S&P futures were fractionally lower from yesterday’s record high as European stocks declined and Asian stocks were mixed, pressured by yesterday’s 5% plunge in crude after OPEC unexpectedly “failed to surprise” markets, and announced the bare minimum supply cut extension that was expected by oil traders, who in turn puked long positions.

It wasn’t just oil: it has been a slow risk-off session as Bloomberg phrased it, ahead of the long weekend for U.S. and U.K. markets, with the key carry pair, USD/JPY breaking below 111.00 as the USD continues to weakens, while the GBP tumbled 0.5%, after the latest poll shows Tory lead narrowing. As futures declined, fixed income markets ground higher as the 2s10s hits flattest level YTD. European equity markets open lower led by oil related stocks after yesterday’s heavy sell-off in oil. Automakers also weaker after possible Trump comments on German car exports. Gold well supported amid general risk-off.

Most of the early attention, however, was on the market’s reaction to yesterday’s oil selloff. “To say that yesterday’s performance was disappointing for bulls is an understatement,” Tamas Varga, analyst at PVM Oil Associates wrote in an emailed report quoted by Bloomberg. “It is, however, not a foregone conclusion that the trend is definitely turning. The question now is whether yesterday’s sharp drop in oil prices was a panic long-liquidation or the technical picture is now firmly turning bearish.”

Stocks from Tokyo to Europe were dragged down by oil producers as oil headed for a weekly loss after falling the most in three weeks on Thursday as OPEC’s move to prolong supply cuts for nine months disappointed investors hoping for more.

“Markets ultimately found the renewed deal among OPEC and friends underwhelming,” Cole Akeson, a strategist at Sberbank CIB in Moscow, wrote in a note. “Essentially, the market consensus seems to have come around to a view that regardless of what effect on global inventories the deal may have for now, OPEC and its partners have little insight as to what to do later on.”

Before this week’s deal, oil had climbed back above $51 a barrel after Saudi Arabia and non-OPEC member Russia rallied support from the Organization of Petroleum Exporting Countries and other nations to extend the supply pact into 2018. However, as the chart below shows, that proved to be too optimstic for a market which no longer will buy simple on OPEC jawboning, but demands results.

With oil in the spotlight, Japan’s Topix index slipped 0.6%, trimming its weekly advance to 0.6%. Australia’s S&P/ASX 200 Index fell 0.7 percent, with BHP Billiton Ltd. dropping 2 percent.  South Korea’s Kospi rose 0.5 percent to another record. The index is up 2.9 percent for the week, the biggest gain in two months. Hong Kong’s Hang Seng Index was flat, keeping its weekly gain at 1.8 percent, while the Shanghai Composite increased 0.1 percent.

The Stoxx Europe 600 Index dropped 0.4% with oil and gas producers falling 1.2%. S&P 500 futures were little changed, after rising 0.4% on Thursday to new all time highs driven by a narrow basket of tech stocks.

Elsewhere, as discussed last night, the British pound tumbled over 0.5% to $1.2861 and looked set for its biggest one-day slide in over three weeks and steepest one-week decline since early April, after a poll showed the Conservative party lead narrowed after the Manchester attack, and as investors in Asia sold the currency after U.K.’s first-quarter economic growth missed estimates. The poll results come less than two weeks before the June 8 general election.

“With this kind of momentum and almost two weeks to go until the vote, not only is this not going to be the breeze that May anticipated when she called the snap election last month, it could yet turn into a humiliating defeat for the Conservative leader and her party,” said Craig Erlam, senior market analyst at OANDA.  “Coming on the back of losses yesterday, it’s turning into a rotten end to the week for the pound.”

Elsewhere, confirming that the reason for the sharp spike in the Yuan over the past two days, the biggest move since January, was direct government intervention, overnight Bloomberg reported that China is considering changes to the way it calculates the yuan’s daily reference rate against the dollar “to reduce exchange-rate volatility while undermining efforts to increase the role of market forces” in Asia’s largest economy. Policy makers may add a “counter-cyclical factor” to the yuan’s daily fixing, according to a government statement on Friday. Analysts said the change would give authorities more control over the fixing and restrain the influence of market pricing.

Overnight, both the onshore and offshore yuan rose to three-month highs on continued speculation the Chinese government will continue to support the currency and stock markets. The currency advanced for a second day on talk state-backed funds were propping up Chinese assets Thursday following Moody’s downgrade of China’s credit rating.

In currencies, the Bloomberg Dollar Spot Index fell 0.1 percent, poised for a second week of declines. The pound slid 0.5 percent to $1.2875 (see above). The yen rose 0.7 percent to 111.11 per dollar, after dropping 0.3 percent on Thursday. The euro strengthened 0.2 percent to $1.1227

After its sharp drop on Thursday, oil edged higher in early trading but remained on the back foot after tumbling 5% in the previous session. On Thursday in Vienna, the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers agreed to extend a pledge to cut around 1.8 million barrels per day (bpd) until the end of the first quarter of 2018 – disappointing investors betting on longer or larger curbs.

Friday economic data include annualized GDP, durable goods orders and University of Michigan indexes.

Bulletin Headline Summary from RanSquawk

• European equities enter the North American crossover lower as energy names underperform following yesterday’s OPEC announcement
• GBP has been placed under pressure after the latest polling data shows the race for Downing Street getting closer
• Looking ahead, highlights include US GDP, Durables and Uni. Of Michigan

Market Snapshot

• S&P 500 futures down 0.1% to 2,411.55
• STOXX Europe 600 down 0.4% to 390.42
• MXAP up 0.01% to 152.86
• MXAPJ down 0.08% to 499.83
• Nikkei down 0.6% to 19,686.84
• Topix down 0.6% to 1,569.42
• Hang Seng Index up 0.03% to 25,639.27
• Shanghai Composite up 0.07% to 3,110.06
• Sensex up 0.8% to 30,983.82
• Australia S&P/ASX 200 down 0.7% to 5,751.66
• Kospi up 0.5% to 2,355.30
• German 10Y yield fell 1.4 bps to 0.348%
• Euro up 0.1% to 1.1225 per US$
• Brent futures up 0.8% to $51.84/bbl
• Italian 10Y yield fell 1.9 bps to 1.826%
• Spanish 10Y yield fell 2.2 bps to 1.562%
• Brent futures up 0.8% to $51.84/bbl
• Gold spot up 0.8% to $1,265.34
• U.S. Dollar Index down 0.1% to 97.11

Top overnight news

• Political uncertainty in the U.K. rose after the race between the ruling Conservative party and opposing Labour party narrowed, raising prospects that the Tory majority will be smaller than expected and this could have implications on the Brexit process.
• The Federal Reserve is ‘very close’ to where it needs to be on policy and shouldn’t be thinking in terms of major increases in the policy rate, St. Louis Fed President James Bullard tells reporters in Tokyo
• Focus on U.S. President Donald Trump’s G-7 summit visit which will involve debates on climate change, free trade, terrorism and security
• China is considering changes to the way it calculates the yuan’s daily reference rate against the dollar, a move that’s likely to reduce exchange-rate volatility while undermining efforts to increase the role of market forces in Asia’s largest economy
• The OPEC’s historic pact to extend oil supply cuts has left markets guessing on the group’s long term plans and its exit strategy

Asia equity markets traded mixed as the region failed to take the baton from another record setting day on Wall St, with oil names dampened following the weakness across the energy complex. This saw commodity-related sectors in ASX 200 (-0.7%) underperform as they felt the brunt of the 5% declines in crude prices due to disappointment from the OPEC output extension deal. A firmer JPY kept the Nikkei 225 (-0.3%) subdued, while Hang Seng (Unch.) and Shanghai Comp. (+0.2%) traded choppy amid a reserved liquidity operation by the PBoC and continued pessimistic comments from Moody’s following the recent sovereign rating downgrade. 10yr JGBs traded higher amid a downbeat risk tone, while the BoJ were also present in the market under its bond buying operation for JPY 750b1n of JGBs in the belly to super-long end. Moody’s stated that China growth will slow, while it added that China may lose Al rating if there are signs debt keeps increasing and debt surpasses expectations.

Top Asian News

• Taiwan’s Economy Grew 2.6% Y/y in 1Q; Survey Est. +2.6%
• China Confirms It’s Considering Changing Yuan Fixing Formula
• Vanguard to Triple Shanghai Staff by Year-End as China Opens
• SBI Said to Pick BofA, Deutsche Bank for $2 Billion Offering
• Incoming Philippine BSP Governor Discusses His Plans: Q&A
• China Money Funneled to Far-Flung Homes Flags Bubble Trouble
• Hong Kong Dollar Heads for Biggest Weekly Drop Since Early 2016

European equities trade with modest losses, largely stemming from the disappointed/scepticism amongst investors over OPEC’s decision to only extend the current output cut by 9-months. Following this announcement crude prices slipped, WTI hitting a low of USD 48.21, subsequently large energy names felt the brunt of this. Although, crude prices have seen a modest reprieve this morning with WTI consolidating above USD 49. Across credit markets, EGB’s have been kept afloat with support from FTQ flow, upside in bunds has met resistance at the 161.55 area, a breach may see a move to the 18th May highs situated at 162.02. As we approach month-end, Citi expect healthy extensions for European and UK bonds, with OATs set to benefit the most.

Top European News

• Retirement Savings Gap Is Seen Climbing to $400 Trillion by 2050
• EU to Demand Full ECJ Jurisdiction on Rights Post-Brexit: Doc.
• Italian Manufacturing Morale Falls Amid Concerns Over Recovery
• Portugal Asks to Make EU9.7b Early Repayment to IMF: IGCP
• Barclays Bid to Cut Africa Stake Still With S. Africa Regulator
• Restaurant Group Surges Most in 9 Months on ‘Reassuring’ Update

In currencies, GBP has been pressured with market attention being placed on the most recent polls which have shown a narrowing lead for PM May and her Conservative party over the Labour party. As such, GBP has tripped below 1.2900 to eye up support layered in around 1.2850-1.2844, a break through this could see a test to the May 4th low at 1.2831. USD-index continued to ease as one of the more dovish FOMC speakers, Bullard sounded the alarm over the path of inflation, most of this seen against the JPY, which has run through support at 111.50. Elsewhere, the slip in commodities pressures AUD yet again, this continues to drive AUD/NZD lower which is now hovering around 3-month lows, given that NZD has remained firm in the wake of New Zealand’s strong budget position.

In commodities, WTI and Brent crude futures have staged a modest recovery from yesterday’s lows to enter the North American crossover modestly higher with the usual value-buyers entering the market amid no new developments on the fundamental side since yesterday’s OPEC-inspired sell-off. In terms of newsflow for the complex, things have remained relatively light as markets take a breather from yesterday. In metals markets, Gold has seen mild support with the safe-haven asset underpinned amid a cautious risk tone, which also kept copper subdued.

Looking at the day ahead now, the focus will be on the US this afternoon where there are a number of important releases due. First up is the second estimate of Q1 GDP where the consensus is for an upward revision in growth to +0.9% qoq from +0.7%.  Our US colleagues expect a small upward revision to +0.8% qoq. Importantly for growth in the current quarter we’ll also receive the April durable and capital goods orders report where the consensus is for a weak headline durable goods  orders print to be offset by a healthy gain in both ex-transportation orders (+0.4% mom expected) and core capex orders (+0.5% mom expected). Also due out  this afternoon is the final May University of Michigan consumer sentiment print where it’s worth keeping an eye on the various inflation expectations indicators too.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 0.9%, prior 0.7%; Personal Consumption, est. 0.4%, prior 0.3%; GDP Price Index, est. 2.3%, prior 2.3%; Core PCE QoQ, est. 2.0%, prior 2.0%
• 8:30am: Durable Goods Orders, est. -1.5%, prior 0.9%, revised 1.7%; Durables Ex Transportation, est. 0.4%, prior 0.0%, revised 0.8%
  • Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 0.5%; Cap Goods Ship Nondef Ex Air, est. 0.5%, prior 0.5%, revised 0.3%
• 10am: U. of Mich. Sentiment, est. 97.5, prior 97.7
  • U. of Mich. Current Conditions, prior 112.7
  • U. of Mich. Expectations, prior 88.1
  • U. of Mich. 1 Yr Inflation, prior 2.6%
  • U. of Mich. 5-10 Yr Inflation, prior 2.3%

DB’s Jim Reid concludes the overnight wrap

With markets already with one eye on the long weekend holidays in the US and UK it’s not been the most inspiring last 24 hours. Really it has been all about Oil after prices fell sharply yesterday in the wake of OPEC and non-OPEC producers agreeing to extend the production cut deal by 9 months into 2018. That was pretty much as guided to although the disappointment reflected in the price action appeared to be twofold with cuts not being deepened and no new producers joining the pact. It did however appear that there was some optionality left open for cuts being extended beyond the additional 9 months should prices decline. It was also noted that the importance of the five-year rolling average of OECD inventory was cemented and our commodity strategists highlight that this helps solidify their expectations that output controls will eventually be extended at least until the end of 2018, and more likely than not into 2019 (you can find more details in their report here https://goo.gl/aE1ehM).

After touching a high of $52.00/bbl yesterday morning, post the headlines WTI proceeded to tumble and finished the day down -4.79% at $48.90/bbl and back to the lowest level in a week. It was also the third biggest daily decline this year. This morning it is down another -0.90% too. The biggest impact on other asset classes yesterday was Oil-sensitive currencies with the likes of the Russian Ruble (-0.90%), Norwegian Krone (-0.79%) and Canadian Dollar (-0.57%) all weaker.

That was really the extent of the excitement in markets though. Given the holidays in Europe volumes were thin and price action was pretty benign as a result (Stoxx 600 ending -0.06%). Meanwhile it was business as usual for US equity markets again where – despite the energy sector doing its best to weigh on broader indices – the S&P 500 (+0.44%) rose for the sixth consecutive session and in doing so notched up yet another record high. The longest consecutive winning streak for the S&P this year came in February when it rose for seven sessions on the trot. Some better than expected results in the retail sector, namely from Best Buy and PVH, appeared to be the driving force yesterday while the VIX also finished the day lower and closed below 10.00 (at 9.99) for the first time in over 2 weeks. In fact it’s now closed below that level 3 times this year, including yesterday. From 1990-2016, it had actually only closed below 10 on a total of 9 occasions.

There was a similar lack of excitement in Treasuries yesterday where yields finished the day little changed after spending much of the session in a tight range. We did hear from the Fed and specifically from Governor Lael Brainard who said that she is encouraged by a brightening global economic outlook and that downside risks from certain economies appear to be fading. Brainard has previously been one of the most dovish Fed officials for what it’s worth.

While we’re on the Fed, it’s worth highlighting that yesterday our US economists made some small timing changes to their Fed call for the rest of the year in light of Wednesday’s FOMC minutes. They note that if the Fed intends to begin reducing its holdings of Treasury and MBS securities this year, then policymakers are likely to announce a change in their reinvestment policy at the conclusion of the September 20 FOMC meeting. The details of this policy should be made known well in advance – most likely after the June meeting (press conference and/or minutes). The team go on to say that given the committee’s concerns about a subsequent over-tightening of financial conditions once the process of reinvestment tapering begins, it is unlikely that the Fed will raise the fed funds rate at the same time that they announce a change in reinvestment policy. As a result the team has now shifted their view of a June and September hike to a June and December hike, with the Fed staying put at the September meeting.

Elsewhere, President Trump’s overseas tour continues with Trump yesterday causing some ripples at the NATO summit after criticising allies for “chronic underfunding”. Meanwhile the travel ban is back in focus overnight after the US attorney general said that the White House will appeal its latest courtroom defeat in the US Supreme Court. Also worth pointing out is the Washington Post reporting that investigators are now focusing on Trump’s son-in-law and advisor Jared Kushner in connection with the Russia-Election investigation. Kushner was said to have held meetings with Russia in December, however it remains to be seen if this is the person of interest that was mentioned in press reports (like Washington Post) last week.

In Asia this morning it’s been a much more mixed start for major bourses. While the Nikkei (-0.35%), and ASX (-0.65%) are down, mostly as a result of weakness in the energy sector, the Shanghai Comp and Hang Seng are flat and the Kospi (+0.48%) has edged higher. US equity futures are also little changed. Meanwhile the big mover in FX this morning is Sterling which is down -0.42% versus the Dollar after a YouGov poll for the Times (conducted over 24-25 May) showed the Conservatives as holding just a 5% lead over Labour at 43% to 38%. That is the smallest lead for the Tories since May became PM back in July  last year. The last YouGov poll (18-19 May) showed the Conservatives as holding a 9% lead at 44% to 35%. Other opinion polls showed a lead for the Tories of as much 12-13% just over a week ago, so it’s worth keeping an eye on this trend over the next week or two. The other news to highlight from overnight is the PBoC announcing that it is planning a change in the formula behind the daily yuan fixing to include a ‘counter-cyclical adjustment factor’. The suggestion is that it’ll dampen the impact of big swings. There has been little change in either the onshore or offshore yuan following that news. Finally inflation data in Japan this morning didn’t throw up any real surprises with headline (+0.4% yoy), core (+0.3% yoy) and core-core (+0.0% yoy) rates all up slightly versus March and more or less matching expectations.

In terms of yesterday’s economic data, in the US the advance goods trade balance reading in April revealed a slightly wider than expected deficit of $67.6bn. Away from that initial jobless claims continue to hover at multi-decade lows after printing at 234k for last week. The four-week average is now at 235k. Meanwhile the Kansas City Fed’s manufacturing activity index for May edged up 1pt to +8 (vs. +9 expected) with the details showing that both new orders and employment were a little firmer which is in contrast to the data we saw in the Richmond Fed’s survey. The other data was the April wholesale inventories print which came in at -0.3% mom and will likely result in downward pressure on some of the GDP trackers. In Europe the only data came from the UK where Q1 GDP was revised down to +0.2% qoq from +0.3% with the big negative contribution coming from net trade.

Looking at the day ahead now, with no data of significance due out in Europe this morning the focus will be on the US this afternoon where there are a number of important releases due. First up is the second estimate of Q1 GDP where the consensus is for an upward revision in growth to +0.9% qoq from +0.7%.  Our US colleagues expect a small upward revision to +0.8% qoq. Importantly for growth in the current quarter we’ll also receive the April durable and capital goods orders report where the consensus is for a weak headline durable goods  orders print to be offset by a healthy gain in both ex-transportation orders (+0.4% mom expected) and core capex orders (+0.5% mom expected). Also due out  this afternoon is the final May University of Michigan consumer sentiment print where it’s worth keeping an eye on the various inflation expectations indicators too.

Away from the data there isn’t much central bank speak to highlight but it’s worth keeping an eye on the G7 summit where Trump, May, Macron and Merkel are gathering. That meeting concludes on Saturday with closing press conferences due to take place so we’ll have a recap in Monday’s EMR of any important snippets. Fingers crossed we’ll also be opening Monday  on the back of an FA Cup final win for Arsenal tomorrow. We need one positive to come away from what has otherwise been a fairly depressing season for Arsenal fans.

Well, Trump did warn he would appeal the travel ban all the way to the Supreme Court if he had to, and that’s precisely what he plans on doing.

On Thursday afternoon, shortly after the 4th U.S. Circuit Court of Appeals, in a 10-3 vote that Trump’s travel ban likely violates the constitution and ruled against the executive order, Attorney General Jeff Sessions said the Justice Department will ask the Supreme Court to review the appeals court ruling. The 4th Circuit (based in Richmond, Va) is the first appeals court to rule on the revised travel ban unveiled in March. A second appeals court, the 9th U.S. Circuit based in San Francisco, is also weighing the revised travel ban after a federal judge in Hawaii blocked it.

The first travel ban issued Jan. 27 was aimed at seven countries and triggered chaos and protests across the country as travelers were stopped from boarding international flights and detained at airports for hours. Trump tweaked the order after the 9th U.S. Circuit Court of Appeals refused to reinstate the ban. Following the revision, Trump’s administration had hoped it would avoid the legal problems that the first version from January encountered, but it was not meant to be.

The new version made it clear the 90-day ban covering those six countries doesn’t apply to those who already have valid visas. It got rid of language that would give priority to religious minorities and removed Iraq from the list of banned countries. But critics said the changes don’t erase the legal problems with the ban.

As described previously, a core question in the case before the 4th Circuit was whether courts should consider Trump’s public statements about wanting to bar Muslims from entering the country as evidence that the policy was primarily motivated by the religion. Trump’s administration argued the court should not look beyond the text of the executive order, which doesn’t mention religion. The countries were not chosen because they are predominantly Muslim but because they present terrorism risks, the administration said.

But Chief Judge Roger L. Gregory wrote that the government’s “asserted national security interest … appears to be a post hoc, secondary justification for an executive action rooted in religious animus and intended to bar Muslims from this country.”

President Donald Trump’s revised travel ban “speaks with vague words of national security, but in context drips with religious intolerance, animus and discrimination,” the appeals court also said Thursday in ruling against the executive order.

To this, Jeff Sessions responded that the court’s ruling blocks Trump’s “efforts to strengthen this country’s national security” adding that Trump is not required to admit people from “countries that sponsor or shelter terrorism until he determines that they can be properly vetted” and don’t pose a security threat.

The three dissenting judges, all appointed by Republican presidents, said the majority was wrong to look beyond the text of the order. Calling the executive order a “modest action,” Judge Paul V. Niemeyer wrote that Supreme Court precedent required the court to consider the order “on its face.” Looked at that way, the executive order “is entirely without constitutional fault,” he wrote.

As for SCOTUS, according to AP, the Supreme Court would likely step into the case if asked as the justices almost always have the final say when a lower court strikes down a federal law or presidential action. Trump could try to persuade the Supreme Court to allow the policy to take effect, even while the justices weigh whether to hear the case, by arguing that the court orders blocking the ban make the country less safe. If the administration does ask the court to step in, the justices’ first vote could signal the court’s ultimate decision.

Ilya Somin, a law professor at George Mason University, said if the Supreme Court follows a partisan divide, the Trump administration may fare better since five of the nine are Republican nominees. Still, he said, it’s difficult to make a confident prediction because “Supreme Court justices don’t always vote in ideological lockstep.”

Critics of Trump’s order were delighted with the outcome:

The case ruled on by the 4th Circuit was originally brought in Maryland by the American Civil Liberties Union and the National Immigration Law Center on behalf of organizations as well as people who live in the U.S. and fear the executive order will prevent them from being reunited with family members from the banned countries.

 

“President Trump’s Muslim ban violates the Constitution, as this decision strongly reaffirms,” said Omar Jadwat, director of the ACLU’s Immigrants’ Rights Project, who argued the case. “The Constitution’s prohibition on actions disfavoring or condemning any religion is a fundamental protection for all of us, and we can all be glad that the court today rejected the government’s request to set that principle aside.”

And now it will be up to the Supreme Court to rule once again on this issue, hopefully finally making it go away. Travel ban aside, the upcoming case will be a litmus test of just what (and how strong) the ideological leanings of the revised SCOTUS bench are, now that Gorsuch is in town.