There are just two drivers setting the pace for today’s risk mood: the OPEC meeting in Vienna which started a few hours ago, and the ECB’s announcement as well as Mario Draghi’s press statement due out just one hour from now. Both are expected to not reveal any major surprises, with OPEC almost certainly unable to implement a production freeze while the ECB is expected to remain on hold and provide some more details on its corporate bond buying program, although there is some modest risk of upside surprise in either case. So while we await the outcome of both key events, European stocks rose, U.S. index futures declined, oil held near $49 a barrel, and the yen gained notably for the third day in a row. 

Crude hovered near a seven-month high as OPEC tries to find a way to push the price even higher even as every member can produce as much as they want, with Saudi Arabia’s energy minister saying he sees supply and demand coming into balance. European equities halted a two-day losing streak and the euro advanced as investors awaited ECB President Mario Draghi’s press briefing for indications of the central bank’s policy trajectory. The ruble rose for the first time in three days. The yen advanced against all of its Group of 10 peers and a sale of 10-year sovereign debt in Japan drew the strongest demand in almost two years. Similar-maturity Spanish bonds led losses in Europe.

As Bloomberg summarizes, global markets have started June tentatively, with the OPEC and ECB meetings Thursday setting the stage for a month that will also see the U.K. vote on whether to remain in the European Union and a possible interest-rate increase by the Federal Reserve. Wednesday data showed the U.S. manufacturing sector grew more than economists forecast last month and American employment figures this week will help shape expectations for the timing of the next rate hike. Fed Funds futures indicate a 22 percent chance of a move at the June 14-15 meeting.

European stocks rose as investors awaited the European Central Bank’s rate decision and President Mario Draghi’s remarks. Euro rises to 1-week high as ECB stimulus seen on hold again. “The ECB meeting and the upcoming Fed decision are correlated – if the Fed does something with the rates this month, the euro will weaken, which is in favor of the ECB plan,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. “The ECB is in a more of a wait-and-see position with regards to what the Fed will do. The inflation forecast Draghi gives will be the main focus. The forecast has to be adjusted in a way that the market knows this a goal that can be achieved.”

In Asia, Japan was in the spotlight after BOJ member Sato dampened prospects for further easing when he said the central bank’s 2% inflation target will not be reach on time, adding the BOJ should make asset purchase operation more flexible and explore flexible approaches to monetary base target; he also admitted that negative interest rate policy has effect of monetary tightening, rather than an effect of easing. As such the market interpreted the words as an indication that any additional stimulus will not be coming soon: “There’s now less chance of more Japanese monetary policy particularly when Abe said he’s thinking about doing more fiscal initiatives,” said Tony Farnham, a Sydney-based analyst at Patersons Securities Ltd. “That should have the U.S. dollar on the back foot for a period of time. There’s certainly nothing in the Beige Book to say the Fed is cowering away from a rate increase.”

On OPEC, while the downside case is said to be priced in, a negative outcome may impact oil prices: “The economic situation in America may be solid, but there are still fears that the rest of the world won’t be able to withstand higher U.S. interest rates,” said Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co. “If the OPEC meeting results in a negative outcome, we’ll see even more risk being taken off the table.”

The Stoxx Europe 600 Index added 0.3%, reversing a 0.2% loss, after capping its biggest two-day decline in four weeks. Banks and energy producers posted the best performances of the equity gauge’s 19 industry groups on Thursday.  Futures on the S&P 500 Index fell 0.1%. Stocks closed Wednesday little changed for a second session, as investors weighed better-than-expected factory data against sluggish global growth, and mulled the implications of a possible interest rate hike this month or next.  Japan’s Topix index tumbled 2.2 percent after Prime Minister Shinzo Abe held back a widely-expected fiscal stimulus package. He postponed a planned sales-tax hike until October 2019 and vowed to take “bold” economic steps in the autumn. Honda Motor Co. tumbled 4.2 percent and Toyota Motor Corp. dropped 1.5 percent after their U.S. sales fell last month by more than analysts estimated.

Market Snapshot

• S&P 500 futures down than 0.1% to 2095
• Stoxx 600 up 0.2% to 345
• FTSE 100 up 0.3% to 6212
• DAX up 0.2% to 10227
• S&P GSCI Index up 0.3% to 372.8
• MSCI Asia Pacific down 0.8% to 128
• Nikkei 225 down 2.3% to 16563
• Hang Seng up 0.5% to 20859
• Shanghai Composite up 0.4% to 2925
• S&P/ASX 200 down 0.8% to 5279
• US 10-yr yield up less than 1bp to 1.84%
• German 10Yr yield up 2bps to 0.16%
• Italian 10Yr yield up 3bps to 1.41%
• Spanish 10Yr yield up 4bps to 1.53%
• Dollar Index down 0.17% to 95.29
• WTI Crude futures up 0.3% to $49.17
• Brent Futures up 0.4% to $49.90
• Gold spot up 0.2% to $1,216
• Silver spot up 0.2% to $16.00

Top Global News

• Apple Gets Good News in Bid to Knock Out $533 Million Verdict: Two Smartflash patents in the case were found to be invalid
• Uber Receives $3.5 Billion Investment From Saudi Wealth Fund: Funding gives Uber the same valuation of $62.5b
• ALS Rejects A$2.67 Billion Takeover Offer From Bain, Advent: The A$5.30-per-share cash bid “significantly undervalues” the company, ALS said
• Iran Resists Saudi Gesture for Unity as OPEC Fractures Reappear: Saudi minister wants to show that OPEC isn’t dead, people say, no indication OPEC is seeking to change current production
• Weatherford Plans $1 Billion Bond Offering to Refinance Debt: Proceeds from the exchangeable notes will back a tender offer for four bonds maturing between 2017 and 2020
• Alibaba Details Price for Buying Back Stock From SoftBank: Paying $74 a share to buy back $2b of its own stock from SoftBank; in total, SoftBank is selling $8.9b of its stake
• Singapore Inc. Buys $1 Billion in Alibaba, Adding to China Bets
• P&G CEO Taylor to Succeed A.G. Lafley as Chairman Next Month: CEO David Taylor will add the title of chairman next month, succeeding longtime company leader A.G. Lafley.
• Sheryl Sandberg Removes Her Name From Disney CEO Speculation: Sandberg, Facebook’s chief operating officer, said she’s happy in her current position, speaks at Recode conference
• Airline Earnings to Near $40 Billion as Oil Beats Slowing Demand: IATA raises 2016 earnings estimate to record level
• Apple Returns to Aussie Debt Market With Two-Part Bond Offering: Marketing debt due in June 2020, January 2024, pricing expected Friday, follows A$1 billion Coca-Cola deal
• Apple Said to Consider Issuing Bonds in Japan, Singapore: WSJ
• Redstone Grandchild Plans to Take Legal Steps Against Shari: Keryn Redstone aims to work with Viacom directors in dispute; Redstone Ex-Girlfriend to Seek New Trial on Mental Capacity
• Payday Lenders Accused of Abusing Consumers Face U.S. Crackdown: CFPB to propose tough restrictions on issuing new loans
• Monsanto Said to Seal Deal With Argentina Over GMO Soybean Tests: Agreed to allow Argentina to help collect soybean royalty payments
• Costco May Comparable Sales Miss Est.; U.S. Ex-Fuel Beat Est.
• Google Raises About $219m Selling Lenovo Shares: Terms
• Amazon Invests Additional $200 Million in India Unit, ET Says
• Amazon to Open Fulfillment Centers in Illinois, Adds 1,000 Jobs
• McDonald’s Nears Deal to Move Headquarters to Chicago: Crain’s
• Nasdaq Sees Strong Chinese Interest for U.S. Listings: Reuters

Looking at regional markets, Asia traded mostly lower following a similar lead from Wall Street with sentiment cautious ahead of the ECB and OPEC meetings today, while Friday’s NFP also looms. Nikkei 225 (-2.3%) underperformed on further JPY strength following hawkish comments from BoJ’s Sato, while ASX 200 (-0.4%) was dampened by weaker commodities after WTI crude futures retreated back below USD 49/bbl. Shanghai Comp (+0.4%) and Hang Seng (+0.5%) outperformed on reports that the Shenzhen stock link will be announced in the near future. 10yr JGBs traded lower following hawkish comments from BoJ’s Sato, however losses were stemmed after a strong 10yr auction which saw a better b/c, a narrower tail in price and in which the lowest accepted price surpassed estimates.

Top Asia News

• Japan’s Debt Burden Is Quietly Falling by the Most in the World: Govt debt is shifting from private hands to central bank
• Bank of East Asia Closes Brokerage Outlets to Lower Expenses: Lender to shut all of securities unit’s retail branches
• China Stocks in Focus as Investors Prepare for MSCI Index Revamp: A-share inclusion in main indexes key issue in June review
• U.S. Closely Eyeing China’s Corporate Hacking Vow, Official Says: Russia, China both are seeking more state control of internet

Equities across Europe reside modestly in the green (Euro Stoxx 50 +0.3%), led by energy names amid the ongoing OPEC meeting dominating newsflow so far this morning. Elsewhere, defensive sectors Utilities and Healthcare names are among the worst performers. From a fixed income perspective, Bunds trade lower amid the upside in equities and head into the North American crossover around the 164.00 level. This morning saw supply from both Spain and France totalling -EUR 13b1n, while some participants remain on the side-lines ahead of the ECB meeting.

Top European News

• Deutsche Bank Sees Capital Hit as Basel Adds to Legal Woes: Will probably set aside even more capital or shrink businesses as global regulators tighten rules for how lenders measure risk
• European Banks Feel the Pinch From Draghi’s Negative Rates: A drop in net interest income, the first in 2 years, may worsen after the ECB lowered its deposit rate to minus 0.4% in March
• Midea Touts Kuka Deal as Chinese Offer Hits German Barrier: Said its offer for Kuka is in the best interests of Kuka, as German politicians explore ways to block the Chinese co.’s deal
• Bain Said Near Deal to Sell German Clutch Maker FTE to Valeo: French auto-parts maker could announce purchase this week
• Draghi Wants ECB Easing Solo Joined by Europe Reform Chorus: ECB expected to leave rates unchanged at 1:45 p.m. in Vienna

In FX, the yen strengthened once again, rising 0.5% to just under 109 per dollar, after surging 1.4% in the last two trading sessions. “This move in the yen is maybe more about a risk-off move, than sort of a positive sentiment,” Sassan Ghahramani, chief executive officer of SGH Macro Advisors, said on Bloomberg TV. “People got a little bit ahead of themselves and were expecting some sort of announcement on a supplementary budget. When that didn’t come, I think there was a bit of a disappointment trade.” The Bloomberg Dollar Spot Index fell less than 0.1 percent, after sliding 0.4 percent in the last session. Investors are paying close attention to U.S. data after Fed officials indicated a potential interest-rate hike as soon as this summer was contingent on continued improvement in the economy.  The euro strengthened 0.1 percent, after climbing 0.5 percent on Wednesday, and the British pound rose 0.2 percent from near a two-week low. The U.K. currency sank around 1.5 percent over the last two days as polls indicated growing support for the country to leave the EU. The MSCI Emerging Markets Currency Index added 0.3 percent as the ruble advanced 0.6 percent, buoyed by oil’s gains. India’s rupee advanced 0.3 percent, strengthening for the first time in four days. The currency erased gains and bonds declined on Wednesday after a local-language newspaper reported central bank Governor Raghuram Rajan doesn’t want an extension of his term. The Reserve Bank of India, the Prime Minister’s Office and the Finance Ministry all had no comment on the report.

In commodities, brent added 0.5 percent to $49.98 while West Texas Intermediate crude halted a four-day slide, climbing 0.5 percent to $49.24. Saudi Arabia was discussing ideas with fellow OPEC members including restoring a production target scrapped in December, according to delegates familiar with the situation. Still, no formal proposal has yet been made and Iran resisted overtures from Saudi Arabia to restore a production target scrapped at the group’s last meeting in December. Gold rose 0.2 percent, after falling on 10 of the last 11 trading days. Zinc climbed 0.8 percent to the highest since July on the London Metal Exchange, while copper and nickel retreated. Soybeans for July rose to the highest for a most-active contract since July 2014 on the Chicago Board of Trade amid speculation hot and dry weather will hurt U.S. crops.

Bulletin Headline Summary From RanSquawk and Bloomberg

• OPEC has grabbed the limelight so far with comments from a number of oil ministers giving participants plenty to digest, as focus appears to be on whether Saudi Arabia and Iran can cooperate
• Equities trade higher led by energy names with Bunds in negative territory and trading around the 164.00 level
• Looking ahead, highlights include the ECB rate decision, US ADP, weekly jobs, EIA nat. gas, DoE inventories, ECB’s Draghi, BoE’s Carney, Fed’s Kaplan and Powell
• Treasuries mostly steady as global equities rally, oil mostly unchanged ahead of OPEC’s Vienna meeting and the ECB’s rate decision.
• The ECB president will probably have little fresh monetary stimulus to offer and updated economic projections are likely to reinforce the perception that despite massive monetary easing the bank is still struggling to meet its inflation goal
• The European Central Bank is set to leave monetary policy on hold when it meets in Vienna on Thursday. That’s not the only thing that will remain steady: most economists expect the ECB to keep its 2016-2018 inflation forecasts unchanged
• The largest banks in the euro region earned less from lending in the first quarter as the European Central Bank’s experiment with negative interest rates compounded the pain of a trading slump and rising regulatory costs
• A Bank of Japan board member expressed pessimism about the economy and the central bank’s strategy, saying in a speech Thursday that the BOJ won’t be able to reach its 2 percent inflation target as forecast and negative rates won’t work to boost investment
• Iran resisted overtures from OPEC’s largest producer Saudi Arabia to restore a production target scrapped at the group’s last meeting in December
• Mega-deals have propelled dollar and euro-denominated bond sales from developing nations to almost $120 billion in April and May. “The current spike in issuance is certainly down to borrowers trying to beat a likely Fed rate rise this summer,” said Mohammed Elmi, an emerging-market money manager at Federated Investors
• China’s investors are piling into Hong Kong equities at the fastest rate in more than a year as they seek shelter against a weakening currency and a worsening economic outlook

DB’s Jim Reid Concludes the overnight wrap

The rollercoaster month of June kicks into gear today with an ECB and OPEC meeting likely to be the main focal points alongside the latest ADP which will be important ahead of tomorrow’s payrolls. The ECB should actually be a relatively dull affair as they are currently in ‘wait and see’ mode with regards to previous policy actions. However all new info on the CSPP will be gratefully received by corporate bond investors.

With regards to the OPEC meeting, the closed door talks are scheduled to take place in Vienna at 12pm local time with the press conference scheduled for a tentative 4pm local time (3pm BST). Yesterday was a fairly volatile session for Oil as a number of headlines did the rounds ahead of the meeting. WTI actually closed little changed around $49/bbl although it did bounce back from intraday lows of $47.75/bbl midway through the afternoon. It appears that the bounceback was driven by the various reports of a potential reintroduction of a ceiling on production after the previous ceiling was scrapped in December. Indeed the WSJ ran a story suggesting that the willingness is shared by Saudi Arabia as well as smaller producers in Nigeria, Qatar, Algeria and Venezuela. Like in previous talks, any outcome looks likely to hinge on the decision of Iran, whose Oil Minister was quoted last night as saying that he doesn’t believe that today’s meeting will reach an agreement. So all that to look forward to this afternoon.

Meanwhile, as a precursor to tomorrow’s payrolls number, market expectations for the ADP employment change reading today are 173k. Our US economists are a little lower than this at 160k which also reflects their below consensus payrolls forecast.

Yesterday’s data flow was largely focused on the factory sector with the overall outcome being one which made for a fairly mixed assessment. The much anticipated ISM manufacturing print for May actually rose unexpectedly last month to 51.3 from 50.8 after expectations were for a 0.5pt decline. That said the details were a bit more mixed with new orders (-0.1pts to 55.7) down, employment (49.2) unchanged and backlog of orders (-3.5pts to 50.5) down sharply. That was however offset by an increase in prices paid (+4.5pts to 63.5) to the highest level in 2011 and new export orders remaining unchanged but at a solid 52.5. Meanwhile the manufacturing PMI was revised up 0.2pts at the final look to 50.7, however construction spending was weak in April (-1.8% mom vs. +0.6% expected) which had the Atlanta Fed revising down their Q2 GDP forecast to 2.5% from 2.9% as a result.

In terms of how markets responded, US equities – in a similar move to Tuesday – were initially on the back foot at the open with the S&P 500 down as much as -0.60% although recovered into the close with the moves in Oil to finish +0.11% on the day. The USD was hard hit however with the Dollar index down close to half a percent, although in contrast 2y yields were up 2bps by the end of play. That said they have held around that 0.900% level for a good 2 weeks now.

Refreshing our screens this morning, all of the focus is on the reaction in Japanese markets following the confirmation from PM Abe yesterday of the sales tax increase delay. The Yen has rallied 0.5% following a 1% rally yesterday and as a result the Nikkei and Topix have fallen -2.29% and -2.09% respectively. 10y JGB yields are up 1bp. Elsewhere in Asia moves have been more modest. The Hang Seng is +0.19% while the Shanghai Comp is unchanged and the Kospi +0.12%. The ASX (-0.80%) is down steeply again with banks and miners under pressure. Iron ore tumbled -3.49% yesterday and in dipping below $50/tn again, is at the lowest level in over 3 months.

Moving on. We’ve got another date for readers to add to what is already a very busy June. Fed Chair Yellen’s semi-annual testimony (previously known as the Humphrey Hawkins) has been scheduled for the 21st and 22nd of June which is unusually early given the event usually takes place midway through July. The timing is interesting however with the FOMC meeting due to conclude on the 15th and the UK EU referendum vote on the 23rd. So one would imagine that should the uncertainty surrounding the Brexit outcome weigh on the Fed Chief’s view at the FOMC meeting, then it’s likely little would change just a week later still pre-vote. A reminder that Yellen is due to speak this coming Monday evening also.

Back to markets yesterday, risk assets in Europe had a much weaker session than their US counterparts. Indeed the Stoxx 600 closed -0.96% for its second consecutive leg lower. European credit was under pressure too with Main a couple of basis points wider. It appeared to be a more peripheral led selloff however with Italian and Spanish equities down -1.19% and -1.30% (bond yields in these countries were also a couple of basis points higher while Bunds were flat on the day). The weakness appeared to stem from a poor session for Italian Banks with Italian press reports suggesting that the Bank of Italy may ask Italian lenders to inject an additional €1.5bn into Italy’s rescue fund.

Staying in Europe, the confirmation of the manufacturing PMI’s showed that weakness in the periphery which we’d expected last month. The final Euro area reading was unchanged at 51.5 while Germany was notched down to 52.1 (-0.3pts) but France revised up a touch to 48.4 (+0.1pts). In the periphery however there were notable monthly declines for Italy (-1.5pts to 52.4), Spain (-1.7pts to 51.8) and Greece (-1.3pts to 48.4). There was a more positive read-through for the UK where the PMI rose 0.7pts to 50.1 (vs. 49.6 expected) and back into growth territory again following that blip in April.

Wrapping up the data, the other release in the US yesterday was the latest vehicle sales numbers where total sales rose in May to an annualized rate of 17.37m (vs. 17.3m expected) from 17.32m in the month prior. Meanwhile, the Fed’s Beige Book didn’t offer a whole lot of new information. The main take away from the report showed that ‘employment grew modestly since the last report, but tight labour markets were widely noted’ and that ‘wages grew modestly, and price pressures grew slightly in most districts’.

One of the reasons why the USDJPY tumbled overnight is because of a set of comments by one of the most hawkish BOJ board members, Takehiro Sato, expressed pessimism about the economy and the central bank’s strategy, saying in a speech Thursday that the BOJ won’t be able to reach its 2% inflation target as forecast and negative rates won’t work to boost investment. “I believe that it is desirable to aim to achieve the price stability target of 2% as a medium-to long-term goal and I expect that the road toward this goal will be long,” Takehiro Sato, one of nine BOJ board members, said in a speech in Kushiro, Hokkaido on Thursday.

This was immediately taken by the market as yet another confirmation that Abenomics will be stretched out, and that the probability for a substantial near-term easing by the BOJ has been notably delayed, leading to the steep drop in the USDJPY observed overnight. To be sure, Sato is a known hawk and dissented on the January decision to adopt a negative-rate policy and also in October 2014, when the BOJ expanded stimulus. That does not make him wrong.

“I believe that the challenge from now on is reforming the policy framework, which is intended to provide solutions in the short term, so as to adapt it to a long-term initiative,” he said Thursday. “The first thing the bank should do for that purpose would be to make the asset purchase operation more flexible.”

As Bloomberg notes, Sato’s concerns about reaching the 2 percent price target as forecast echo those of some investors as Governor Haruhiko Kuroda continues to buy bonds at a record pace and keeps expanding stimulus, yet inflation hovers near zero. Former Deputy Governor Kazumasa Iwata, who served on the board 2003-2008, has predicted that the BOJ will hit the wall in terms of asset purchases by the middle of 2017. “There are growing concerns about the sustainability of the BOJ’s easing,’’ said Daisuke Karakama, chief market economist in Tokyo at Mizuho Bank, a unit of the country’s third-biggest lender. “We can’t see when the BOJ is going to meet the price target and if you take Kuroda’s words at face value, he will have to keep adding stimulus.”

What is more remarkable, was Sato’s admission that instead of easing conditions, the BOJ is in fact tightening them: “I believe that the negative interest rate policy has the effect of monetary tightening, rather than an effect of easing. In addition, the negative interest rate policy could affect financial system stability.” He cited risks from a negative-rate policy adopted in January because it clashes with the expansion of monetary base target.

Perhaps Kuroda should have thought of that back in January.

Sato continues: “I expect that its growth is highly likely to remain sluggish in the future while being susceptible to developments in the global financial markets and overseas economies”

He then bashed QE: “From financial institutions’ recent move to purchase super-long-term bonds in pursuit of tiny positive yield, I detect a vulnerability similar to that seen before the so-called VaR shock in 2003” when Japan’s bond yields surged in the short term, Sato said. The BOJ has to buy about 120 trillion yen of bonds this year as some bonds mature, which is more than 90 percent of newly issued bonds in Japan’s market. The BOJ held 32 percent of government bonds at the end of December, according to the bank.

In other words, as we predicted in late 2014, the BOJ is now monetizing virtually all gross issuance, and is why Japan is scrambling to find an excuse to issue more debt.

But the punchline was the following: “Japan’s economy, with its potential growth rate of nearly 0%, is so fragile as to be liable to post negative growth even because of trivial external factors such as weather conditions.”

But of course we already knew that: recall that the US’ own BEA applied a second seasonal adjustment to last year’s Q1 GDP data to smooth out the “weather impact.” Which, however suggests that the US economy is just as bad as that of Japan, one where the weather alone can push the economy into a recession. At least Japan has not yet figured out that there is a seasonal adjustment for that.