Nothing good ever happens after midnight. Some count sheep when they can’t sleep, others count money. Perhaps Mama’s wisdom rings true for half-year end, but the EU immigration deal hashed out from an all-nighter has lifted risk appetites and the EUR. The better UK GDP and the lack of bad news on trade allows a relief rally. Throw in the bone that EU’s Barnier says Brexit progress has been achieved, yet divergence over Ireland border issue is huge and PM May pushing for more and faster talks. Markets are a confidence game and the lack of attention to the usual list of fears helps. China also helped by easing foreigner ownership rules with the NDRC cutting its “negative list,” seen by many as a bone to spur more US/China talks. Risk-on markets mean global shares higher, bonds lower, USD lower and commodities higher. Global coordinated growth hopes are back at the end of the soggy 2Q. The debate for 3Q is about this convergence of growth restarting. US bond 10-year yields are about 40bps higher on the year while German Bunds are down about 10bps. Seeing the EUR rally back to 1.17 is unlikely to sustain if this persists.  The economic surprise index for the US and EU highlight the problems of explaining away 1Q slow patches with just holidays and weather.  The all-nighter result for the EU will surely help but may not be sufficient to end the fears of populist political troubles and ongoing economic muddling through leading to an ECB that can’t quite taper or raise rates.

While yesterday we highlighted the EUR as the risk barometer to watch today something is different – blame it on Friday, month-end, quarter end and the July 4th holiday’s next week. Today is about rates and whether they are going to remain benign in the macro picture or an offset to equity bulls. The US rate risks seem to be worth highlighting again with the risk of 2.95% higher than a break to 2.75%. If US rates rise and equities go up – then its about USD/JPY, the return of the carry trade and hope for bargain buyers in EM again.

Question for the Day: Will the first week of July change the mood? The month ends with global risk-on mood, better US growth in 2Q, better data from Europe and yet the clouds of populist politics and trade disorder continue. We have Mexico elections this weekend – expected to deliver the leftish version of Trump – AMLO – but we also get the July 6 deadline for China as Trump decides then to put $34bn in tariffs on Chinese goods. “The administration is not convinced that the Chinese are willing to make enough progress soon enough,” US-China Ambassador Branstad told reporters at a Beijing financial forum. “I’m still hopeful that despite the fact that we are moving into these tariffs, that there is still a possibility that we can resolve some of the differences,” he said. Branstad said there was still a chance to address issues such as non-tariff barriers, loss of intellectual property and forced technology transfers.

Bottom Line – the US trade war skirmishes with China getting worse and the underpriced risks for MXN into a leftist President are the two focus points for next week’s geopolitical fears. The charts from BNP on the election risk and their report this week are worth considering into the weekend trading shut-down.

What Happened?

• Japan June Tokyo core CPI up 0.7% y/y after 0.5% y/y – better than 0.6% y/y expected while the core/core CPI was up 0.4% after 0.2% - also more than 0.3% y/y expected.
• Japan May unemployment drops to 2.2% from 2.5% - better than 2.5% expected. The May employment up 1.51mn  y/y from April’s 1.71mn.
• Japan May industrial production -0.2% m/m after +0.5% m/m – better than -1.1% m/m expected. The government keeps view that factory output is picking up moderately.

• Japan June consumer confidence 43.7 from 43.8 – weaker than 44.3 expected. The government kept its view that consumer confidence is weak. As for 12M inflation outlooks - The group who expect "Go up" in June was 81.7%, a decrease of 0.4% points from the previous month.
• Australian May private sector credit  up 0.2% m/m after 0.4% m/m – less than 0.4% m/m expected. Business credit -0.1% m/m, personal credit -0.1% m/m while housing was up 5.8% y/y but investor housing up 2% y/y.

• Swiss June KoF leading indicator rises to 101.7 from 100 – slightly less than the 103 bounce expected. This implies slightly above average growth for the economy into 2H2018 but the economy is no longer as strong as Winter 2017-2018. The indicator bundles for export development made a particularly clear contribution to this improvement. However, there have also been positive developments in domestic demand. In particular, the propensity to consume increased in June. In addition, the prospects for the construction industry are more favorable. Minor impulses come from the manufacturing, banking, accommodation, and food service activities sectors. In the goods-producing sectors (manufacturing and construction), the indicators for order backlogs, inventory reserves and intermediate goods purchasing point to a more positive development. However, the indicators for actual production development are dampening the positive picture somewhat.
• German June unemployment -15,000 after -12,000 – better than -8,000 expected. The rate unchanged at rate 5.2% as expected with 2.342mn jobless down from 2.357mn. Job vacancies rose 4,000 after 5,000 in May while payroll jobs rose 37,000 the same as May. The May ILO employment rose 37,000 to 44.684mn with jobless 1.48mn and rate steady at 3.4%.
• German May retail sales -2.1% m/m, -1.6% y/y after revised  1.6% m/m – worse than -0.6% m/m expected.  April revised lower from+2.3% m/m. The 3M average now -0.1% compared to +0.6% but with 2Q rate 0.6% after 1Q -0.6% q/q.
• German May import prices  up 1.6% m/m, 3.2% y/y after 0.6% m/m – more than the 1% m/m expected.  Export prices rose 0.5% m/mm, 1.3% y/y after 0.7% y/y. The import energy prices were up 8% m/m, 27.2% y/y while ex-energy import prices were up 0.8% m/m, 0.7% y/y.
• French June flash HICP up 0.1% m/m, 2.4% y/y after 2.3% y/y – as expected.  The national CPI rose 0.1% m/m, 2.1% y/y after 2.0% - slightly more than the 1.9% y/y expected.  The May PPI rose 0.6% m/m, 2.9% y/y with manufacturing PPI up 0.8% m/m, 3.0% y/y, oil products up 8.5% m/m and 36.2% y/y while industrial import prices were up 1.4% m/m, 3.2% y/y.  French May consumer spending rose 0.9% m/m, -0.2% y/y after revised -1.8% m/m – better than 0.7% m/m gain expected.
• UK 1Q final GDP revised up to 0.2% q/q, 1.2% y/y from 0.1% q/q preliminary – better than no change expected. Improvements in the measurement of construction output drove the 0.1pp upward revision to Q1 q/q GDP growth. Construction output was revised upwards to show a 0.8% q/q decline, from a 2.7% fall reported previously. On an output basis, services contributed 0.23pp to overall growth. Production output was revised downward, but still contributed 0.06 percentage points to growth. On the expenditure side, net trade was upwardly revised to show a 0.1pp positive contribution growth, up from its prior neutral contribution, while business investment was revised down 0.2pp to -0.4% q/q. The households' saving ratio fell 0.4pp to 4.1% in Q1, the third-lowest on record. 2017 annual GDP growth was revised down 0.1pp to 1.7%.
• UK May mortgage approvals 64,526 from 62,941 – better than  62,150 expected.  Net consumer credit rose GBP1.405bn after GBP1.764bn – slightly less than the GBP 1.5bn expected.  The BOE M4 rose 0.9% m/m, 3.4% 3M y/y.

• Eurozone June flash CPI 2% y/y after 1.9% y/y – as expected. The core HICP up 1% down from 1.1% y/y – also as expected. Energy was 8% y/y while food/alcohol/tobacco was 2.8% y/y.

Market Recap:

Equities: The S&P500 futures are up 0.36% after a 0.62% gain yesterday. The Stoxx Europe 600 is up 1.2% with bounces in Autos and Banks. The MSCI Asia Pacific rose 0.5% with gains in China notable.

• Japan Nikkei up 0.15% to 22,304.51
• Korea Kospi up 0.51% to 2,326.13
• Hong Kong Hang Seng up 1.61% to 28,955.11
• China Shanghai Composite up 2.20% to 2,848.31
• Australia ASX off 0.26% to 6,289.70
• India NSE50 up 1.18% to 10,714.30
• UK FTSE so far up 0.85% to 7,680
• German DAX so far up 1.20% to 12,324
• French CAC40 so far up 1.3% to 5,346
• Italian FTSE so far up 1.15% to 21,680

Fixed Income: Better moods means more gains for periphery – that is the story for today as Italy with its deal on immigration gets more relief – Italian 10Y BTP yields off 10bps to 2.67%, Spain off 3.5bps to 1.325%, Portugal off 2.5bps to 1.78% and Greece off 8bps to 3.905%.  The core is calm with curve flattening focus – 10Y UK Gilt yields up 1bps to 1.27% with UK GDP driving, German Bunds flat at 0.317% and French OATs off 2bps to 0.68%.

• US Bonds are lower with curve bear flattening – 2Y up 0.6bps to 2.515%, 5Y up 1.2bps to 2.726%, 10Y up 0.7bps to 2.845% and 30Y up 0.3bps to 2.97%.
• Japan JGBs watching risk-on mood swing, ignores BOJ and better jobs - 10Y flat at 0.03%, BOJ cut buying in 5-10Y by Y20bn to Y410bn today – but little reaction.
• Australian bonds lower with global move – 3Y flat at 2.06%, 10Y up 2bps to 2.63%.
• China PBOC net drains CNY20bn on the day, CNY370bn on the week – but against that is the RRR cut that added estimated CNY700bn. On the day, the central bank injects CNY80bn via 7-day reverse repos but CNY100bn matured.  Money market rates are higher with 7-day up 14bps to 3.016% and ON up 48bps to 2.664% - with month-end/2Q end driving. The 10Y bond yields continued to drop off 5bps to 3.47% today.

Foreign Exchange: The US dollar index off 0.4% to 94.78 but still up 0.2% on the week and 5% in 2Q - watching 95.09 yesterday lows as first resistance then 95.53 and 95.67 yesterday highs against 94.38 the 21-day and 94.03 June 13 highs as support. In EM Asia FX, USD lower on EU deal – KRW up 0.85% to 1115, TWD up 0.3% to 30.50 – still down 1.7% on month, 4.5% in 2Q, INR up 0.55% to 68.432 and down over 5% in 2Q.  For EMEA, FX USD also lower – RUB up 0.85% to 62.708, ZAR up 0.5% to 13,739, TRY up 0.3% to 4.5720.

• EUR: 1.1655 up 0.8%. Range 1.1558-1.1666 with focus on 1.1610 pivot for 1.1720 or 1.1540 again. ECB policy vs. FOMC back in play with EU deal driving today.
• JPY: 110.65 up 0.15%. Range 110.38-110.79 with EUR/JPY 128.95 up 1%. Risk-on and rates nowhere – data mixed with jobs not leading to CPI.
• GBP: 1.3150 up 0.6%. Range 1.3069-1.3183 with EUR/GBP .8865 up 0.25%. Brexit hopes better, GDP higher – GBP holding with EUR leading 1.30-1.3250 stuck.
• AUD: .7385 up 0.45%. Range .7336-.7401 with NZD up 0.1% to .6765 – sideshow with carry not enough to matter and .7420-50 resistance holding – AUD/NZD only story.
• CAD: 1.3245 off 0.10%. Range 1.3211-1.3270 with focus on oil vs. BOC vs. trade and crosses not helping.
• CHF: .9925 off 0.5%. Range .9918-.9982 with EUR/CHF 1.1565 up 0.3% - all about EU deals and .9850-1.0025 watch.
• CNY: 6.6166 fixed 0.31% weaker from 6.5960, CNY opens weaker at 6.6390 off 0.2%, but now up 0.1% to 6.6180 on the day.

Commodities: Oil mixed, Gold up, Copper up 0.3% to $3.0075.

• Oil: $73.29 off 0.2%. Range $72.93-$73.67.  WTI watching $74.03 yesterday highs then $75 and the $75.90 bull trend channel with $72.20 and $71.40 support. Brent up 1.05% to $78.67- watching $78.20 yesterday highs as pivot for then $80 barrier test against $76.11 June 27 lows. Focus is on US demand vs. production vs. Iranian sanction issues.
• Gold: $1251.60 up 0.25%. Range $1248-$1252.  Watching $1246.90 then $1236.6 Dec 12 lows with 200-week m.a. at $1233.90 against $1261.20 June 21 lows and $1272.70 June 22 highs. Gold and USD connection continues to dominate. Silver up 0.35% to $16.063, Platinum flat at $849.25 and Palladium up 0.45% to $949.55.

Conclusions: Is a stronger USD bad for global risk?  The correlation of the USD to Trump approval is interesting to consider as the President seems to be running for re-election in 2020 ahead of the 2018 mid-terms. There isn’t a perfect logical reason to connect the USD fate to Trump but the trade issues and stronger US jobs reports are clearly part of the story. The global slowdown risks link back to USD funding squeezes, more FOMC rate hikes, less ways to have FX depreciation lead to more exports and finance. For the 3Q, USD gains maybe something to consider when managers look for value.  Hedging FX appears to be more important than ever.

Economic Calendar:

• 0830 am US May personal spending 0.6%p 0.4%e / personal income 0..3%p 0.4%e / PCE prices core 1.8%p 1.8%e
• 0830 am Canada April GDP 0.3%p 0.1%e
• 0830 am Canada May PPI (m/m) 0.5%p -0.5%e
• 0945 am US June Chicago PMI 62.7p 60e
• 1000 am US June final Michigan Consumer Sentiment 99.3p 98.5e
• 1030 am BOC Business Outlook