What Happened Monday

The markets of the world’s two largest economies, the US and China were
closed on Monday, May 29.  
  As one would expect, capital
markets were mostly quiet. 

Even the launch of another ballistic missile test by North Korea, the
ninth this year, which followed on the heels of the G7 pledge to increase
pressure on the rogue nation to abandon its efforts, failed to have much
  Korea’s Kospi set a new record high before retreating into
the close and losing 0.1% on the day.   The Korean won also slipped by
about the same among, while most of the regional
currencies fell a little more.  

The MSCI Asia Pacific Index eased 0.1%.  It is the second
consecutive decline and the fourth losing session in the past five.  That
said, it was up 1.3% last week, which brought the regional benchmark to its
best level in two years.  The Dow Jones Stoxx 600 say half the decline (or
0.05%).  It was the third consecutive losing session.  It  reached its best level since August
2015 near the middle of the month and had been consolidating its recent gains over
the past two weeks.  

Of note, the Italian stock market  (FTSE MIB Index) fell 2%, with
bank shares off 3.4%.
  It is the biggest drop for financials in more
than three months.  It is the fourth consecutive loss for Italian
shares.  The Italian bond market also sold off sharply, with the 10-year
yield rise in almost nine basis points and the two-year yield ring nearly three
basis points.   

The trigger were signs that Italy
may be moving toward a fall election.
  The parliamentary session ends
next spring, but there may be a deal between the PD’s Renzi, who is fresh from a
primary victory, the never-to-be-counted-out Berlusconi, and the Five-Star
Movement head Grillo.  Reports suggest that the essence of electoral reform
has been agreed.  It will be a
purely representative system, with no bonus seats for the majority winner and
the threshold for participation may be increased, which could minimize the
political fragmentation.  If the early reform proposal looked more like
Greece, the new one looks more like Germany.    

The speculation is that the election could be held at the same time or nearly the same time as the German
election in late September.
  Recent polls suggested a statistical dead
head between the PD and the Five-Star Movement.  However, without the
possibility bonus seats, the risks of a Five Star government seems to be
reduced.  That said, given the serious economic straits, high
unemployment, unresolved banking challenges, the election, whenever it is
,  poses significant risks.  

UK Prime Minister May thought the odds favored her when she engineered
the snap election, having to maneuver around the law the Cameron had signed
that sought to avoid this practice and set a formal election schedule.
Initially, polls showed the Tories with
as much as a 20 percentage point lead over the seemingly hapless Labour
Party.  The polls closed considerably following the latest Tory reversal
(on the extent of elderly responsibility for their own health care costs).  This
appeared to weigh on sterling last week
when it suffered its largest weekly decline in six months (-1.8%).  

As many as six polls were reported
over the weekend showed the Tories are still set to win the coming weekend
  All the results gave the Tories a wider lead than the YouGov poll before the weekend, which put the
lead at five percentage points.  On average, the weekend polls gave the
Tories an average of a 10-point margin.   Sterling was the strongest
of the major currencies, gaining about 0.3% against the dollar and

Merkel’s comments at a CSU campaign rally over the weekend caused a
stir.  It followed an acrimonious NATO and G7 meeting.
  The US
President stuck to his narrow definition of defense spending, so as not to
include the spending associated with past military action, like the refugee
crisis, and failed to reaffirm his commitment to Article 5 of the joint defense
treaty.    At the G7 meeting, Trump was awkward, and separated
himself, such as riding a golf cart while the other heads of state walked to an
event.   The US President refrained from endorsing the Paris Agreement and
shortly after the G7 meeting, word leaked not from the so-called “deep
state” but apparently from his own
team, that he will announce his lack of support for the Paris Agreement later
this week.  

Merkel essentially said to her followers, that Europe could not
“fully rely” on the US going forward and that “We Europeans
must really take our destiny into our own hands.” 
While these comments
and sentiment are not new, many parts of the international media (and social
media) gave it extra significance.  However, few noticed this put Germany
and the US on the same page. For many years, the
US has harangued Europe to 1) spend more on its own defense, 2) be more
vigilant it guarding its own neighborhood (e.g. Bosnia, Libya, etc.),  3)
facilitate stronger economic activity, including resolving the legacy of bad
loans and a semi-permanent crisis in Greece, and 4) promote freer, less mercantilist
trade policies.

The euro peaked on May 23 a little shy of $1.1270.  It fell to
almost $1.1160 by the end of last week, and consolidated below $1.12 on Monday
and held the pre-weekend low.   Options worth nearly one billion euros
expire at $1.12 on Tuesday.  The data highlight of the week is the
preliminary estimate of May CPI.  The key question is how much of the
recent surge was unwound.  

Data on Monday showed slower money supply growth (M3 rose 4.9% in April
after 5.3% year-over-year in March), while credit extended to the private
sector edged up to 2.0% from 1.9%.
   Separately, speaking before
the EU Parliament, Draghi played down the likelihood of a significant policy
adjustment coming from next week’s ECB meeting.  While Draghi acknowledged
that the tail risks have diminished “measurably,”
the regional economy continued to require significant support.  

The dollar was largely confined to
a 15 pip range on either side JPY111.30, which is the middle of its pre-weekend
  Nearly $1.6 bln of options expire tomorrow struck between
JPY111.00 and JPY111.30.  

The Australian dollar was flat in less than a quarter cent range. 
On Tuesday, A$565 mln option struck at $0.7450 roll-off.   After
being repelled by offers near CAD1.35 before the weekend, the greenback pushed
below the CAD1.3433 low.  Demand for US dollar was seen last week a little
below CAD1.3400.  The data highlight of the week for Canada is the Q1 GDP
estimate due Wednesday.  The Canadian economy is expected to have grown more than 4%, which would put it on the top of
the G7.  


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