Asian markets should see a modest open after US markets were closed for the Memorial Day holiday and European markets roughly gained half a percentage point. The European indexes gains stemmed from the European Parliament elections which saw the mainstream parties perform better-than-expected against populist candidates. On the trade front, plenty was said from President Trump at his press conference with Japan PM Shinzo Abe, but nothing that deviated from the recent hard line the US has taken.
Euro – EU may fine Italy on June 5th
GBP – Election results add fuel to no-deal fire
Oil – Rises as summer driving season begins and hurricane season nears
Gold – Could breakout if talks stall until G20
The euro started the week on a firm note as mainstream parties fared better than expected against a wave of populism. The focus however is quickly shifting to election aftermath, as Italy’s Deputy Premier Salvini said he will be focused on cutting taxes, and won’t let the EU prevent him from delivering fiscal stimulus.
It appears that the battle between Rome and Brussels could return, and with that, the bond market is already nervous as the Italian 10-year yield jumped 12.1 basis points to 2.670%. The European Commission is never happy with Italy’s lack of austerity and markets should not be surprised they are considering a 3.5 billion-euro fine. Finance ministers will have to agree upon the fine at the next meeting which is expected in a few weeks. With much of the euro zone struggling for economic growth, we could see this become a key debate that gets stretched out beyond the summer.
The British pound fell after the EU elections saw both pro-Brexit and anti-Brexit parties fare better than the middle. The election results mean a soft-brexit is likely and no-deal risks go up. The likelihood we will see a deal reached by the Halloween deadline is starting to appear as unlikely. Even front-runner Boris Johnson already appears to be losing momentum and markets should have no base case yet on who will eventually replace PM May.
Labour Leader Jeremy Corbyn’s party faired poorly at the EU Parliamentary elections, thus leaving no option but to support a referendum on any deal. Brexit has more questions than answers and we should not see meaningful positioning until we know who will be the final two candidates.
Crude prices finished up 1% on Monday, following the worst loss of the year last week. With US markets closed for Memorial Day, thin conditions and shortened trading saw the Monday rally as nothing but a bounce. The two immediate key bearish catalysts are falling demand due to the US-China trade war and concerns US production will see softer rising record levels as rig counts continue to fall. With the summer driving season beginning in the US, demand is expected to pickup and with Hurricane season expected to be near-normal, oil prices should see some support shortly. For the June to November period, NOAA is forecasting nine to 15 storms this season, four to eight hurricanes, and two to four major hurricanes.
The immediate geopolitical risks from the Middle East, Libya and Venezuela remain in place and should see Brent crude supported just ahead of the $67 a barrel level.
The trade war between the two largest economies have been a key focal point for gold traders. With both sides taking tough stances, we could see a long delay in a resumption with talks, be the catalyst for gold to breakout above $1,300 an ounce. If the next meaningful update occurs when Trump and Xi potentially meet at G20 Osaka summit, that would likely unease the nerves of stock traders and open the door for a fresh round of safe-haven buying.