The Weekly Update

Last week markets awaited the Trump-Kim summit in Singapore, which appeared to go through without a hitch; although nothing concrete was announced. There was some talk of denuclearisation and subsequent US sanction easing, with China also saying it may revise sanctions on the Peninsula. The next key event was the FOMC meeting where, as largely priced in, the Fed hiked rates by 25bps, to 1.75%-2.00%. There was a fairly muted market response following the end of a relatively more hawkish FOMC meeting; the yield curve flattened and the dollar tumbled, although this could have also resulted from the reignition of US-China trade tensions. Flight to safe assets into the week’s close saw the yield on the 10-year close at 2.92%, and the dollar gained 1.34%. The yield curve continued to flatten with the spread between the 2s30s falling to mid-2007 levels.

Elsewhere, China surprised some market players by refraining from increasing its repo rate in response to the Fed hike; the PBoC appears unfazed by the narrowing interest rate differential. As the country strives to deleverage, we expect the PBoC will maintain a neutral stance, however, a cut to the reserve requirement ratio may follow, especially after the broadly softer series of activity data for May.

Also last week, the BoJ reduced its purchases of 3-5 year JGBs on the back of yield stability; and left its monetary policy unchanged. Meanwhile, the ECB remained somewhat dovish, pledging to keep interest rates at current levels at least until “the summer of 2019”; highlighting “undeniable increase in uncertainty”, due to recent trade tensions. The central bank did, however, signal an end to its EUR 2.4tn bond-buying programme by the end of this year. The statement stated: "the monthly pace of the net asset purchases will be reduced to €15bn until the end of December 2018 and that net purchases will then end". There was, however, a caveat reading, “subject to incoming data confirming the Governing Council’s medium-term inflation outlook”. The euro witnessed a dovish post-meeting nosedive against the dollar.

As the World Cup kicked-off with Russia playing Saudi Arabia, the two nations met to discuss the future of oil pricing, the message from the Russian energy minister and Saudi oil minister was that both parties support a gradual rise in supply “in principle”, however, no specific details were divulged. Saudi oil minister did, however, state that OPEC members will “inevitably” decide to boost supplies, albeit moderately initially. We expect to receive more clarity by the end of the week at the OPEC meeting in Vienna. Brent closed ~4% lower on the week, following increased expectations of a relaxation of production caps.

This week the main highlight will be the ECB forum on central banking which kicks-off today (until Wednesday) and the BoE policy meeting on Thursday, no change to policy is expected. Throughout the week we will hear from Fed speakers and no doubt the ongoing US-China trade tensions will remain a focal point. The OPEC International Seminar will also be of interest towards the end of the week.

A fairly data-light week started with a better-than-expected annual increase in UK house price release, later today we will get the NAHB housing market index. US housing starts and building permits will be released on Tuesday and Wednesdays Q1’18 US current account balance and May’s existing home sales may garner some attention. The main data event, however, will be the series of global PMI releases towards the end of the week.

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