MNI Spotlight: US Stock Futures Soar on Daily Mail Brexit Poll

–IMF: Japan Reflationary Policy Failing
–Canada Wholesale Sales Disappoint Again

The following are top events and news reported Tuesday morning ET by MNI in the global financial system:

* The market sensitivity to shifting views on Thursday’s UK vote on whether to negotiate a new relationship with the EU is showing itself in soaring U.S. stock futures and European gains, with the Dow E-mini up 214, the S&P E-mini up 1.29%, the Stoxx Europe 600 up 3.85% and the DAX up 4.65%. The pound was up to 1.4655 against the dollar, oil prices were rising, with Brent above $50 again, while the U.S. 10-year was dropping 12/32 at a yield up to 1.654%. Among the triggers was a Daily Mail poll showing 45% in the “remain” camp against 42% in the “leave” category and an aggregate of poll results showing an even split, which amounts to a gain for the “remain” side. The dollar index was running negative. U.S. firms by one estimate, by the Washington Post, have more than a million employees in the UK, a key gateway for U.S. trade with EU countries with more than a trillion dollars a year in U.S.-European trade and investment flows at risk. [9:10 ET]

* Canada wholesale sales disappointed once again Monday with a 0.1% monthly increase in April to C$54.8 billion, down 0.2% from a year ago, the largest 12-month decrease since June 2013, Statistics Canada reported. Analysts in a MNI had expected a 0.5% increase in April. While the 0.1% advance was smaller than anticipated, it was slightly offset by an upward revision to March’s reading to -0.8% from -1.0%. February was revised up to -2.2% from -2.3%. Still, after two months of strong declines and a month of May where the economy is expected to suffer from the sand oil production disruptions related to the wildfire in Fort McMurray, April’s 0.1% uptick was no relief. In real terms, wholesale trade performance was not much better, with a 0.2% advance after being flat in March and decreasing 2.0% in February. Real sales were down 0.5% year-over-year, the largest drop since October 2015 (-1.2%). [8:30 ET]

* European Central Bank President Mario Draghi’s passionate call for deeper Eurozone integration received conflicting answers from local elections in Italy and a survey of EU citizens, underscoring the uncertainty about Europe’s political roadmap days ahead of Britain’s ‘Brexit’ referendum. While Italian voters flocked to support the anti-EU Five Star Movement in local elections Sunday, a new Bertelsmann study found that a majority of citizens in large member states back Draghi’s call for ‘more Europe’. “We have to find a new way to build trust among the Member States and the peoples of Europe – a way that builds on existing institutions to better ensure that the common needs of the people are met,” Draghi said Friday. “We have seen that the price of inaction is high. We have seen how it leaves the economy vulnerable to instability.” Election results in Italy, however, provided more evidence of lost trust in EU institutions rather than support for deeper integration: in a blow to Prime Minister Matteo Renzi’s centre-left Democratic Party, the Five-Star Movement achieved a breakthrough by winning mayoral elections in Rome and Turin. Mounting support for the anti-establishment Five-Star Movement suggests that Renzi might have a hard time winning October’s referendum on constitutional reform, creating one of many political risk events in the euro area this year. A Bertelsmann study, on the other hand, sent a more optimistic signal about Europeans’ support for a joint future, a message Draghi and his colleagues will hope to be heard in European capitals. [Updated 7:04 ET]

* Japan’s reflationary policy mix, in place since Prime Minister Shinzo Abe returned to power in late 2012, has failed to guide the economy to sustained growth and replace years of deflation with stable price increases, the International Monetary Fund said Monday. “Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the timeframe set by the authorities,” the IMF said, referring to more than three years of aggressive monetary easing, increased fiscal spending and promises of structural reforms. The IMF’s statement concluding the 2016 Article IV Mission followed its staff visit with Japanese policymakers. The IMF called on Japan to “embark on prolonged and cumulatively larger fiscal adjustment and move explicitly towards a more flexible time frame for achieving the inflation target, while reserving further monetary easing and fiscal stimulus for addressing large shocks.” IMF First Deputy Managing Director David Lipton told reporters that setting a specific date for hitting the 2% inflation target and failing to achieve it causes uncertainty over monetary policy. [4:02 ET]

* The German Bundesbank said Monday that its models pointed to a positive effect of quantitative easing on growth and inflation but said that the estimates were uncertain. In an analysis published in its June monthly report, the German central bank also warned that the side effects of QE would increase over time and urged the European Central Bank to begin normalizing monetary policies as soon as developments pointed towards achieving the inflation target. Calculations based on two distinct simulation models and run on the first set of QE measures, which the ECB adopted in January 2015, showed an impact of between 0.1 and 2.5 percentage points on euro area inflation in the years 2015 to 2017. The extended measures adopted last December provided another boost of 0.1 to 1.0 percentage points annually between 2016 and 2018, the Bundesbank said, while adding that the effect of the latest monetary policy package agreed in March would be “a little less” than that. [6:00 ET]

* Bank of Japan Governor Haruhiko Kuroda said Monday that the BOJ does not need to give up its quest of 2% inflation even though many economists see it as too ambitious a target to achieve in a short period. “Japan is still halfway through toward achieving the 2% price target” but the BOJ’s aggressive monetary easing has producing some effects, Kuroda told a seminar at Keio University. The BOJ has failed to achieve its initial goal of turning years of deflation into a stable 2% inflation in about two years from April 2013, when it launched its aggressive easing program. But the governor said, “I don’t think we need to change our commitment to achieving the 2% price target at the earliest possible time.” Kuroda said the BOJ cannot tell when and what policy measures it will take in advance as such decision-making dependents on developments in economic activity and prices. In his speech to an academic audience, Kuroda said while quantitative easing has easing effects, its mechanism its not yet clear. [5:12 ET]

* Foreign exchange sold by banks in China to their client base fell in May, suggesting capital outflow pressure is easing further, according to data released by the State Administration of Foreign Exchange. SAFE said Monday that the country’s banks sold a net CNY67.7 billion worth of foreign exchange in May, down sharply from net sales of CNY150.1 billion in April, CNY218.7 billion in March and February’s CNY228.5 billion. In the first five months of the year, banks sold a net CNY1.12 trillion in foreign exchange to clients, it said. In a separate statement, SAFE said the forex supply and demand situation was more balanced in May, noting capital outflow pressure has been easing gradually since the beginning of the year as individuals and companies appetite for holding foreign exchange moderated further. SAFE also said China has a solid foundation to maintain the basic stability of the cross-border capital flows in medium and long term as China’s economic performance is within expectation overall, economic structure optimized further, and the economy will maintain relatively high growth. [4:28 ET]

* If the UK electorate opts to leave the European Union in the June 23 referendum, the outlook for the economy could hinge on what trade deal the country can strike with the EU, the International Monetary Fund said in a report released Friday. In the annual review of the UK economy, known as the Article IV consultation, the IMF said the UK economy had performed reasonably well in recent years, but growth had slowed in recent months, apparently weighed by uncertainty ahead of the EU vote. And the IMF warned it is unlikely the uncertainty would be lifted following a vote to leave until the details of a new trade deal with the EU were in place. If the UK negotiates a deal similar to Norway’s, in which it abides by EU trade rules including free movement of labour, the impact would be modest. If it ends up operating under World Trade Organisation rules, with no special deal with the EU, the hit to the UK economy would be heavy, in the IMF’s view. [Repeated 7:12 ET]

–MNI Washington Bureau; tel: +1 202-371-2121; email:

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