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Five Things To Know on Monday

Summary:
The US and UK markets were closed on Monday.  Together they accounted for almost two-thirds of the turnover in the foreign exchange market.  The dollar was narrowly mixed against the majors.  The dollar bloc and sterling ticked a little higher, and the euro and yen were a touch heavier.  The illiquidity seemed to weigh on Norway the most as the krone slumped a little more than 0.5%.   Among emerging markets, Latam's Brazil, Mexico, and Chilean peso performed best, while the JP Morgan Emerging Market Currency Index rose by nearly 0.25%, its fifth gain in the past six sessions.  Most Asia Pacific equities rallied, with 1%+ gains in Japan, Korea, and Australia. Europe's Dow Jones Stoxx 600 snapped a two-day drop, and its nearly 1.5% advance brought to new highs for the month.  US shares

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Five Things To Know on MondayThe US and UK markets were closed on Monday.  Together they accounted for almost two-thirds of the turnover in the foreign exchange market.  The dollar was narrowly mixed against the majors.  The dollar bloc and sterling ticked a little higher, and the euro and yen were a touch heavier.  The illiquidity seemed to weigh on Norway the most as the krone slumped a little more than 0.5%.   Among emerging markets, Latam's Brazil, Mexico, and Chilean peso performed best, while the JP Morgan Emerging Market Currency Index rose by nearly 0.25%, its fifth gain in the past six sessions.  Most Asia Pacific equities rallied, with 1%+ gains in Japan, Korea, and Australia. Europe's Dow Jones Stoxx 600 snapped a two-day drop, and its nearly 1.5% advance brought to new highs for the month.  US shares are trading firmer, and the S&P looks poised to challenge the 3000-mark tomorrow.  Bond yields slipped in Europe, and premiums over Germany continued to narrow.  Gold consolidated at lower levels, holding above $1720 but unable to rise much above $1735.  Oil prices were firmer, recouping most of the pre-weekend loss.  July crude was straddling $34 a barrel.  

Here are the five things you should know about Monday's developments:  

  1. US- Chinese rhetoric remained elevated over the weekend.  The dollar closed at CNY7.1364 before the weekend.  The PBOC set the reference rate at CNY7.1209, a little lower than most bank models.  The dollar stayed with the pre-weekend range but finished near CNY7.1368.  Pressure still in Hong Kong, though the Hang Seng was steady after losing more than 5% ahead of the weekend.  The pressure on the fixed exchange rate is evident in the forward market.  The 3-month forward points were at 64 pips on May 15 and jumped to 206 before the weekend and were around 163 today.  The 12-month forward points stood at 235 on May 15, rose to 415 before the weekend, and 715 today.  Thin markets may have contributed.  Watch tomorrow.   
  1. Reports indicate that thousands in Hong Kong protested China's intention to have HK adopts new "national security" laws.  Nearly 200 people arrested.   Water cannons and tear gas were used.  The US added 33 names (24 companies and universities for ties to the Chinese military, and 9 entities for human rights violations.  US report to affirm the autonomy of Hong Kong is expected shortly after China's National People's Congress concludes at the end of the week.  Watch Chinese shares in the US tomorrow after Alibaba and Baidu, two favorites, fell by around 6% at the end of last week. 
  1. The French-German proposal for 500 bln euro grant facility at the EU was immediately opposed, but over the weekend, Austria, Denmark, Netherlands, and Sweden offered an alternative proposal based strictly on loans, a two-year sunset clause and conditionality.  The EC is expected to make its own proposal over the next couple of days, which will set the stage of negotiations and then a heads of state decision next month.  Separately, two weeks after the German Constitutional Court ruling, the Bundesbank published a report before the weekend that defended the ECB's asset purchases (~2.7 bln euros) on the grounds that in the four biggest economies, output, lending, and inflation rose. 
  1. The US will block most non-US citizens traveling from Brazil as Brazil's cases surged.   It now has the second-highest infections and six highest deaths.  Its fatalities are doubling every two weeks.  By comparison, the UK is doubling every two months.  Nevertheless, the Brazilian real continues to recover.  The US dollar recorded an important downside reversal pattern on May 14 after reaching a record a little above BRL5.97.  It dipped briefly below BRL5.4450 today.   This is part of a larger story in May:  the recovery EM currencies and especially Latam   Of the 10 best performing EM currencies so far in May, Latam provides four of them:  Mexico leads the world with a 7.25% gain in the peso.  The Colombian peso is in third (behind South Africa's rand) with a 4.3% gain.  The Chilean peso is fourth up about 4.1%.  The Brazilian real is in ninth place with a 0.5% gain, just above the Polish zloty (~0.4%).  They have been helped by emboldened risk appetites, belief that the sell-off was overdone, and rising commodity prices in general. 
  1.  Two economic reports were released of note.  Hong Kong's April trade figures showed more improvement than expected as the contraction in imports and exports moderated.   Germany reported its IFO survey.  The measure of current conditions weakened further, slipping to 78.9 from 79.4, but the expectations component rose to 80.1 from 69.4.  Together these lifted the overall business climate to 79.5 from 74.2


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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