40 seats likely to embolden the ever restive elements, whose penchant for internecine warfare is well documented, to embark on a fresh leadership challenge, given the incompetence of the party's campaign. Even if a substantially larger majority is achieved, there is little doubt that it will make not a iota of difference to the EU's stance on Brexit negotiations, though it will heighten the risk that both sides continue to talk AT, rather than TO each other, and end in a complete breakdown. There is also little doubt that the UK economy is now facing some significant headwinds, above all consumers that are facing higher inflation, weak wage growth and the pressures associated with a far too rapid pace of credit growth, the more so given an increasingly soggy housing market, above all in the populous south east.

from Marc Ostwald
 
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