• European bourses trade on the backfoot following on from the soft close in the US on Friday with losses having picked up since the cash open.
• DXY is caged to a tight range on either side of 102.75, EUR looks heavy after bleak German Ifo data, and Yen is among the outperformers.
• Safe havens are bid across the board, with bonds, precious metals, JPY and CHF on firmer.
• German Ifo Economist said the likelihood that the German economy will shrink again in Q2 has increased.
• Wagner Group chief Prigozhin accepted a proposal by Belarusian President Lukashenko to stop the movement of his troops to Moscow.
• Looking ahead, highlights include ECB’s Lagarde speaking at the ECB Sintra Forum, and supply from the US.

26th June 2023

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EUROPEAN TRADE

EQUITIES

• European bourses trade on the backfoot following on from the soft close in the US on Friday with losses having picked up since the cash open.
• US equity futures are extending on Friday’s losses as traders continue to debate whether the pullback is a consolidation of recent gains or a more sinister reversal. Tesla is lower by some 2.1% in the pre-market after being downgraded to neutral from buy at Goldman Sachs with GS of the view that the Co.’s long-term outlook is already priced in.
• Equity sectors in Europe have a slight negative bias with underperformance in the banking sector. Defence names are also enduring a session of losses potentially as a read-across from events in Russia which could bring the end of the Russia-Ukraine conflict nearer.
• Click here and here for a recap of the main European updates.
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FX

• DXY is caged to a tight range on either side of 102.75 with G10s mostly firmer against the Buck.
• Yen is among the outperformers amidst softer US Treasury yields and more supply from Japanese exporters, but also a notable pick-up in levels of verbal intervention.
• NZD also ranks among the notable G10 gainers after New Zealand’s Trade Minister said he had positive discussions with China on joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
• EUR lost tentative grip of the 1.0900 handle against its US rival on the back of a bleak German Ifo survey and downbeat accompanying commentary.
• CNH is on the backfoot following China's return from the Dragon Boat Festival holiday as reports indicated depressed levels of spending on travel to compound other signs of weak domestic demand and consumption.
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FIXED INCOME

• Bunds got a big boost from Ifo given that the business climate deteriorated more than anticipated and expectations were especially weak against consensus to outweigh marginally better than forecast current conditions.
• Gilts moved higher in tandem with the German debt, albeit with a lag, between the 95.75-96.39 Liffe parameters.
• T-note futures are also bid with the 10yr contract touching 113-15 at best ahead of the US 2yr auction .
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COMMODITIES

• WTI and Brent futures are now on the backfoot following the German Ifo Survey which warned of a higher likelihood the German economy will shrink in Q2. This followed an APAC session of firmer prices in the aftermath of the weekend’s brief Russian mutiny by the mercenary Wagner Group, although this was abruptly called off on Sunday.
• Nat Gas prices gapped higher with Dutch TTF jumping over 7% as supply-side risk premium from Russia is priced in at a time countries look to replenish gas supply for the winter.
• Spot gold has risen, despite a rather rangebound Dollar, as heavens are lifted across the board (FX, Fixed Income, Precious Metals) with spot silver approaching USD 23/oz from lows of USD 22.41/oz
• Base metals are mostly and modestly firmer in what has been a choppy session thus far, with some industrial names possibly cushioned from hopes of more Chinese stimulus.
• OPEC Secretary General said they see global oil demand rising to 110mln bpd by 2045, according to Reuters.
• Saudi Aramco CEO said oil market fundamentals remain generally sound for the rest of the year and developing countries, especially China and India, are driving oil demand growth of more than 2mln bpd this year. he also stated that China's transport and petrochemical sectors are still showing signs of demand growth despite economic headwinds, while he added that renewable energy growth has not met growth in global energy consumption.
• Saudi Aramco and TotalEnergies (TTE FP) award contracts for USD 11bln Amiral project, according to Reuters.
• Qatar said the situation in Russia calls for maximum restraint and will have repercussions on energy and food supplies, according to a Foreign Ministry statement cited by Reuters.
• Eastern Libyan authorities threatened to blockade oil exports over the distribution of state energy revenue.
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NOTABLE US HEADLINES

• US President Biden will give an address on economic policy on June 28th, according to the White House.
• A train derailment in Montana collapsed a bridge and sent several tanker cars carrying hazardous materials into the Yellowstone River.

NOTABLE EUROPEAN HEADLINES

• UK PM Sunak defended possible curbs on UK public sector pay in which he warned that high public sector pay rises would be giving with one hand and taking with the other by fuelling inflation, according to FT.
• UK Chancellor Hunt will tell consumer watchdogs that they must use their powers to help lower prices amid concerns that supermarkets, banks and utility companies are using high inflation as a cover to boost profits, according to the Sunday Times.
• ECB published an interview with Vice-President de Guindos in which he noted that monetary policy measures are starting to have an impact on financing conditions and a contraction in credit will pass through to the real economy with dampening demand to lower inflation. De Guindos noted that the finishing line is in sight when questioned if the target is a long way off and responded that it will depend on the data when asked if an end to hikes can be expected before the summer holidays.
• ECB’s Makhluof said he is undecided regarding a rate increase beyond July and is prepared to look at the evidence, while he thinks they are near the top of the ladder, according to Irish Independent.
• Europe’s Single Resolution Board pushes policymakers to provide more protection for depositors and is said to be requesting a rethink into how lenders are wound down following recent bank failures, according to FT.
• German Ifo Economist said the likelihood that the German economy will shrink again in Q2 has increased; weak demand for industry and order backlog falling, according to Reuters.
• Bundesbank may need recapitalisation to cover bond-buying losses, potentially ruining the ECB's plans to carry out similar future plans, via FT.
• German minimum wage commission proposes raising the minimum wage to EUR 12.41 (prev. EUR 12) from January 2024, according to Reuters.
• Greek conservatives led by former PM Mitsotakis had a clear lead over former PM Tsipras’s Syriza party in the rerun election with official results showing Mitsotakis’s New Democracy party winning 40.4% of votes and a majority of 157 seats in the 300-seat parliament, according to Reuters.

EUROPEAN DATA RECAP

• German Ifo Business Climate New (Jun) 88.4 vs. Exp. 90.7 (Prev. 91.7, Rev. 91.5)
• German Ifo Curr Conditions New (Jun) 93.7 vs. Exp. 93.5 (Prev. 94.8)
• German Ifo Expectations New (Jun) 83.6 vs. Exp. 88.0 (Prev. 88.6, Rev. 88.3)

CRYPTO

• Bitcoin is slightly softer intraday but remains north of the USD 30k mark.

GEOPOLITICS

RUSSIA/UKRAINE

• There were reports that the Wagner Group took control of all military facilities in two big Russian cities including Voronezh which is 310 miles from Moscow and that a convoy was headed to Moscow led by senior Wagner commander Utkin after Wagner Group Chief Prigozhin declared war against the Russian Defence Ministry.
• Russian President Putin stated during a national address that they are facing treason and internal betrayal, while he said that any differences should be dropped and that everyone that took part in a mutiny will be punished. Furthermore, he signed an order for 30 days of detainment if martial law is violated and the Russian Foreign Ministry warned Western countries against using the Wagner mutiny ‘to achieve their Russophobic goals’, according to Reuters.
• Russian Wagner Group chief Prigozhin issued a defiant message following Russian President Putin’s speech in which he officially refused to obey Putin’s orders and said he and his men would not turn themselves in on Putin’s orders, as well as stated that Putin is wrong to accuse him of treason. There were also comments in a Wagner-affiliated Telegram channel that Putin made a wrong choice and Russia will have a new president soon.
• It was later reported on Saturday that Wagner Group chief Prigozhin accepted a proposal by Belarusian President Lukashenko to stop the movement of his troops to Moscow which was said to be a profitable and acceptable proposal to solve the issue on the table in which Prigozhin will move to Belarus and the charges against him will be dropped, while Prigozhin confirmed the Wagner Group is returning its convoys to bases to avoid bloodshed and is turning the column advancing to Moscow back to bases.
• Russia’s Kremlin confirmed that Belarusian President Lukashenko helped mediate with the Wagner Group and said fighters that did not take part in the march will sign contracts with the Defence Ministry, while other fighters who took part will not be prosecuted in recognition of their service and stated that avoiding bloodshed was more important than punishing people.
• Ukrainian President Zelensky said the situation in Russia shows no one is in control and there is chaos. Zelensky also stated that Ukraine will not remain silent, will not be inactive and will defend Europe’s eastern flank, while he added that the longer Russian troops remain in Ukraine, the greater the devastation they will bring to Russia, according to Reuters.
• Ukrainian President Zelensky said he spoke with US President Biden in which they discussed the course of hostilities and processes taking place in Russia, while he called for global pressure on Russia and noted that leaders discussed a further expansion of defence cooperation with the emphasis on long-range weapons, according to Reuters.
• Russian President Putin said he is in contact with Defence Ministry officials and Russia feels confident in realising all its plans and tasks related to the special military operation to which he gave top priority to, according to Reuters.
• Ukraine’s Defence Minister Reznikov discussed recent events in Russia with Defence Secretary Austin in which he stated that Russian authorities are weak and that things are moving in the right direction, according to Reuters. It was separately reported that a Ukrainian official said there were no visible signs of a meltdown on the frontline but added that the Wagner Group turmoil could create some new opportunities.
• Ukrainian military intelligence chief General Budanov said Russia has finished preparations for a terrorist attack at the Zaporizhzhia nuclear plant with 4 out of 6 power units at the plant mined with explosives and ready to be blown, according to an interview with The New Statesman.
• US Secretary of State Blinken said the Russian turmoil is an internal matter and he doesn’t think we’ve seen the final act of the turmoil. Blinken also stated that it is too soon to say what the future holds for Wagner fighters and that there has been no change in the US nuclear posture, as well as noted that the unity to support Ukraine remains, according to Reuters.
• US, UK, German and French leaders reaffirmed their commitment to continue supporting Ukraine for as long as necessary, according to a German government spokesperson cited by Reuters.
• Germany reportedly pushed back against the EU plan to raid Russian assets, according to FT.
• Russia’s central bank said the Moscow stock exchange, banks and other financial institutions will operate as normal on Monday despite the non-working day being observed in Moscow as banks need to ensure the continuous and smooth operation of Russian financial markets, according to Reuters.
• 3,000 elite Chechen troops were sent to protect Moscow from mutinous mercenaries if necessary, according to RIA.
• NATO's Stoltenberg said we do not see any indication that Russia is preparing to use Nuclear weapons, according to Reuters.

OTHER

• US Secretary of State Blinken said he raised the issue of China’s military base in Cuba with Cuba.
• Chinese Foreign Minister Qin met with Russian Deputy Foreign Minister Rudenko in Beijing and exchanged views on regional and international issues of common concern, according to China’s Foreign Ministry cited by Reuters.
• Taiwan’s Defence Ministry said Chinese aircraft approached within 24 nautical miles of Taiwan’s coast.
• North Korea said it will increase its response to stronger US military measures and provocations on the Korean peninsula, while it added that US Secretary of State Blinken’s threats against China to pressure Pyongyang expresses a dangerous hegemonic mentality, according to KCNA.
• Turkish President Erdogan spoke with NATO Secretary General Stoltenberg and said that Sweden must stop protests by PKK supporters for NATO membership, according to Reuters.

GLOBAL NEWS

• Bank for International Settlements warned of material risks of further financial stress, while it called for more interest rate hikes and said the world was at a crucial point as countries struggle to rein in inflation, according to Reuters.
• Turkish Central Bank said securities maintenance regulation was simplified to increase the functionality of market mechanisms and strengthen macro-financial stability, according to Reuters.

APAC TRADE

• APAC stocks traded mostly subdued after Friday's losses on Wall St owing to weak global PMIs and amid a lack of fresh catalysts to spur markets with weekend newsflow dominated by the brief uprising of the Wagner Group in Russia.
• ASX 200 was lacklustre with price action rangebound as weakness in the top-weighted financial sector offset the modest gains in real estate and tech.
• Nikkei 225 lacked decisiveness as participants digested the latest BoJ Summary of Opinions which mostly stuck to the dovish script as it stated it is appropriate to maintain current monetary easing and premature to shift policy, although a member suggested the BoJ must consider reviewing YCC at an early stage even as it maintains easy monetary policy.
• Hang Seng and Shanghai Comp were somewhat varied with the Hong Kong benchmark kept rangebound, while the mainland underperformed on return from the Dragon Boat Festival where travel spending was below pre-COVID levels to add to the weak domestic demand and slower consumption narrative.

NOTABLE ASIA-PAC HEADLINES

• PBoC set USD/CNY mid-point at 7.2056 vs exp. 7.2095 (prev. 7.1795)
• PBoC injected CNY 196bln via 7-day reverse repos on Sunday and injected CNY 244bln via 7-day reverse repos with the rate for both operations kept at 1.90%, according to Reuters.
• Japan Chief Cabinet Secretary Matsuno said it is important for FX to move stably reflecting economic fundamentals; closely watching FX moves with high sense of urgency; sudden and one sided moves seen in FX markets according to Reuters.
• Japan's top FX diplomat Kanda said they will respond to FX moves if moves become excessive and FX should move stably reflecting fundamentals, while he will not rule out any options when asked about intervention and said they are focusing on FX moves rather than levels. It was also reported that Finance Minister Suzuki said they will continue to watch the FX market with a sense of urgency and will respond appropriately if there are excessive moves.
• SNB’s Jordan said the central bank will probably have to hike rates again and the recent interest hike was likely not enough to fully get to grips with the high inflation in Switzerland, according to an interview with SRF.
• BoJ Summary of Opinions from the June meeting stated it is appropriate to maintain current monetary easing and that wage growth is needed, not just cost-push inflation to sustainably and stably hit the price target. BoJ also stated that it is premature to shift policy as smaller firms become keen to hike wages and invest more, as well as noted that the BoJ must maintain easy policy with an eye on side-effects, as long-term risks to prices are skewed to the downside. Furthermore, it stated there was no need to make operational tweaks to YCC as the distortion in the shape of the yield curve has been resolved although a member also noted that the BoJ must consider reviewing YCC at an early stage, even as it maintains easy monetary policy.

DATA RECAP

• Japanese Services PPI YY (May) 1.6% (Prev. 1.6%)