European equity close: Selling intensifies late in the day

UK markets were closed today

There’s a negative tone in early week trade with Japan also falling by 1%. That could reflect some end-of-month flows. We’ll get a better picture tomorrow when liquidity returns.
  • German DAX -0.7%
  • Spain IBEX -0.9%
  • French CAC -0.7%
  • Italy MIB +0.2%
About half of the selling came in the final 40 minutes of trade, at the same time as the jumps in the US dollar against the yen, euro and pound.

Draft communique: G7 leaders commit to use carbon pricing as a policy lever

Highlights of the draft communique

G7 communique
  • Leaders commit to use carbon pricing as a policy lever to embed climate change in policy making
  • Will say they strongly support G20 efforts to agree on a global minimum corporate tax rate
  • To stress importance of agreeing on where to tax multinationals
  • Commit to not withdrawing policy stimulus too quickly after pandemic
  • To say central bank digital currencies could act as a liquid safe settlement asset and anchor in the payments system
  • Reaffirm May 2017 FX commitments
I think we’re underrating some of the changes that are coming. Global minimum corporate taxes, digital taxes and carbon pricing are all negative for equities.
The meeting is June 5 and will be the first in-person meeting since the pandemic.

Oil climbs $1 ahead of Iran and OPEC+ meetings

Big week for oil. Brent up 95-cents to $69.68

Big week for oil. Brent up 95-cents to $69.68
Meetings between Iran and the world powers are ongoing in what Russian officials called the ‘final round’ of talks. They aim to reach a deal that will lift sanctions and allow Iran to resume pumping at a full pace.
Tomorrow, OPEC+ will also meet to discuss production quotas. They’re fully expected to rubber stamp an earlier agreement on July quotas but there will be talks about what to do afterwards.
A hint today came from OPEC’s JMMC monitoring group, which said the inventory overhang will be mostly gone by the end of June  and will fall at 1.4 mbpd in 2021 if production is held steady after July. That’s a chance from their 1.2 mbpd forecast previously.
Of course, those numbers could change dramatically if Iran begins to ramp up. They have at least 500kbpd ready to pump now and could add another 500kbpd before year end.
On the pricing side, the brent chart is the one to watch as it flirts with $70 again. That’s seen as a level where OPEC might be persuaded to pump additional barrels or where discipline at the cartel could break down.
On the technical side though, we keep knocking on this door. Two weeks ago there was some selling on Iran headlines and I have to think that’s largely priced in now. If OPEC stays the course, this is the week we might finally get a break but it’s a delicate balance.

Oil stays perky ahead of OPEC+ meeting tomorrow

WTI up 1% just above $67 currently

WTI D1 31-05
Oil is trading close to its best levels for the year and from a technical perspective, may be set for a surge of gains if it can hold a daily close above $67 with a firm break above the $68 level preferable for buyers to extend the upside momentum.
Iran remains a wildcard but the OPEC+ meeting tomorrow will be among the focal points in trading this week.
On the latter, I don’t see OPEC+ upsetting the status quo but the market will be looking for hints on any step up in production later in the year. That is one risk to watch during the week besides the technical considerations and risk sentiment.
In the bigger picture though, there will be growing expectations – certainly not misplaced – that OPEC+ will eventually flood the market with oil again. That said, demand conditions are also expected to be strong enough to take all that in by then.
As such, there is still a strong bullish consideration for oil as long as the reflation narrative keeps up over the next year or so.

PBOC raises FX reserve requirement ratio from 5% to 7%

The yuan falls on the announcement

The change will go into effect starting from 15 June.

The yuan has had a bit of a volatile trading day so far with earlier remarks by an ex-PBOC official suggesting that local authorities may intervene – prompting a drop in the currency – before the PBOC itself fixed the yuan at its strongest since May 2017.
And then this.

In the bigger picture, I don’t see this reversing the trend in the stronger yuan as long as officials are going to maintain the narrative that a stronger currency reflects more solid economic fundamentals.
But such a move as that above will at least pump the brakes to prevent things from going too far, too fast – which has never been to China’s liking.

China reportedly to allow three children per couple

Xinhua expands from the earlier report

Since 2016, families would be allowed to have two children but amid the lessening population, it seems that China’s Politburo is making a major change to its birth policy.

That said, it remains to be seen how much this will change the mentality of people and encourage them to have more children.
There has been many stories on how reluctant zoomers are in having many kids – if at all – due to lifestyle struggles and the lack of financial opportunities in general.
It will take some time to see how this policy change affects the overall demographics of the country but if this isn’t going to have much impact, Japan’s story is one that will be a lesson in history that may repeat itself for many countries around the world.

Eurostoxx futures -0.2% in early European trading

Tepid tones in early trades

  • German DAX futures -0.2%
  • Spanish IBEX futures -0.2%
This carries over the slightly softer tone from Asia, with the Nikkei ending down by 1.0% and the Topix falling by 1.1%. The Hang Seng is down 0.6% though mainland Chinese equities have pared earlier losses, with the Shanghai Composite now up 0.1%.
US futures are muted but just be aware that the cash market will be closed in observance of Memorial Day today.

France’s Le Maire: Convinced that economy will grow 5% this year

Remarks by French finance minister, Bruno Le Maire

  • Economic activity will be back to pre-pandemic levels at the start of 2022
That is an encouraging outlook but there are still some caveats. For now, vaccinations may be progressing smoothly but the threat of new virus variants may threaten a broader and large-scale reopening not just in Europe, but across the globe as well.
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