Risk on soon turns risk-off on the last day of the month.
Italian politics gaining traction, but Trump ups the ante with respect to trade wars.

It was yet another interesting day in the funda-world of FX for the last day of May with markets initially going with the flows of Wednesday’s relief rally due to Italian politics gaining some risk friendly traction seeing a further decline in the IT/DE spread.

While it seems like a sure bet that Spain’s Rajoy will be booted today in European time zones, Italy was on the path to forming a functioning coalition government. Conte has accepted the mandate to be PM and an alternative finance minister in Giovanni Tria has been placed, although the proposed Cabinet still has anti-Euro Savona as minister for European Affairs. If the proposals are accepted by President Mattarella, then both houses will seek to endorse and confirm them. The Government is expected to be introduced and sworn in at 1400 GMT today – and a snap election has been averted. However, this was not really helping the euro in any great shape and the pair, in fact, fell on improved US data, losing the 1.17 handle as NY traders walked in to buy the greenback.

Trade wars sent Wall Street on the defence and stocks to their lowest levels for the last day of the month

Meanwhile, the risk-on attitude did not last for long when markets were beaten up due to the Trump administration saying it would impose tariffs on metals imported from its closest allies, being the European Union, Canada and Mexico.

“Tariffs of 25 percent on steel and 10 percent on aluminum from the European Union, Canada and Mexico, which together supply nearly half of America’s imported metal, are to take effect at midnight Thursday, said Wilbur Ross, the commerce secretary,”

 – The New York Times

Retaliations are in play with Trudeau saying that US steel and aluminum tariffs are totally unacceptable. This followed Trump’s requirement of a 5-year sunset clause to any NAFTA deal that had been in negotiation before falling apart just recently. 

Trudeau has said that ‘Tariffs will disrupt linked supply chains’ and that it is ‘Inconceivable’ that Canada could be a security threat – “Americans remain our partners, allies and friends. Hope that at some point, common sense will prevail but we see no sign of that in latest US action.”

Canada accounts for roughly half of US steel exports and Freeland retaliated by saying that Canada will put tariffs on steel and aluminum from US along with other products and that will amount to $16.6 billion taking effect as soon as July 1st, ( leaving some time for negotiation, perhaps),  lasting until US tariffs are eliminated.

As far as data went, the Eurozone’s May CPI rose more than forecast, in line with recent national releases: (core 1.1%y/y (f/c 1.0%) and the headline 1.9% (f/c 1.6%) was lifted by fuel costs). Eurozone April unemployment was at 8.5% highlighting that labour slack remains in the region. Across the pond, the Fed’s preferred inflation measure, the PCE deflator, climbed by 0.2% for the month in April on both the overall and the core measure, putting annual inflation at 2.0% and 1.8% respectively.

Key fundamental headlines:

Mexican economy minister: Mexico will impose equivalent measures on diverse products in reaction to US tariffs
French Pres Macron: US’ tariffs decision is a mistake and illegal
Canada to impose retaliatory measures against US steel, aluminum and other products
Fed’s Brainard: Global financial-market stress, possible channels to US an important consideration for monpol
Fed’s Brainard: FOMC needs to adjust ‘stale’ language around accommodative policy in statement
Fed’s Bullard: Fed should be cautious with further rate increases
Italy: League and 5-Star have completed accord on coalition government
Atlanta Fed: GDPNow rises to 4.7% from 4% for Q2
US Commerce Sec Ross: Even if EU and others retaliate, impact on US econ won’t be much
French Pres Macron: US’ tariffs decision is a mistake and illegal
Basque Nationalist Party (PNV) to support Sánchez (PSOE) oust Mariano Rajoy – TVE
ISM – Chicago: Chicago Business Barometer rises to 62.7 in May
US Commerce Sec Ross: EU, Canada & Mexico to face steel and aluminum tariffs beginning at midnight
OPEC May oil output falls 70,000 bpd to 32 mln bpd – Lowest since Apr. 2017
Canada: Real GDP grew 0.3% in the first quarter
US: Initial claims was 221,000, a decrease of 13,000 from the previous week
US: Annual core-PCE price index meets expectations with 1.8% in April

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