- The G7 meetings got underway on Sunday in Germany, with Russian sanctions, inflation, the threat of recession and climate change all on the agenda. The US, UK, Japan and Canada will reportedly announce a ban on new gold imports from Russia during the summit, and talks around a price cap on Russian oil exports are set to continue.
- Russia has technically defaulted on its foreign currency sovereign debt after sanctions prevented the payment of USD 100mn due May 27 from being paid. Usually ratings agencies would declare a default, but due to sanctions, the ratings agencies have withdrawn their ratings. It is now up to bondholders to decide whether or not to call a default or wait for sanctions to be eased at some point, allowing payment to be made in the future.
- US data at the end of last week came in better than expected. New home sales rose by a more than forecast 10.7% m/m in May, reversing some of the decline in April which was also smaller than initially estimated. The rise in new home sales was despite sharply higher mortgage rates in recent weeks. The median sales price of a new home rose 15% y/y in May to USD 449k.
- Separately, the University of Michigan survey of long-term inflation expectations came in at 3.1%, much lower than the preliminary reading of 3.3% that Fed Chair Powell had alluded to after the FOMC raised rates by 75bp in June. However, the headline index came in at 50.0 in the final reading, slightly lower than the preliminary 50.2, an historic low.
- UK retail sales declined by less than expected in May, down -0.5% m/m and -4.7% y/y. excluding petrol, retail sales fell -0.7% m/m. The figures for April were also revised down. High inflation is expected to continue to dampen consumer spending in the coming months, as real incomes decline, although PMI surveys suggests that spending on services appears to be faring better than spending on goods.
- Germany’s IFO survey for June came in worse than expected as confidence declined off the back of several regional concerns. The headline business climate reading fell to 92.3 from 93.0, lower than the predicted 92.8 whilst expectations declined to 85.8 from last month’s 86.9 and well below the expected 87.4. These figures underline growing fears over rising inflation, supply chain issues and the particularly bleak prospect of energy supply shortages from Russia.
- Bloomberg reports that the Saudi Arabian Central Bank placed around SAR50bn (USD13bn) in time deposits at commercial banks to help ease the liquidity crunch in the domestic market. The deposits were reportedly placed in three tranches, beginning just before the Fed’s June FOMC meeting, and were offered at a discount to the 3m SAIBOR rate. The 3m SAIBOR spread over 3m USD Libor has indeed narrowed in recent weeks, falling to 0.89% on Sunday from 1.5%at the end of May.
- The UAE will be signing Comprehensive Economic Partnership Agreements (CEPA) with several countries in the coming months, to boost international trade and economic growth. The UAE is currently negotiating terms with Indonesia, Colombia and Turkey to reduce or remove tariffs and duties on trade.
- Egypt is set to purchase 180,000 tonnes of wheat from India according to supply minister Aly Moselhy, as reported by Reuters. The shipment will take place as soon as the cargo arrives at the port, which will help alleviate some of the pressure on Egypt which has struggled with the fallout from the Russian invasion of Ukraine. The Black Sea region traditionally accounts for around 80% of Egypt’s wheat imports and the rise in prices has been a major driver of accelerating headline inflation. The government is also looking at ways to boost flour extraction from its wheat, according to Moselhy.
Today’s Economic Data and Events
- 16:30 US durable goods (May) forecast 0.2%
Fixed Income
- Fear of an imminent recession helped to support benchmark fixed income markets last week with US Treasuries catching a decent bid. A broad index of US Treasuries rallied by 0.6% last week with the 2yr UST yield falling by about 12 bps to 3.0632 and the 10yr yield down by 10bps to 3.1301%, helped lower by slightly lower consumer inflation expectations.
- The run up in US Treasuries comes largely on market moves, rather than being spurred by any developments from Fed officials. Most commentary in the last week following the June FOMC has served to reaffirm the view that inflation is the priority challenge for the Fed and that another large 75bps hike is being set up for the July meeting.
- Recession anxiety also helped to lift European bonds last week with a broad index of bonds from across the economies up by 1.5% last week. Yields on the 2yr Schatz fell by 28bps to 0.794% last week while the 10yr bund yield dipped 22bps to 1.437%. In the UK, 2yr gilt yields fell by 27bps to 1.9170% and the 10yr gilt yield closed at 2.3%, down by almost 20bps w/w.
- Central bank activity is relatively muted among major central banks this week.
FX
- Sliding US Treasury yields helped to sink the dollar last week with a surge in risk sentiment at the end of the week also helping to push the greenback lower. EURUSD added 0.5% last week to close out at 1.0553 while GBPUSD managed a 0.2% gain over the week to settle at 1.2268. a recovery in risk helped to push USDJPY higher at the end of the week, bringing gains for the pair (and losses for the yen) up by 0.16% to 135.23.
- In the commodity currency space gains against the dollar were mixed with CAD leading the pack. USDCAD fell by 1.1% to 1.2891 while AUDUSD managed a gain of 0.19% last week to 0.6945 and NZDUSD was marginally higher to settle at 0.632.
Equities
- Equity markets enjoyed a measure of relief last week as the bulk of the major global indices closed up on the week. Better-than-expected data out of the US helped support stocks which saw strong gains on Friday in particular, although with the economic outlook still looking highly challenging this could yet prove to be a bear market bounce. Nevertheless, for the time being sentiment has clearly improved on that seen in recent weeks, and the Dow Jones, the S&P 500 and the NASDAQ gained 5.3%, 6.7% and 9.0% respectively.
- Gains were somewhat more measured in Europe where the DAX still closed down, albeit modestly at -0.1%. The FTSE 100 added 2.7% and the CAC 3.2%.
- In Asia, the Shanghai Composite, the Nikkei, and the Hang Seng gained 1.0%, 2.0% and 3.1% w/w respectively.
Commodities
- Rising recession anxiety helped contribute to lower oil prices last week with WTI futures closing at USD 107.62/b, down 1.8% while Brent settled at USD 113.12/b, unchanged on the week. However, both got a boost at the end of last week in line with a broader recovery in risk appetite.
- OPEC+ meets this week to outline plans for August production and beyond. By August, all of the OPEC+ cuts taken during the pandemic will have been agreed to have been returned to the market, even if actual production is likely to fall far short as many members are already running up against production constraints.
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