European Calendar to Dominate Markets’ Attention in the Week Ahead

5 June 2017

Rates & FX Market Weekly

European Calendar to Dominate Markets’ Attention in the Week Ahead

Highlights

Global Markets

¨   A fairly quiet economic week ahead in the US where we will eye the Factory Orders for April as well as Service data with investors likely to shift their focus towards the UK election and ECB's rate decision. Despite a mixed labour report on Friday, the Fed is likely to increase by another 25bps its interest rate benchmark, a decision largely priced-in since no surprise arose from the various Fedspeaks over the past weeks, which should mitigate volatility similar to the market reactions observed after the December and March hikes. Furthermore the US political turmoil should continue to exert downward pressure on both USD and UST yields.

¨   Over in the UK, services PMI and production indicators are due in the week ahead, but the overarching event for the week will be the June 8 election. With opinion polls indicating only single-digit leads by the Conservatives over Labour, the outcome may be subjected to greater uncertainties than before, although the markets’ and our base case remains for a Conservative majority. Despite recent GBP movements reflecting a modest probability of an upset, we still expect a sharp negative GBP reaction if the Conservatives failed to secure a parliamentary majority, or if Labour pulls off an unexpected victory; we continue to suggest a light GBP positioning in the week ahead.

¨   In Europe, the focus will be on the UK elections as well as the ECB’s decision on the same day. While rates and APP are likely to remain unchanged, the Euro could climb on markets expectations of a less dovish tone from the Bank.  However we remain of the view that a change of stance is still premature at this juncture as Mario Draghi repeated that inflation depends on monetary policy (including forward guidance), while the latest softer inflation readings support his view that there is little urgency to start unwinding the QE. As such a stabilization of the EURUSD pair could occur below the 1.1340 resistance. Turning to Japan, eye the final reading on 1Q17 GDP growth expected to cement the stronger economic momentum. However, better economic numbers are unlikely to change BoJ’s stance in the near to medium term as inflation remains muted; remain neutral JPY. Over in Australia, the June 6 RBA meeting is unlikely to delivery any major surprises, although we keep an eye on any potential comments on Australia’s external sectors amid the recent pullback in Terms of Trade. Following the meeting, 1Q17 GDP due is expected to moderate to 0.3% q-o-q (SA) after a stellar 4Q16 print, with any disappointment likely to push RBA into a dilemma, given the stretched Australian property sector; stay neutral AUD over the near-term.

AxJ Markets

¨   Diverging trends between official and Caixin Manufacturing PMIs are likely to be investors’ focus in the week ahead as debates on nascent signs of moderating demand undermines risk sentiment in the AxJ region. With Caixin Services PMI expected to remain in expansion territory, we eye China’s import print in the week ahead, where a strong reduction could further compound on the surprise Caixin Manufacturing PMI print released last week. As investors digest PBoC’s new adjustment on Yuan fixing formula, we expect CNY and CNH to find a firmer footing in the week ahead following its strong push towards the 6.80/USD handle.

¨   A quiet economic calendar is seen for Singapore and South Korea in the week ahead, where we expect movements on SGD and KRW to be primarily driven by risk sentiment, as investors continue to mull over the pace of FFR hikes over the coming year amid the array of US economic data prints. The 2/10y SGS spreads tightened to its 11-month low of 87bps, where we expect subdued domestic inflation outlook to limit any material widening on the 2/10y spreads over the near term; keep a neutral duration view on SGS. Notably, USDTHB is likely to continue testing its 34.0 psychological support despite the quiet economic calendar in Thailand, where we expect strong demand for Thai bonds to continue support downward movement on the pair over the near term; prefer to keep a mild underweight duration on ThaiGBs.

¨   A busy economic calendar in Malaysia in the week ahead, with trade, foreign reserves and IP data due, while BNM will also release foreign MGS ownership data for the month of May. With recent MYR movements signalling better sentiment towards Malaysian assets, expect foreign ownership to improve over April’s print, which should continue to lend support towards the govies; stay neutral MGS. Elsewhere, expect a relatively quiet week in Indonesia with only May foreign reserve due, which is not expected to swing materially given subdued fixed income inflows, despite the recent S&P rating upgrade. Global market movements are likely to influence Indonesian assets in the week ahead, although volatility is still likely to remain low; stay neutral IDR.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	Core EGB
Neutral	UST, GILT, ACGB, SGS, CGB, KTB, MGS, IndoGB	USD, EUR, GBP, AUD, JPY, MYR, THB, SGD, IDR, CNY
Mild Underweight	ThaiGB	KRW
Underweight	JGB

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