S&P futures rose 0.3% in subdued trading with Dow Jones futs once again in record territory as European stocks jump 0.6% following Sunday’s landslide victory for Macron’s party in the French parliamentary elections and as Brexit negotiations are set to officially roll out on Monday.

In the latest terrorist incident in London overnight, a man drove a van into pedestrians as people left their mosque following prayers, with UK PM May stating that UK police have confirmed the incident is being treated as a potential terrorist attack. Later updates stated that the one fatality could have been dead before being run-over while 2 others are considered to be seriously injured.

Asian equities opened on the front foot led by a rebound in tech stocks while benchmark sovereign yields and FX remains little changed; kiwi outperforms following solid domestic data; yen slightly lower. Australian bonds modestly softer, T-note futures unchanged with the AUDUSD sliding, but then recouping all losses after Moody’s cut the long-term ratings of Australia’s four major banks, ANZ, CBA, NAB and Westpac, to Aa3 from Aa2.

In China, the PBOC kept daily CNY fixing little changed and conducted net 110 billion yuan of open market operations, injecting liquidity for a fifth straight day and boosting cash injections in the past two days to the most since January. 7-day repo rate fell 23 basis points. Boosted by the sudden bout of PBOC liquidity generosity, Chinese 10-year sovereign bond yield declined 8 basis points, the most since Dec. 29, to 3.50%, sending the yield to the lowest since early May, however the 1-year yield dropped just 4 basis points to 3.58%, sending the Chinese 1s10s yield curve even more inverted.

Chinese and Hong Kong stocks jumped 0.7% and 1.2% ahead of a decision by index provider MSCI on Tuesday, expected to see it add mainland-listed Chinese stocks to its top share benchmarks for the first time. Chinese data had also helped, with Reuters noting that liquidity conditions appear to have eased and home prices up 10.4% in May from a year ago, although slowing from April’s 10.7% gain.

“Generally, the environment still remains fairly positive for risk appetite,” said Khoon Goh, head of Asia research at Australia and New Zealand Banking Group in Singapore.

In Europe, stocks headed for their biggest rise in seven weeks on Monday as investors snapped up slammed retail, tech and automaker stocks and France’s shares and bonds cheered an absolute parliamentary majority for President Emmanuel Macron as the Stoxx Europe 600 gained for a second day. Europe’s retailers also clawed back some ground having been clobbered along with U.S. peers like Wal-Mart and Target on Friday by Amazon’s $ 13.7 billion deal to buy upscale grocer Whole Foods Market. The CAC 40 jumped after President Emmanuel Macron’s government claimed a historic majority in France’s legislature, although marred by a record low turnout, which perhaps is why the German-French spread moved just fractionally on monday.

“We expect the Macron reforms to transform France like the Thatcher reforms had cured the erstwhile sick man of Europe, the United Kingdom, some 35 years ago,” said Berenberg European economist Holger Schmieding. “And like the ‘Agenda 2010’ reforms had turned Germany from one of the weakest into one of the strongest economies in Europe almost 15 years ago.”

As Bloomberg notes, investors are once again in risk-on mode as the week begins, even as a cloud of uncertainty swirls around both U.K. leadership and the outlook for Brexit negotiations.

“Risk assets around the world are rallying again as the ‘carry party’ resumes,” Societe Generale SA strategist Kit Juckes wrote in a client note. Fed Chair Janet Yellen “did nothing to persuade the market” to take its hawkish outlook for the path of interest rates seriously, he said.

Sterling rose with cable just above $ 1.28 ahead of the formal start of negotiations on Britain’s planned exit from the European Union, expected to generate plenty of headlines for the currency in the weeks ahead. Brexit Secretary David Davis starts negotiations in Brussels on Monday, which will be followed by a Brussels summit on Thursday and Friday where Prime Minister Theresa May will meet – but not negotiate with – fellow European Union leaders.

Davis’s agreement to Monday’s agenda led some EU officials to believe that May’s government may at last be coming around to Brussels’ view of how negotiations should be run. May’s own political survival is in doubt after she lost her parliamentary majority in an election this month.

On the topic of Brexit negotiations, which officially kick off today, SocGen’s Juckes said “we expect nothing because the UK position is as clear as mud’ beyond growing signs that the UK wants free trade without being part of the customs union or conceding grounds on borer controls. Sterling’s probably range-bound. Any rally triggered by ‘soft Brexit’ hopes is probably temporary.”

With no macro data on today’s calendar, the market will await comments by New York Fed President William Dudley when he speaks at a business roundtable in New York state.

“In the wake of Friday’s weak U.S. data, Dudley could provide insight into whether the Fed is still poised to continue normalizing monetary policy,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

The euro was steady as talks begin on the U.K.’s split from the European Union, while the British pound strengthened after dropping early in the session.

In commodities, oil futures lingered near six-week lows over concerns about a supply glut amid faltering demand. WTI slipped 0.35% to $ 44.58 a barrel, while Brent dropped 0.3% to $ 47.21. Iron ore rallied 2.8% after snapping a three-week losing streak.  Gold touched a 3-1/2-week low earlier in the session and was trading down slightly at $ 1,250 an ounce.

In rates, two-year gilts underperform the rest of the curve after the Sunday Times reported the BOE is considering ending its term funding scheme; euro-area periphery bonds outperform core peers. The yield on 10-year Treasuries was little changed at 2.15 percent.

Bulletin headline Summary from RanSquawk

  • European equities enter the North American open in positive territory, continuing from Asia, buoyed by Macron’s convincing parliamentary election victory.
  • A quiet morning in FX land, with all focus on GBP, GBP/USD has pivoted around the 1.28 handle, as participants await the Brexit negotiations.
  • Looking ahead, the highlight will be the fallout of day one of Brexit Negotiations, with Barnier and Davis set to brief the press at 17:00BST

Global Market Snapshot

  • S&P 500 futures up 0.3% to 2,437.75
  • STOXX Europe 600 up 0.7% to 391.35
  • MXAP up 0.6% to 155.18
  • MXAPJ up 0.7% to 505.44
  • Nikkei up 0.6% to 20,067.75
  • Topix up 0.6% to 1,606.07
  • Hang Seng Index up 1.2% to 25,924.55
  • Shanghai Composite up 0.7% to 3,144.37
  • Sensex up 0.8% to 31,303.70
  • Australia S&P/ASX 200 up 0.5% to 5,805.17
  • Kospi up 0.4% to 2,370.90
  • German 10Y yield rose 0.2 bps to 0.278%
  • Euro down 0.04% to 1.1193 per US$
  • Brent Futures down 0.4% to $ 47.17/bbl
  • Italian 10Y yield rose 1.9 bps to 1.695%
  • Spanish 10Y yield fell 2.5 bps to 1.431%
  • Brent Futures down 0.4% to $ 47.17/bbl
  • Gold spot down 0.2% to $ 1,250.84
  • U.S. Dollar Index up 0.01% to 97.18

Key Overnight Headlines

  • London police say one dead, eight injured after van hits pedestrians
  • BOE said to consider ending the Term Funding Scheme at a meeting this week
  • Macron’s party secures French parliamentary majority, turnout plummets
  • Trump isn’t under investigation for obstruction of justice, his lawyer says
  • RBA’s Lowe repeats growth likely a bit stronger over next couple of years
  • Japan May trade balance -203.4 billion yen vs +43.3 billion estimate
  • Oil Declines as U.S. Adds Yet More Rigs in Oversupplied Market
  • Amazon Said to Plan Cuts to Shed Whole Foods’ Pricey Image
  • Basic Energy Said to Be in Talks to Merge With Rival Key Energy
  • Boeing Takes Aim at Airbus Single-Aisle Edge With Stretched 737
  • GE Won’t Participate on New Boeing If Three Engine Providers
  • JD Takes $ 17.6b of Orders During ‘618’ Online Shopping Gala
  • Ocado Jumps as Amazon Deal Seen Positive by Credit Suisse
  • Clovis to Seek Broader Label as Ovarian Cancer Study Meets Goals
  • Myriad Genetics, Foundation Medicine May Fall on Clovis Plans
  • Pentagon Sees Saving $ 2b From 445-Jet Contract for F-35 Fighter

In Asia, equity markets began the week on the front-foot with all major indices in the green, as participants eyed the political landscape in Europe including the start of Brexit negotiations today and after French President Macron’s party and its allies won a clear majority in the 2nd round parliamentary elections. Nikkei 225 (+0.62%) gained as JPY softened across the board, while ASX 200 (+0.54%) was led higher by outperformance in utilities and financials. Elsewhere, Shanghai Comp. (+0.7%) and Hang Seng (+1.1%) are also upbeat following a firm liquidity operation by the PBoC, while the region also awaits MSCI’s verdict tomorrow on whether to add China A-shares to its Emerging Markets Index in the nation’s 4th attempt for inclusion. Finally, 10yr JGBs were subdued alongside gains in riskier assets and after the BoJ’s Rinban announcement, in which it refrained from JGB purchases and instead concentrated on treasury bills.

Top Asian News

  • Hong Kong Wants to Win the Next Alibaba With Exchange Revamp
  • China’s Home Prices Increase in Fewer Cities as Curbs Bite
  • Japan’s Recovery Creates Room for Bolder Reforms, IMF Says
  • Aussie Extends Drop After Moody’s Cuts Ratings on Nation’s Banks
  • CRCC May Eye Up to $ 2b From Shanghai, Hong Kong Share Sales: IFR
  • Why the Qatar Crisis Defies Rapid Resolution: QuickTake Q&A
  • Taiwan Watchdog Fines SinoPac, Ousts Chairman for Lax Oversight
  • In Prohibition Pakistan, Brewery Plans Soft Drink Switch
  • Abe’s Popularity Slides as Mounting Japan Scandals Take Toll
  • Toshiba Finalizing Chip Sale to Group With Bain: Nikkan Kogyo

In Europe, equities likewise have kicked-off the week on the front foot, with all major European bourses firmly in the green (Eurostoxx 600 +0.6%) in a continuation of the positive sentiment seen during Asia-Pac trade. The CAC 40 (+1 %) is trading broadly in-line with the market as Macron’s victory in the French parliamentary elections was largely priced in given the results seen in the first round. In terms of sector performance, gains have been relatively broad-based with modest underperformance for RWE following a broker downgrade while Ocado (+6.5%) trade higher in the wake of Amazon’s purchase of Whole Foods. In fixed income markets, prices have largely been swayed by the upside in equities as paper trades lower this morning (albeit modestly so) in what will be a quieter week with regards to sovereign supply (Belgium comes to market today with 3 OLO offerings). Peripheral yields are marginally lower this morning with Greek paper also taking a bit of a breather after the nation managed to strike a deal with creditors last week.

Top European News

  • Macron Under Pressure to Deliver as Turnout Plummets in France
  • Brexit Talks Begin With May Under Pressure to Get Soft Split
  • London Home Sellers Cut Price for Second Time in Three Months
  • ECB’s Smets Says Start of Brexit Negotiations a ‘Sad Day’
  • ECB’s Smets Says Inflation Expectations Must Be Solidly Anchored
  • Buyers Line Up as Europe’s Biggest Debt Collector Divests Units
  • Kazakhstan Says Eni-Shell Venture Offers Settlement to End Spat
  • Astra, Tesaro May Move on Clovis Oncology’s Ovarian Cancer Data
  • U.K.’s Johnson: ‘Realistic Prospect’ of Brexit Deal With EU
  • SNCF Mandates Lazard to Sell Ermewa, Les Echos Says

In currencies, GBP will be a focus throughout the session as today sees the beginning of negotiations between EU’s Barnier and Brexit Secretary Davis. That said, GBP remains firmer against the greenback and back above 1.2800 even despite weekend reports of a potential attack on May’s leadership which could further add to the political uncertainty gripping the nation. Elsewhere, the broader risk sentiment has supported the USD with USD/JPY gaining traction in early trade. However, some remain cynical about how much room there is to the upside with hearty offers at 111.50. Finally, AUD saw some selling pressure this morning amid news that Moody’s has downgraded the nation’s big four banks.

In commodities, this morning has been a quieter one for the commodity complex with energy prices stuck in a tight range amid light newsflow, other than reports that oil output has been increasing at Libya’s Sharara oil-field. In metals, copper eked mild gains overnight amid the positive risk sentiment in Asia, although upside was limited alongside subdued trade across the complex, while the risk sentiment has acted as a downward force for gold prices. There were new details released by Jodi about Saudi Arabian oil data as follows:

  • Crude exports fell by 0.226min BPD M/M to 7.006min BPD in April
  • Crude Stocks fell 3.927min BBLS TO 263.927min BBLS in April
  • Domestic refinery crude throughput rose 0.390min BPD to 2.651 min BPD in April
  • Crude output rose by 0.046min BPD M/M to 9.946min BPD in April

Looking at the day ahead, there are no data releases scheduled in the US, although we have two Fed speakers: at 8am, Fed’s Dudley holds a business rountable in Plattsburgh, NY; while later at 7pm Fed’s Evans speaks in New York.

* * *

DB’s Jim Reid concludes the overnight wrap

Politics remains a hotbed of activity at the moment. There may only be around 20 miles between France and the UK but the fascinating thing about these two very different countries at the moment is that while the French seem to be rejecting socialism in their droves the momentum in the UK seems to be leading the country in the opposite direction. While Macron talks of sweeping labour market reform, the buoyant UK opposition (ahead in the polls now) talk of renationalisation, higher taxes and higher spending.

As expected Macron’s En Marche party swept the board in the second round of the parliamentary election yesterday winning 350 out of 577 seats – perhaps slightly short of expectations but still a commanding victory. The record low turnout (estimated at 44%) will also be a disappointment and already Melonchon has suggested that this doesn’t give Macron legitimacy to tear up worker’s rights. Indeed Melenchon said that “this bloated majority in the National Assembly does not in our eyes have the legitimacy to perpetrate the anticipated social coup, the destruction of all public social order by the repeal of the labour law”. Elsewhere the ruling Socialist party fell from 280 to an estimated 45 seats though and were firmly defeated. It’s easy to forget that it was only 14 months ago that the En Marche party was formed and how remarkable it is that they’ve come from nowhere to secure such a victory and banish the two main parties. Europe is going through a buoyant patch economically at the moment which is taking the edge off populism but under the surface huge political change is still occurring.

Meanwhile in the UK politics is as decisive as at any point I can remember with Brexit, the recent elections and the tragic fire last week in a tower block in London creating anger, resentment, activism and at times scenes descending into what seems like mob behaviour. The overnight breaking news of another vehicle striking into pedestrians in North London is sadly another talking point. When the opposition party leader Jeremy Corbyn suggests that empty privately owned houses in the region of the Grenfell Tower fire should be subject to requisition orders to house the homeless and that a YouGov poll suggests that 59% of the population agrees with the idea in theory then you can see that a political tide is turning.

Added to this, PM May has had such a difficult 10 days that opinion polls now give the Labour Party (led by a socialist core) a lead in the polls (recent Survation poll being evidence) a couple of months after being 20% behind and written off by many and expected to see one of the worst election results by an opposition party in history. For now PM May stumbles on without an official political understanding with the DUP as yet and only 2 days before the Queen’s Speech where she will lay out the Government’s legislative agenda for the next Parliamentary session (now lasting 2 years). On the same day there seems to  be momentum building for a “day of rage” against the Government with marches and protests planned. Those on the left of the political spectrum have really been emboldened over the last few weeks. Wednesday could be an interesting day in the UK. As we’ve been saying a lot over the last year we think the Brexit and Trump vote will be seen in years to come as an inflexion point across the world where Governments had to spend more to appease the bottom half of the population on the income scale or risk getting voted out. The recent political developments in the UK make me more convinced of this. Europe is not immune from this but as discussed above populism is seeing a slight retracement as growth edges towards the upper end of the post financial crisis range. If and when growth fades Europe will again likely face these issues.

Staying with the UK today sees Brexit negotiations officially begin. Chancellor of the Exchequer Phillip Hammond suggested yesterday in a TV interview that a gentle departure from the EU should be targeted. The Chancellor indicated that “transactional structures” would be needed to help smooth the process and that “we need to get there via a slope, not via a cliff edge” – suggesting a softer tone in negotiations. In contrast to the PM, Hammond also rejected the mantra “no deal is better than a bad deal”. Hammond also said that his position was one of a “jobs first” Brexit which is also a slight shift in tone compared to the PM. Separately, Hammond said that the UK government had “heard a message last week in the general election” and that ways to soften austerity were being looked at with voters seemingly growing “weary” of it. Hammond did however also say that he will still look to balance the budget by the middle of the next decade and that the UK had to “live within our means”. It’s worth noting that Hammond is due to deliver his Mansion House speech tomorrow after it was delayed from last week.

Away from politics, the big story in markets on Friday and over the weekend was that of Amazon’s $ 14bn bid for Whole Foods. The headlines sparked ripple effects of selling through the retail sector on Friday with investors quick to dump shares over fears of a potential huge new entrant in the market, potential further disruption and more fears of narrower margins. Bricks and mortar food retailers like Wal-Mart (-4.65%) and Kroger (-9.24%) were hit but it didn’t stop there with other general US bricks and mortar retailers under pressure. Costco (-7.19%), Walgreens Boots (-4.99%), CVS (-3.78%) and Target (-5.14%) all stood out. It was a similar story in CDS with spreads for the likes of Nordstrom (+6bps), Target (+4bps) and Wal-Mart (+3bps) all wider. Europe wasn’t immune with Tesco (-4.92%), Sainsbury (-3.85%) and Carrefour (-3.22%) also seeing big moves lower. Since the bid was made there have been plenty of articles over the weekend questioning whether this is deflationary for food prices and as such overall inflation. So it’s sure to be a talking point for a while.

While the retail sector did its best to drag markets down on Friday the S&P 500 actually managed to eke out a small +0.03% gain by the end of play after steadily rising into the close. A decent day for the energy sector had a lot to do with that after Oil (+0.63%) pared some of last week’s heavy fall. The Nasdaq (-0.22%) did however close in the red for the fifth time in the last six sessions. Prior to this the Stoxx 600 (+0.66%) had actually put up its best day since May 4th supported in part by the positive progress made in Greece to some degree.

This morning in Asia it’s been a fairly positive start to the week for risk. In equity markets the Nikkei (+0.60%), Hang Seng (+0.87%), Shanghai Comp (+0.33%), Kospi (+0.41%) and ASX (+0.20%) appear to all be feeding off the positive momentum into the Wall Street close on Friday. US equity index futures are also up +0.20%. It’s worth adding that there are some eyes already looking ahead to tomorrow’s decision from the MSCI as to whether or not China’s domestic A-shares will be included in its globally tracked EM index. The MSCI has previously delayed the decision over concerns about regulation worries and accessibility. Staying with China, house prices data out this morning revealed that new home prices rose in 56 of the 70 cities tracked by the government, down slightly from 58 in April. Meanwhile in Japan this morning our economists noted that customs trade stats for May confirmed stagnant international trade growth with a seasonally +0.9% mom rise in export volumes, a +0.4% mom rise in import volumes, flat growth in export value and +0.3% mom rise in import value.

Other markets were relatively quiet on Friday. Treasuries were a bit stronger at the margin (10y -1.2bps to 2.152%) and the USD softer (-0.28%) following some soft US data and dovish Fedspeak. In terms of the former both housing starts (-5.5% mom vs. +4.1% expected) and building permits (-4.9% mom vs. +1.7%) declined unexpectedly in May while the labour markets conditions index also rose a little less than expected (+2.3 vs. +3.0 expected). The flash June University of Michigan consumer sentiment reading was also a little disappointing after falling 2.6pts to 94.5 and the lowest since November. Both current conditions and expectations weakened although inflation expectations 1-year ahead did hold steady at 2.6% while 5-10 year expectations actually rose two-tenths to 2.6%. It’s worth noting that the Atlanta Fed’s Q2 GDPNow forecast is down to 2.9% (a 0.3% downward revision versus Wednesday) and at the lowest so far.

Meanwhile the Fedspeak consisted of comments from Kashkari and Kaplan. The former (who dissented last week) reiterated his view that the Fed should not have hiked rates last week given recent inflation data, preferring instead to wait and see if the data is transitory or not. The latter meanwhile told reporters that before he is comfortable taking the next step in tightening, “I’m going to want to see more evidence that we’re making progress in reaching our 2% inflation objective”.

In terms of the data in Europe on Friday, the only release of note was the confirmation of the final inflation readings for the Euro area in May. Headline CPI was unrevised at -0.1% mom which has in turn confirmed an annual reading of +1.4% yoy and down from +1.9% in April. The more significant core reading was confirmed at +0.9% yoy which compares to +1.2% the month prior.

To the week ahead now. It’s a quiet start to the week today with no data of note in either Europe of the US. It’s not looking likely to be much busier on Tuesday with only Germany PPI and the US current account balance in Q1 due. On Wednesday the early focus will be on the UK with May public sector net borrowing data due out. In the US we’ll get existing home sales for May. The calendar finally picks up a bit on Thursday. In France we’ll receive June confidence indicators while in the UK we’ll get CBI total orders data for June. In the US on Thursday the data includes initial jobless claims, Kansas City Fed’s manufacturing index, FHFA house price index and the conference board’s leading index. The busiest day for data looks set to be Friday. In Asia we’ll receive the flash June manufacturing PMI for Japan while in Europe we’ll get the flash PMIs for the Euro area, Germany and France. Also due out is the final revisions to Q1 GDP in France. Over in the US on Friday we’ll also receive the flash PMIs along with May new home sales.

Away from the data there are a bunch of Fedspeakers scheduled over the week including Dudley (Monday), Evans, Fischer, Rosengren and Kaplan (Tuesday), Powell (Thursday) and Mester, Bullard and Powell (Friday). Away from that we’ll receive BoJ minutes from the April meeting on Wednesday while the BoJ’s Kuroda (Wednesday) and Iwata (Thursday) are also due to speak. Also of note is the Queen’s speech scheduled for Wednesday which officially marks the state opening of the new parliamentary session in the UK. EU leaders are also due to gather for a 2-day meeting beginning Thursday to discuss the relocation of European agencies after Brexit.

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