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Newsquawk European Market Wrap - 20th May 2025

20/05/2025 15:00

Market Analysis

  • European stocks opened modestly firmer and gradually ground higher as the session progressed.
  • Choppy trade for the Dollar, which fluctuated between 100.00 and 100.50 during European hours.
  • Japan is reportedly mulls accepting US tariff reduction, not exemption, according to Kyodo.

EQUITIES

  • European bourses (STOXX 600 +0.7%) opened modestly firmer and gradually ground higher as the session progressed.
  • European sectors opened mixed but looked close to the European session with a positive bias. Utilities took the top spot, with sentiment in wind names boosted after the Trump administration lifted a stop-work on Equinor’s (+1.3%) New York offshore wind farm project; peers such as Orsted (+16%) have also been edging higher.
  • US equity futures are modestly lower across the board, in contrast to a mostly positive APAC/European session. In terms of key movers, Home Depot (+2%, Revenue beat and affirms guidance), Nike (+0.5%, Lays off some workers in shake-up of tech division), Google (+0.4%, Self-driving unit Waymo received approval from California to expand its robotaxi operations), PDD (-0.7%, EU is reportedly considering imposing a EUR 2 handling fee on small packages ordered online, primarily from China, via FT).

FX

  • USD - DXY initially extended on yesterday's downside which was largely attributed to the Moody's downgrade on the US on Friday, slipping to levels just above the 100 mark before rebounding to levels just shy of 100.50 during European hours today following a pick-up in US yields. Newsflow on the trade front has been non-incremental aside from a Reuters sources piece noting that the US Treasury does not anticipate any trade deal announcements at the G7 Finance Meeting in Canada this week. In what is a quiet week of data, focus has been on the busy Fed docket with FOMC's Williams yesterday underscoring the uncertainty surrounding the US outlook by noting that the path forward might not become clearer for months. Today, Fed speak during European hours has been relatively quiet, with Bostic reiterating recent commentary while Barkin offered no commentary on policy and outlook. Little move was also seen on commentary from US President Trump, who on tax bill, said if the bill is passed, there will be largest tax cuts in history. If not, there will be a 68% tax increase.
  • EUR - EUR struggled to hold onto opening gains vs. the USD with not a great deal in terms of Eurozone newflow aside from ongoing ECB speak with Executive Board member Schnabel noting that disinflation is on track, though new shocks could pose new challenges. As it stands, a 25bps ECB cut next month is priced at around 92%. On the trade front, FBN's Gasparino reported yesterday that "US - EU trade discussions are being complicated by an internal EU disagreement over how to approach any deal with the US, meaning this one APPEARS to have a long way to go before culmination". EUR/USD sat towards the middle of yesterday's 1.1169-1.1288 range.
  • GBP - A touch softer vs. the USD and steady vs. the EUR. This morning saw remarks from BoE Chief Economist Pill, who dissented at the 8th May rate decision by voting for an unchanged rate vs. consensus for a 25bps cut. Pill noted that his dissenting vote stemmed from a concern that the pace of withdrawal of monetary policy restriction since last summer is too rapid, given the balance of risks to price stability. He added that his vote should be seen as a skip and not a halt to the withdrawal of the restriction process. The remarks had little follow-through to GBP with the pound instead focused more on tomorrow's inflation metrics. Cable has ventured as high as 1.3394 but stopped shy of yesterday's best @ 1.3404, before reversing course and slipping below the 1.3350 mark.
  • JPY - Fractionally firmer vs. the USD with the JPY supported by moves in Japanese yields as the 30yr JGB yield hit its highest level since its debut in 1999 following a soft JGB auction overnight. On the trade front, Japanese Economy Minister Akazawa said there has been no change to Japan's stance of demanding the elimination of US tariffs. Note, Japanese Finance Minister Kato and US Treasury Secretary Bessent are expected to discuss exchange rates on the sidelines of the G7 meeting in Canada this week. USD/JPY delved as low as 144.10 before recovering to levels closer to 145.
  • Antipodeans - Both softer vs. the USD with AUD lagging across the majors, post-RBA. As expected, the RBA pulled the trigger on a 25bps cut whilst offering a cautious view on the outlook and lowering its inflation forecasts in its accompanying SOMP. At the follow-up press conference, AUD/USD moved to levels closer to 0.64 after Governor Bullock revealed that the board discussed cutting by 25bps or 50bps. Oxford Economics notes that it views "rates as still being in slightly restrictive territory after this cut and expects to see two more rate cuts in the second half of 2025". Markets price 72bps of easing by year-end. NZD/USD slipped below the 0.59 mark but remained within yesterday's 0.5876-0.5932 range.
  • CAD - CAD a touch stronger vs. the USD after firmer-than-expected Canadian inflation metrics which saw the Y/Y rate print at 1.7% (exp. 1.6%, prev. 2.3%) and the BoC core CPI average measures rise to 2.93% from 2.66%). In reaction to the report, pricing for the BoC's June meeting saw odds of a 25bps cut fall from 63% to 48% with a total of 42bps of cuts seen by year-end vs. 46bps pre-release. That being said, it remains the case that the trade war may prove to be more incremental for the BoC than near-term inflationary developments. USD/CAD delved as low as 1.3930 but stopped shy of yesterday's 1.3917 base.

FIXED

  • The session began with a bearish-handover from JGBs, hit after a very poor 20yr auction that lifted the 30yr yield in Japan to its highest since inception.
  • This weighed on JGBs by around 60 ticks in the minutes after the results crossed. However, the benchmark then pared over the remainder of the APAC session and was approaching unchanged as the European morning got underway.
  • USTs dented ever so slightly overnight from the above, before shrugging this off and continuing the intraday rebound seen on Monday, taking them above Monday’s best to a 110-14+ high, but stalled shy of last week’s 110-21+ best.
  • Bunds and Gilts in-fitting with this. EGBs unreactive to lower German Producer Prices (driven by energy) or a handful of ECB officials. Gilts unmoved by BoE’s Pill who explained his dissent was a “skip”.
  • Bunds surpassed Monday’s 130.60 peak in short order, getting as high as 130.75. Gilts similar, and outperforming in the morning as they didn’t get as much time to benefit from Monday’s late-door rebound, to a 91.91 peak.
  • Since, benchmarks found themselves subject to gradual pressure and are back into the red. There hasn’t been a clear/singular fundamental driver behind it but the move is perhaps a function of the robust European risk tone (see Equities). Bunds and Gilts are now set to end the European day at lows of 130.16 and 91.06 respectively, with downside of c. 40 ticks.
  • Similarly, USTs have faded though not to quite the same degree. Focus on Fed speak (nothing of particular note yet) and fiscal matters as Trump is currently speaking to House Republicans in order to ensure the spending bill passes the Rules Panel debate, 06:00BST Wednesday, before hitting the floor on Thursday.
  • Germany sells EUR 0.99bln vs exp. EUR 1bln 0.00% 2030 Green Bund and EUR 0.92bln vs exp. EUR 1bln 1.80% 2053 Green Bund.
  • Hong Kong pension fund managers are reportedly sounding the alarm of potential forced selling of US Treasury holdings following Moody's downgrading US' rating, according to Bloomberg sources Hong Kong Investment Fund Association (HKFIA) has recommended that an exception to the maximum 10% holding rule is made for US Treasuries, to allow funds to invest above the limit even if the US is rated one notch below AAA, according to the sources. Japan's R&I still has an AAA rating (outlook stable) on the US, and is not considering a downgrade currently "don't believe the situation described there has significantly changed".
  • BoJ releases briefing material used at a meeting with bond market participants: notes some members said JGB market functionality is improving as a trend due to the BoJ taper. Some look for an eventual end to bond buying, some are after bigger cuts in the next plan. Some seek substantial cuts in one go. Deteriorating demand-supply for super-long JGBs is not something the BoJ can fix.

COMMODITIES

  • Crude Futures - Subdued price action amid a recovery in the Dollar and following some of the more sanguine tones from US President Trump regarding Russia, whilst upside was seen on less consiliatory commentary from the Iranian Supreme Leader. In other energy news, Equinor is to resume its USD 5bln Empire Wind project after the Trump administration reversed its decision, which now allows for a restart of construction. Aside from that, energy-specific newsflow has been quiet with WTI currently in a USD 61.60-62.63/bbl range while its Brent counterpart resides in a USD 65.00-66.00/bbl range.
  • Precious Metals - Initially flat but later started grinding higher despite the recovery in the Dollar, but alongside some downticks across US equity futures. There is little to add aside from the aforementioned geopolitics, whilst a slew of central bank speakers are slated for today, although speakers will likely give balanced commentary given the broader uncertainty surrounding tariffs. Spot gold resided in a USD 3,204.67-3,251.01/oz range vs yesterday's USD 3,206.72-3,249.85/oz parameter.
  • Base Metals - Mixed trade in narrow ranges amid a lack of pertinent catalysts during the European session, whilst the broader risk tone remains cautious. Overnight, the PBoC cut their LPRs by 10bps as widely telegraphed, whilst this did little to spur advances across base metals. Furthermore, Chinese President Xi called for continuous efforts to build the manufacturing industry, according to Xinhua. 3M LME copper currently resides in a USD 9,443.05-9,526.35/t.
  • Iraq's Oil Ministry says it rejects "special measures" by Iraqi Kurdistan's Government for deals with US companies.
  • Ukrainian Foreign Minister says the price cap on Russian oil should be lowered to USD 30/bbl.

TARIFFS/TRADE

  • Japan is reportedly mulls accepting US tariff reduction, not exemption, according to Kyodo. The Japanese government is reportedly considering the option of accepting a reduction in the rate of additional tariffs and reciprocal tariffs on automobiles and other items. Due to the US, according to sources, refusing to eliminate tariffs in prior negotiations and is said to have "indicated its intention to exclude additional tariffs on automobiles, steel, and aluminium, which are important to Japan, from the talks".
  • Japan's Top Tariff Negotiator Akazawa intends to visit US again later this month after this week's third US-Japan talks, via Kyodo.
  • EU is reportedly considering imposing a EUR 2 handling fee on small packages ordered online, primarily from China, via FT.

EUROPEAN NEWS

  • Senior UK Government officials are reportedly discussing whether to reverse the controversial winter fuel policy within weeks, via BBC's Zeffman; announcement could come alongside the June spending review, though this has not been decided.

EUROPEAN DATA

  • German Producer Prices MM (Apr) -0.6% vs. Exp. -0.3% (Prev. -0.7%); YY -0.9% vs. Exp. -0.6% (Prev. -0.2%)
  • EU Current Account SA, EUR (Mar) 50.9B (Prev. 34.3B); Current Account NSA,EUR (Mar) 60.1B (Prev. 33.1B)
  • German VCI Chemical Industry Association: Q1 Production +0.6% Y/Y; Revenue +1.8% Y/Y; notes that production is expected to stagnate this year and industry sales will decrease slightly.

CENTRAL BANKS

  • BoE's Pill says "dissenting vote stems from a concern that the pace of withdrawal of monetary policy restriction since last summer – quarterly cuts of 25bp – is too rapid given the balance of risks to price stability". Dissent was in line with his preference for “cautious and gradual” cuts in Bank Rate expressed over the past twelve months. Would characterise his dissenting vote as favouring a ‘skip’ in the quarterly pattern of Bank Rate cuts. It should not be seen as favouring a halt to (still less a reversal of) that withdrawal of restriction. Is concerned that structural changes in the price and wage setting behaviour have increased the intrinsic persistence of the UK inflation process. The underlying disinflation continues. The prospective path of Bank Rate from here is downward. Dissent from the most recent decision does not reflect a fundamental difference with the MPC. Says "we should not be dependent on how the data turns out". Can't assume that the inflation "pain" of new economic shocks will dissipate quickly. Agrees with the MPC that there is an easing in the labour markets, has questions over the pace. Some key pay indicators "remain quite strong".
  • ECB's Schnabel says disinflation is on track, though new shocks could pose new challenges. Tariffs could be disinflationary in the short run but result in upside risk over the medium term. "We are facing a historical opportunity to foster the international role of the euro" & "When the inflation regime changes, we must be ready to respond swiftly".
  • ECB's Knot says mid-term inflation outlook is too uncertain to say whether a rate cut is needed in june; projections will likely show lower inflation in 2025 and 2026, longer-term is uncertain.
  • ECB's Escriva says global environment is deifned by geopolitical, trade tensions and the unpredictable policies from the US administration.
  • Fed's Barkin (2027 voter) does not comment on monetary policy and economic outlook in prepared remarks.
  • PBoC reiterate to implement moderately loose monetary policy and meet the financing needs of the economy, via a Symposium on Financial Support.
  • CBRT bought USD 5bln of foreign currency last week, net reserve increase of USD 2.3bln according to Reuters citing traders.

GEOPOLITICS

  • Iranian Supreme Leader Khamenei says "I don't think nuclear talks with the US will be successful"; via Mehr news. Says to the US that they must remain from making outrageous demands. Saying that Iran will not be allowed to enrich uranium is excessive and outrageous.
  • "Israel Broadcasting Corporation: Netanyahu extends the stay of the Israeli negotiating team in Doha for an additional day", according to Alhadath.
  • Israeli PM Netanyahu says "Gaza war could end "tomorrow" if hostages return and Hamas leaders lay down their arms", via Sky News Arabia.
  • Iran has received a proposal for the next round of indirect negotiations with the US, according to Iran International.
  • Israeli PM Netanyahu "is holding at this hour discussions on the question of rather to return the Israeli delegation from Doha, due to the fact that there has been no advance", according to journalist Stein.
  • "Iranian Foreign Minister: A date has been proposed for the next round of negotiations with Washington, but we have not yet approved it", according to Sky News Arabia
  • Ukraine President Zelensky says Russia is playing for time to continue the war; no doubt that the war has to end at the negotiating table, there must be a clear and realistic proposal on the table.
  • EU Foreign Affairs Representative Kallas says the EU has approved its 17th sanction package against Russia, targeting nearly 200 shadow fleet ships; more sanctions on Russia are in the works.
  • Russia Foreign Ministry says Russia is ready to continue to talks with Ukraine, now it's up to Kyiv to decide.
  • German Foreign Minister says "we expect our US allies not to tolerate the fact that Russia did not impose an immediate ceasefire". As long as Russian President Putin is not serious about negotiations, Europeans will be ready to impose further sanctions on Russia. There is a great readiness in the US to consider additional sanctions on Russia.
  • EU Commission President von der Leyen says, on the latest Russian sanctions package (the 17th), that "An 18th package is being prepared with further hard hitting sanctions."

NOTABLE NORTH AMERICAN NEWS

  • US President Trump, on tax bill, says this party is united, it is not a question of hold outs, the economy is roaring. If the bill is passed, there will be largest tax cuts in history. If not, there will be a 68% tax increase. "We are not doing any cutting on anything meaningful, we are going to cut the waste." Will cut three things, waste, fraud, abuse. Not changing medicaid, medicare, social security.
  • US President Trump says he is a fiscal hawk.
  • "TRUMP softens a bit on SALT. Says that Democratic governors want it", according to Punchbowl's Sherman
  • US Representative Lawler (R) says the latest SALT offer is "insufficient", via CNN's Fox.
  • White House Council of Economic Advisers Chair Miran says there is no doubt over inflation, interest rates coming down, via Bloomberg TV.

NORTH AMERICAN DATA

  • Redfin US Home Sales (April) -0.1% M/M (prev. 0.17%); first M/M decline since September 2022. 4.1% Y/Y (prev. 4.9%)
  • Canadian CPI Inflation YY (Apr) 1.7% vs. Exp. 1.6% (Prev. 2.3%)
  • Canadian CPI Inflation MM (Apr) -0.1% vs. Exp. -0.2% (Prev. 0.3%)
  • Canadian CPI BoC Core YY (Apr) 2.5% (Prev. 2.2%)
  • Canadian CPI BoC Core MM (Apr) 0.5% (Prev. 0.1%)
  • BoC Core CPI Measures Average (Apr): 2.93% (prev. 2.66%, rev. 2.66%)
  • US Redbook YY w/e 5.4% (Prev. 5.8%)