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Major US stock indexes fell moderately, as China signaled a further escalation of the trade war with the US, which heightened fears that the dispute between the two largest economies in the world could drag out and put pressure on global growth.

The Xinhua news agency reported that China is ready to use rare earth metals, a group of 17 elements widely used in many industries - from high-tech consumer electronics to military equipment - to put pressure on the US in a trade war.

In addition, the Chinese Huawei Technologies Co Ltd filed a petition for a simplified review of its claim to the US government, demanding to recognize the unconstitutional and reject the State Defense Act 2019 (NDAA), prohibiting federal agencies to buy Huawei products that threaten to oust it from world markets.

Fears of a global recession have pushed investors to sell stocks in global stock markets and switch to debt obligations in Germany and the United States. This led to the fact that the yield on 10-year US government bonds fell to its 20-month lows, and the yield curve of three-month and 10-year bonds was inverted, which is usually regarded as a leading indicator of recession.

Almost all the components of DOW finished trading in the red (27 out of 30). Johnson & Johnson (JNJ; -4.37%) was an outsider. The growth leader was Intel Corp. (INTC; + 1.60%).

All sectors of the S & P recorded a decline. The largest decline was shown by the health sector (-0.9%).

At the time of closing:

Dow 25,126.41 -221.36 -0.87%

S & P 500 2,783.02 -19.37 -0.69%

Nasdaq 100 7,547.31 -60.04 -0.79%

The latest survey from the Federal Reserve Bank of Richmond revealed on Wednesday that the U.S. fifth district's manufacturing was moderate in May.

According to the report, the composite manufacturing index inched up from 3 in April to 5 in May. 

Economists had expected a reading of 6.

A reading above 0 signals expansion, while a reading below 0 indicates contraction. 

Shipments and new orders had fairly flat reading and the third component, employment, remained positive, the report said. On the price front, price pressures eased for both prices received and prices paid in May.

The Bank of Canada (BoC) left its benchmark interest rates unchanged at 1.75 percent on Wednesday, as widely expected.

In its policy statement, the Canadian central bank notes that the country’s recent economic data are in line with the projections in its April Monetary Policy Report (MPR) and have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate, the BoC added. It also promises to remain data-dependent and especially attentive to developments in household spending, oil markets and the global trade environment.

Jane Foley, the senior FX strategist at Rabobank, notes that no one knows for sure whether UK’s new MEPs will remain in their seats in the European Parliament for a meaningful period.

• “Irrespective, the results of the European parliamentary elections have already had an influence on domestic UK politics and investors are combing through the various permutations and combinations in an attempt to evaluate the possible impact on UK assets and the pound.
• In our view GBP remains vulnerable in the near-term to fears that the new PM will take a more hard line on Brexit.  However, the risk that parliament will oppose a no deal Brexit is likely to put a floor under GBP in the coming months.
• The outlook for UK politics clearly remains highly charged. The first major focus for GBP investors will be the Tory leadership election, the result of which are expected in July. If the new leader sees a no deal Brexit as a live option in October, GBP can be expected to fall towards the December low in the region of GBP/USD1.2480.
• However, the potential for further losses is likely to depend on how much parliament looks likely to push back against a no deal Brexit. This process, however, will be disrupted by parliament’s summer recess which usually lasts from late July until early September. This means that the final weeks before the October 31 Brexit date are likely to be fraught with political tension and in the meantime GBP will be clouded by political woes.
• On a no deal Brexit, we see potential for GBP/USD to plunge to the 1.10 region and for EUR/GBP to push towards parity.”

U.S. stock-index futures traded flat on Tuesday, as growing U.S.-China trade tensions fanned worries about a global economic slowdown, pushing investors to flee from risky assets.

Global Stocks:

Analysts at TD Securities are expecting Australia’s Q1 private capex to show a decent advance of 2.7% q/q , while this is entirely skewed towards non-residential construction (+6% q/q) as foreshadowed in the recent Q1 construction report.

• "The sector that feeds into GDP – plant and equipment – is expected to be weak (f/c -1%/q). For 2018/19 (almost an actual print) we look for a modest upgrade from $A118.3b to $A122.8b (a 4% increase compared with 2% in the prior survey) and an upgrade from $A92.1b to $A100b for next year 2019/20 (although after adjustment is the same 1% increase).
• Building approvals for Apr are also released and we have seen double-digit swings in both directions in recent months. The odds, therefore, favour a flat print as predicting the appearance/disappearance of high-density buildings in this series is near-impossible.”

(company / ticker / price / change ($/%) / volume)

Amazon (AMZN) initiated with a Buy at Pivotal Research

Facebook (FB) initiated with a Buy at Pivotal Research

Twitter (TWTR) initiated with a Buy at Pivotal Research

• Wants to continue to work with coalition partner Five Star but would not accept situation similar to past few weeks

Krishen Rangasamy, analyst at National Bank Financial, notes that the Case-Shiller National Home Price Index has risen more than 50% after hitting a trough in early 2012.

• The last time we saw such a run up in U.S. resale home prices was just before the 2006 housing crash. Does that mean the U.S. housing market is due for an imminent correction? Probably not.
• Fundamentals remain good as evidenced by low mortgage rates, improving household formation and a strong economy. Unlike excesses observed before the 2006 crash, house price inflation is not out of line with income growth.
• A hot labour market is supporting household incomes while tight mortgage standards are preventing runaway prices. Indeed, while back in 2006 less than 25% of mortgage originations went to highest-rated borrowers (credit scores 760+), these days this share is above 55%.
• The high quality of loans and solid economy explain why mortgage delinquencies are at decade lows.

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. dropped 3.3 percent in the week ended May 24, following a 2.4 percent advance in the previous week.

According to the report, the refinance applications fell 6.0 percent, while applications to purchase a home declined 1.4 percent.

Meanwhile, the average fixed 30-year mortgage rate remained unchanged last week at 4.33%.

“Concerns over European economic growth and ongoing uncertainty about a trade war with China were some of the main factors that kept mortgage rates low last week,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “It is possible that the trade dispute is causing potential homeowners to hold off on buying, with the fear that further escalation — or the lack of resolution — may have adverse impacts on the economy and housing market,” Kan added.

Hu Xijin, editor-in-chief of Chinese and English editions of the Global Times, tweets: "US crackdown on Chinese companies including Huawei is no longer like a trade war. The US is shifting from protecting its interests to destroying China. It increasingly resembles air striking Chinese high-tech companies. China is mulling qualitative change in countermeasures."

• Notes that external uncertainties are rising
• Calls for targeted policy, to push forward with reforms
• To keep economic operations within reasonable range
• To coordinate stabilizing growth, reform, and risk prevention

Australia and New Zealand Banking Group's (ANZ) analysts note that the RBNZ's May 2019 Financial Stability Report revealed the central bank kept loan-to-value ratio restrictions unchanged as they anticipated, following a slight easing in January.

• "The May 2019 Financial Stability Report provided few surprises, with loan-to-value ratio (LVR) restrictions left unchanged as the Bank assesses the effects of previous easing and mortgage rate falls.
• The RBNZ noted that financial system risks remain elevated, but are largely unchanged from the November FSR. Ongoing effort is seen as needed to bolster system soundness and efficiency, a nod to their assessment that higher bank capital requirements are necessary.
• While LVR settings were left unchanged today, the RBNZ noted that restrictions will be reviewed every six months.
• We expect that the LVR policy will be eased again in November as housing market risks continue to decline and banks’ lending standards for new mortgages remain prudent. The focus from here will be on developments in house prices, credit growth, and credit lending standards.
• The FSR again dedicated a box to financial stability risks from climate change, outlining a survey of banks and insurers regarding potential industry impacts."

Torbjörn Isaksson, an analyst at Nordea Markets, notes that Sweden’s Q1 GDP growth was better than expected, coming out at 0.6% q/q and 2.1% y/y, and was stronger than the Riksbank’s forecast.

• "The main surprise on the upside was export of services. The rise was broad-based, and may be extra boosted by the recovery of the telecom company Ericsson. Exports of goods were on the weak side but not too far from our call. All indicators point to a slowdown in exports, which will probably hit export of services as well going forward.
• There was some bad news in the GDP report as well, making the composition of GDP growth unfavourable.
• The stronger than expected Q1 GDP reading point to some upside risks to our forecast for the full year of 2019 at 1.2% (Riksbank 1.7%). But it is too early to conclude that our forecast is too low as indicators have softened and a bit more than we had expected.
• We see no reason to change our view on the Riksbank. The next rate hike remains distant."

Rabobank'S analysts suggest there is some risk of further downgrades to the ECB projections and the scene is set for an announcement of the TLTRO-III modalities.

• "We expect the ECB to set the interest rate at MRO flat, with a potential discount to MRO-20bp.
• Still, the ECB faces a clear risk of not appearing dovish enough amidst rate cut expectations.
• Policy rates: 

1. Forward guidance to remain unchanged at “through the end of 2019”
2. In practice, we expect the first deposit rate hike to be delayed until June 2021
3. We don’t expect a tiered deposit rate in the foreseeable future

• Asset Purchase Program: No changes to the reinvestment program or its forward guidance.
• LTROs: We expect a decision on the modalities. We look for a base pricing of MRO flat and a discounted rate of MRO-20bp if targets are met."

The ECB will discuss options to give more support to the euro zone economy and lay out the details for another set of TLTRO lending operations at its meeting next week, ECB policymaker Olli Rehn said.

Rehn said that the ECB is ready to "adjust and use" all its policy instruments if required adding that the timing of any ECB interest rate rise had slipped back.

"Our central scenario is not a recession. We have a soft patch in the economy," Rehn said, adding that the ECB would wait for the next economic forecasts before debating how to adjust its policies.

Rehn said an ample degree of policy stimulus remained appropriate at present.

Karen Jones, analyst at Commerzbank, points out that USD/JPY pair is eroding the 38.2% Fibonacci retracement at 109.23 and failure there concentrates attention back on the recent May low at 109.02.

“Failure at 109.02 would push the late January low at 108.49 and the 50% retracement at 108.25 to the fore. Further down sits the 107.27 61.8% Fibonacci retracement. Minor resistance comes in at the 110.84 April 10 low and the 111.41 200 day moving average. These guard the 112.33 downtrend. We look for the market to remain capped by its downtrend, only above here would target the 114.55 October 2018 high.”

The ECB will decide on detailed terms for its new TLTRO loans to banks at a future meeting of policymakers and depending on market conditions at the time, ECB Governing Council member Bostjan Vasle said.

The ECB said in March it would launch a third series of its Targeted Long-Term Refinancing Operations -- cheap two-year loans to help banks finance themselves and to encourage lending to businesses and households that supports the economy. But no terms have been set for the scheme, due to start in September.

Vasle told the Governing Council had decided to "wait with concrete terms for long-term financing loans" until a future policy meeting and the terms "will depend upon economic conditions on the markets at the time". It will next meet to decide on monetary policy on June 6.

The services companies that make up the bulk of Britain's economy struggled in the three months to May and remain loathe to invest because of uncertainty around Brexit, a business survey showed.

Business and professional services companies reported the biggest fall in the volume of work since August 2012 and were "extremely negative" about the outlook for the year ahead, the Confederation of British Industry (CBI) said.

They expected to cut investment in land and businesses at the fastest pace since 2010, the survey showed.

The CBI said the volume of work also declined in the consumer services industry, albeit at a slower pace than in the business and professional sector.

On the upside, the CBI said services companies remained keen to hire staff -- a finding broadly mirrored by a survey published on Wednesday by the Recruitment and Employment Confederation. "The jobs market is robust, but more businesses remain negative about the future than positive," REC chief executive Neil Carberry said.

According to the report from Istat, in May 2019, the consumer confidence index improved from 110.6 to 111.8. Looking at its components: the economic one bettered from 122.8 to 125.9, the personal one from 105.9 to 107.4, the current one from 106.9 to 109.6 and, finally, the future one from 115.6 to 115.8.

As for the business confidence climate, the related index (IESI, Istat Economic Sentiment Indicator) increased from 98.8 to 100.2.

• The confidence index in manufacturing progressed from 100.8 to 102.0.

• The confidence index in construction went up from 141.2 to 144.3.

• The market services confidence index edged up slightly from 99.1 to 99.3.

• The retail trade confidence index got better moving from 101.3 to 102.6.

According to data from the Federal Labour Office, German unemployment rose unexpectedly in May for the first time in nearly two years, in a sign that a slowdown in Europe's largest economy is spilling over to the labour market.

The number of people out of work rose by 60,000 to 2.279 million in seasonally adjusted terms. That compared with forecast for a fall of 8,000.

The Labour Office said that the rise was mainly due to a special effect, but also to the slowing economy. Out of the increase of 60,000, the bulk, or about 50,000, is attributable to one-off effects related to checks of the work placement status of people entitled for unemployment benefit, while around 10,000 is due to economic impact.

The seasonally adjusted jobless rate rose to 5.0% from 4.9% in April. The number of registered job vacancies stood at 792,000 in May, down 1,000 on year, the agency said.

• Materialisation of downside risks to economic growth could spark greater financial market volatility

• Persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments

• Bank profitability prospects subdued given slow progress in addressing structural issues

• Uncertainty about global economic growth prospects has contributed to bouts of high volatility in financial markets.

• Weaker than expected growth and a possible escalation of trade tensions could trigger further falls in asset prices

• Repricing risks appear particularly high in riskier segments of the corporate sector.

• The global leveraged loan sector, which has grown significantly in recent years, is susceptible to weaker corporate earnings.

• Should downside risks to growth materialise, financing costs for vulnerable sovereigns are likely to increase which may unearth debt sustainability concerns.

• Bank profitability is expected to remain low in the euro area. ECB estimates point to an aggregate return on equity of around 6% over the next 2-3 years.

• A large share of euro area banks will not be able to meet the expected returns required by investors (of around 8-10%).

According to the report from KOF Economic Research Agency, economic Barometer fell again in May. It therefore dives further below its long-term average. The Swiss economy is developing rather sluggishly.

The KOF Economic Barometer drops by 1.8 points in May to 94.4 points from 96.2 in April (this figure is unchanged compared to the previous publication). Economists had expected decrease to 95.9.

The majority of sets of indicators are tending downwards. The indicators for banking and insurance, consumption and foreign demand have developed negatively. The prospects for accommodation and food service activities and the other service providers have become gloomier. In the manufacturing sector, the outlook hardly changed compared to the previous month. For the construction sector, the outlook has improved.

In the goods producing sectors (manufacturing and construction), the business situation is under pressure. The employment outlook also deteriorates slightly. Production could, however, develop positively in the coming months, so that the data in the goods producing sector do not show a completely uniform development.

According to the report from National Institute of Statistics and Economic Studies (Insee), in April 2019, household expenditure on goods increased by 0.8% in volume, after two consecutive months of decline (−0.3% in March and −0.5% in February). Economists had expected a 0.4% increase. Last increase was driven by a rebound in energy consumption (+4.0%) and, to a lesser extent, food consumption (+0.8%). Purchases of manufactured goods fell slightly (−0.4%) for the first time this year.

In April, energy consumption rebounded after two consecutive months of decline. Gas and electricity consumption was on the rise, due in particular to a return to seasonal temperatures in April, after relatively mild ones in February and March. Expenditure on refined products also increased (+1.3%), particularly on diesel.

Food consumption increased (+0.8%), after three consecutive months of decline.

Spending on manufactured goods fell slightly (−0.4%) for the first time this year. In particular, purchases of textile-clothing fell (−1.5%).

Consumption of durable goods was stable in April (+0.0%): the increase in housing equipement purchases (+0.5%) was offset by a decline in transport equipment consumption (−0.4%).

According to the provisional estimate made Insee at the end of the month, over a year, the Consumer Price Index (CPI) should slow down in May 2019 (+1.0% after +1.3% in April). This drop in inflation over a year should result from a slowdown in the prices of services, energy and food and from a little more marked drop in those of manufactured goods. Contrariwise, tobacco prices should gather pace.

Over one month, consumer prices should slow down barely (+0.2% after +0.3% in April). Services prices should fell back in the wake of those in transport and energy prices should slow down. On the other hand, food prices should be more dynamic than in April, due to a rebound in fresh product prices. The prices of manufactured goods and tobacco should rise slightly more than in the previous month.

Year on year, the Harmonised Index of Consumer Prices should slow down sharply (+1.1% after +1.5% in April). Over one month, it should slow down to +0.2%, after +0.4% in the previous month.

The U.S. and China will likely reach a trade deal within the next six months, but that won’t end tensions between the world’s two largest economies, according to a political risk consultant.

Earlier this month the U.S. placed Huawei on a blacklist that restricts American firms from doing business with the Chinese tech giant earlier this month, while China is said to be considering limiting rare earth exports to America - which are materials critical in the production of things like iPhones and electric vehicles.

“The technology war is not going to end,” Alastair Newton, director of Alavan Business Advisory and a former British diplomat, told.

He said he wouldn’t be surprised if U.S. President Donald Trump and Chinese President Xi Jinping, who will be meeting at the G-20 summit in Japan at the end of June, “shake hands on an outlined deal” that could be finalized by October. “Technology is where this battle is going to be fought out, even if we do get a trade deal on bilateral goods,” he added.

A U.S.-China deal also wouldn’t calm tensions on the trade front because Trump could turn his attention to Europe and take the tariff fight there, Newton predicted.

According to analysts at Danske Bank, it is another relatively quiet day in terms of data releases, and hence market focus will be on political developments, notably in Europe following the EU elections.

“The risk of a battle between the EU and Italy is looming after the EU signalled the launch of an EDP on the deviation of Italy's 2018 fiscal figures from the EU targets. Statements from the Italian government suggest Italy will not stand down. The Bank of Canada is widely expected to leave policy rates unchanged at today's interim monetary policy meeting. At the previous meeting the central bank removed its modest tightening bias and focus today will be on any new policy signals. We do not expect any significant news and see the potential for a moderately stronger CAD on an 'on-hold' announcement.”

Bank of Japan Governor Haruhiko Kuroda said major central banks may have to become more flexible targeting inflation, as they are missing targets due to the price dampening effects of technological innovations and globalisation.

The missed targets and subdued inflation have raised concern over the credibility of central banks' inflation targets, Kuroda said.

Japan's experience shows it is hard to re-anchor inflation expectations once they slide below desirable levels, Kuroda said.

"If missing inflation comes from structural factors such as globalisation and digitalization, central banks should continue examining how best to manage inflation expectations .. within the flexible inflation targeting framework," Kuroda told.

With inflation and wage growth remaining subdued in many countries, Kuroda said central banks must explore ways to use unconventional policy tools to fight the next economic downturn.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1308 (7596)

$1.1266 (3029)

$1.1231 (1744)

Price at time of writing this review: $1.1163

Support levels (open interest**, contracts):

$1.1125 (4251)

$1.1088 (3833)

$1.1044 (3129)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 7 is 124255 contracts (according to data from May, 28) with the maximum number of contracts with strike price $1,1500 (9016);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2907 (570)

$1.2818 (378)

$1.2745 (611)

Price at time of writing this review: $1.2659

Support levels (open interest**, contracts):

$1.2623 (4001)

$1.2599 (1769)

$1.2568 (2393)

Comments:

- Overall open interest on the CALL options with the expiration date June, 7 is 40518 contracts, with the maximum number of contracts with strike price $1,3450 (3277);

- Overall open interest on the PUT options with the expiration date June, 7 is 40427 contracts, with the maximum number of contracts with strike price $1,2700 (4001);

- The ratio of PUT/CALL was 1.00 versus 1.00 from the previous trading day according to data from May, 28

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.