Morning Commentary: Land of the Rising Sun

Foreign Exchange - Morning Commentary
Land of the Rising Sun
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
President Trump spent the holiday weekend in Japan and attended multiple events with Japanese PM Abe.  The four day trip appeared to focus more on pageantry rather than resolving the key differences between the two countries. 
 
While a trade agreement was not reached on the trip, President Trump did indicate the possibility of a deal being reached by August which, if realized, will conclude talks much earlier than the six-month timeline that he laid out earlier.  President Trump has been focused on the trade surplus that Japan carries with the US, with focus on automotive trade as well as greater access to the Japanese market for American farmers. 
 
On the Japanese side, PM Abe confirmed that both sides have agreed to accelerate talks and aim for a “win-win” result.  While meetings between allies tend to result in constructive comments regardless of the extent of actual progress, President Trump’s stance with Japan appears to be in line with the US’s evolving stance of maximum pressure on Japan and a pivot from other trading partners.  Over recent weeks, the US de-escalated tensions with the EU (delayed auto tariffs), Canada and Mexico (reached an agreement to remove steel and aluminum tariffs) while ramping up both tariff and non-tariff barriers against China. 
 
In the end, trade talks with Japan remain fluid.  However, it is important to note that trade talks with Japan are fundamentally different than trade talks with China, which involve much more structural issues.  This means that while an agreement with Japan isn’t an easy thing to reach, it is certainly a much easier task than with China.   
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • EU parliamentary election results were a bit of a mixed bag.  While populist groups did increase the number of seats held, their gains were not the huge wave that some predicted and the near term impact on the euro should be minimal. 
  • Following the results, Greece has announced a snap election where the incumbent PM is likely to lose.  The results also put pressure on the coalition governments in Italy and Germany.  In Italy, a strong showing for Lega gives more credibility to their push for more power.  In Germany, a poor showing from one of the coalition government’s members put into question the viability of its relationship with Angela Merkel’s conservatives.   
  • In the UK, the two main political parties—the ruling Conservative Party and the main opposition Labour Party—suffered losses.  The main beneficiaries were the pro-Brexit and anti-Brexit parties, illustrating how divided the country is over the issue of Brexit.  So far, 9 candidates have officially launched campaigns to succeed PM May with Boris Johnson holding a shrinking lead. 
  • Eurozone consumer confidence came in at -6.5, meeting expectations.  German consumer confidence came in at 10.1 versus expectations for a 10.4 print.
  • US 10-year yields dropped to 2.27%, marking a new cycle low.  Notably, the 3-month/10-year curve has inverted more than it did back in March. 
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