Allies hit back at tariffs, Italy gets a government while Spain loses a prime minister, and it’s jobs day.
U.S. allies reacted with a mixture of anger and threats to the imposition of metal tariffs on their exports of steel and aluminum. Canadian Prime Minister Justin Trudeau said the move was “totally unacceptable” as his administration announced it will impose duties on as much as C$16.6 billion ($12.8 billion) of U.S. steel, aluminum and other products from July 1. Europe and Japan issued a joint statement condemning the move with the EU saying it would bring a case against the U.S. to the World Trade Organization. Treasury Secretary Steven Mnuchin received a cold welcome at yesterday’s G-7 meeting in Canada amid worries that these moves could herald the start of a wider trade war.
Changes at the top
After a week that saw rejection, election speculation and a very nervous bond market, Italy finally gets a government. The populist coalition between the Five Star Movement and League parties, with law professor Giuseppe Conte as prime minister, will take power later today after a compromise was reached over who would be finance minister. In Spain, Prime Minister Mariano Rajoy has lost a confidence vote, with Socialist leader Pedro Sanchez promised enough backing to take over. Bond markets in both countries are continuing their recovery this morning, with Spanish and Italian equities also rallying.
At 8:30 a.m. Eastern Time, payrolls data for May are released, with economists surveyed by Bloomberg expecting 190,000 new positions added in the month. With the unemployment rate expected to hold at 3.9 percent, focus is likely to remain on signs of labor-market tightness, especially wages. Average hourly earnings are forecast to continue posting modest growth of 2.6 percent year on year.
Overnight, the MSCI Asia Pacific Index was little changed while Japan’s Topix index closed 0.1 percent higher for its second day of gains as the yen weakened. In Europe, the Stoxx 600 Index was 1.1 percent higher at 5:45 a.m. as equity markets in Spain and Italy rallied and German stocks staged a recovery following yesterday’s selloff. S&P 500 futures pointed to a gain at the open, the 10-year Treasury yield was at 2.880 percent and gold was a little higher.
Huge data day
Jobs report aside, there is a lot else going on for eco-watchers today. Already this morning there was manufacturing PMI data in the Europe, which showed some weakening in national measures. Markit May manufacturing PMI for the U.S. is due at 9:45 a.m., with ISM manufacturing at 10:00 a.m. Auto-sales data for the U.S. comes out today, without General Motors, which has stopped publishing monthly numbers. At 1:00 p.m., the latest Baker Hughes rig count is released. The G-7 meeting of finance minister and central bankers continues in Canada today.
What we’ve been reading
This is what’s caught our eye over the last 24 hours.
- Deutsche Bank CEO says staff are ‘sick and tired’ of bad news…
- …As S&P cut the lender’s rating one notch to BBB+.
- S. opens criminal probe into trading in Fannie, Freddie bonds.
- China’s MSCI club entry is a key symbolic step, analysts say.
- Bund options bet eyes $100 million payout on euro-area cataclysm.
- The European Central Bank turns 20.
- Happy Fibonacci day!
And finally, here’s what Luke’s interested in this morning
Bill Gross this week suffered his worst day at the helm of the Janus Henderson Global Unconstrained Bond Fund. It appears as though nearly everything that could go wrong did go wrong. Gross thought “bonds, like men, are in a bear market.” So his fund — unlike most with a fixed-income focus — was acutely geared to benefit from higher yields. But, he also foresaw more of a “hibernating bear market” in fixed income, expecting the 10-year Treasury yield to “meander” between 3.15 percent and 2.8 percent this year — although that’s hard to square with how steeply negative the fund’s stated effective duration was. So, you sell interest rate vol too. And then rate volatility posts its largest one-day jump since February 2016 during the best day for duration since the aftermath of the Brexit referendum. Betting on rising rates is an expensive habit; selling vol helps subsidize it. The fund’s discussion of its first-quarter performance reveals that Gross was doing just that everywhere you can think of — U.S. rates, foreign currency, high yield debt, and even commodities. As one analyst told me, it seems the only vehicle Gross wasn’t selling vol through was the VIX suite of products. These tactics also briefly battered the one-time “bond king” in February. Calling for convergence between Treasuries and German bunds likely didn’t help this time around, either. It could be worse: Field Street Capital Management’s global investments fund is reportedly down 50 percent in May, thanks to its bet on Italian debt.