Upcoming EU Referendum Continues to Pose Downside Risks to Global Sentiment

2 June 2016

Rates & FX Market Update

Upcoming EU Referendum Continues to Pose Downside Risks to Global Sentiment

Highlights

¨   Global Markets: Better-than-expected manufacturing ISM and Markit PMI, alongside Fed’s Beige Book indicating tightening labour market conditions, mounting expectations towards a summer rate hike; 2y UST yields edged 2bps higher to 0.899%. 2/10y spreads hit an 8y low (93bps), as longer-dated treasuries remain anchored on benign inflation expectations; stay mild overweight UST duration. UK manufacturing PMI printed better than expectations (50.1; consensus: 49.6), although GBP was pressured as recent polls revealed that the “exit” camp gained momentum; 1m option volatility surged past 20%. With a substantial proportion of voters (c.10%) undecided, event risk remains elevated; stay neutral GBP. In EU, manufacturing PMI remains unchanged from the flash print (51.5), with OECD upgrading the bloc’s GDP forecast to 1.6% this year (previous: 1.3%). We opine for a status quo decision during ECB’s meeting later today, although further easing remains on the cards over the medium term; stay mildly bearish EUR.

¨   AxJ Markets: China Caixin manufacturing PMI fell further to 49.2 in May (previous: 49.4), in contrast with the official gauge, and the 15^th straight month of contraction. However, the need to rebalance away from credit-fueled growth continues to constrain the authorities’ ability to stimulate the economy, and could continue to stoke capital outflow pressures; stay mildly bearish CNY. Final South Korea’s 1Q16 GDP was bumped up by 0.1ppt to 2.8% y-o-y, although weak export data and low inflation continue to build the case for another 25bps BoK rate cut; stay mildly bearish KRW. Over in Indonesia, both CPI and Core CPI printed in line with consensus estimates, although we remain of the view for BI to hold off further monetary easing in the upcoming June meeting as volatility in the FX markets picks up ahead of a potential FFR hike; stay neutral IndoGBs.

¨   USDJPY fell 1.10% overnight as PM Abe confirmed the postponement of the sales tax hike by 2.5 years, with some investors downplaying the probability of another BoJ easing over the near term as a result. We opine that the delay is unlikely to materially lift consumer spending, as the Japanese economy remains challenged by tepid wage growth and sluggish global demand; stay mildly bearish JPY.