MNI US MARKETS ANALYSIS - Energy Prices Surge on EU Oil Ban

US TSYS SUMMARY: Treasuries Catch Up On Inflation Fears

• Cash Tsys have seen a modest intraday rally having opened sharply lower as they played catch-up to growing inflation fears led by Europe whilst the cash market was closed for Memorial Day.
• The net result is a bear steepening to put the recent rally on pause, with 2YY +6.9bps at 2.544%, 5YY +8.8bps at 2.805%, 10YY +8.6bps at 2.824% and 30YY +6.9bps at 3.033%.
• Whilst a steepening since Friday, the slope of the curve is well within recent ranges with 2s10s at 28bps.
• TYU2 at 119-17+ is down 3+ ticks from yesterday’s early close but closer to 20 ticks lower from Friday, as volumes return strongly. The rally has stalled at the 50-day EMA of 120-15, with support next eyed at 119-03 (May 23 low) after which it could open a key short-term support at 118-01+ if inflation fear momentum builds.
• Data: MNI Chicago PMI, Conference Board consumer confidence and Dallas Fed manufacturing surveys for May plus various house price releases.
• Bill issuance: US Tsy $45B 13W, $42B 26W bill auctions – 1130ET
• Fed Chair Powell is scheduled to meet President Biden in the White House at 1315ET, with Yellen potentially attending.

STIR FUTURES: Fed Hikes Buoyed By 50bps At ‘Several’ Meetings

• Hikes implied by FOMC-dated Fed Funds have given back some of the yesterday’s rise but remain up solidly from Friday’s close as the US comes back in.
• The rise has been supported by Shanghai and Beijing easing some Covid restrictions, along with Waller (voter) yesterday opting for a more hawkish tone with support for 50bp hikes at ‘several’ meetings, upping what has been widespread FOMC support for 50bp clips at the next ‘couple’ meetings.
• They sit with 51.5bps for Jun before a cumulative 100bps for Jul (+2.5bps from late Fri), 137bps for Sep (+5bp) and 188bps to year-end (+7bps).
• Not the usual Fedspeak but Powell meets President Biden in the White House at 1315ET, with Yellen seemingly set to join as well, following Biden’s inflation plan in his WSJ op-ed.

EGB/GILT SUMMARY: ECB Gearing Up For Hawkish GC Meeting

European government bonds have continued to sell off, while equities have pared back yesterday's gains.

• The EU has reached an agreement to ban most Russian oil imports. A compromise agreement was reached in which only oil delivered by sea will be banned, allowing pipeline imports to continue following objections from Hungary.
• The May estimate for Eurozone inflation came in above expectations (8.1% vs 7.8% expected).
• The ECB's Ignazio Visco earlier stated that the negative rate policy should now be left behind but that rate hikes still need to be gradual.
• Bunds had a choppy start to session and now trade below yesterday's close. Yields are up 3-4bp with the curve slightly steepening.
• OATs trade in line with bunds. Yields are now 2-4bp higher on the day.
• BTPs have underperformed core EGBs with yields up 5-9bp.
• Gilts have weakened with yields up 1-3bp.
• Supply this morning came from Germany (Bobl, EUR, EUR2.463bn allotted) and Italy (BTP/CCTeu, EUR6.75bn allotted).

EUROPEAN COUNCIL: After Surprise Oil Compromise, Focus On EU Energy & Food Security

In the wake of the surprise compromise reached by EU leaders late last night on a partial embargo on the import of Russian oil, focus at the special European Council meeting turns to EU energy policy (notably the RePower EU plan) as well as regional and global food security.

• As noted in our political risk bullet (see 2320BST) and our energy bullets (see 0752BST and 0830BST), EU leaders came to an agreement last night that sees oil imports banned in principle, with exceptions for pipeline oil via the southern Druzhba line.
• Prior to the summit the mood from EU leaders had been downbeat, with Commission President Ursula von der Leyen stating on her arrival that there were 'low expectations' for a deal, while Hungarian PM Viktor Orban stated that there was 'no agreement because of the irresponsible behaviour of the Commission'.
• Today, focus on the RePower EU proposal from the Commission, and food security. RePowerEU is the Commission's long-term plan to disconnect the EU from Russian energy via diversifying supply lines and boositng renewables.
• On food security, African Union head, Senegalese President Macky Sall, will join via videolink. Major concerns in EU and AU about both shortages and major price spikes exacerbated by the war in Ukraine. In some North African states heavily reliant on cheap Russian and Ukrainian grain there are concerns of civil unrest should prices spike further.

UK: Stream Of Letters Raising Confidence Vote Risk For PM Johnson

Rumours swirling in Westminster that Prime Minister Boris Johnson could face a confidence vote in early June. There is speculation that the threshold of 54 letters of no confidence being submitted to the chair of the the 1922 Committee (the group of backbench Conservative MPs) is about to be hit, triggering a confidence vote in the PM.

• There is no way of telling how many letters have definitevly been submitted. Tom Larkin at Sky has the tally of Conservative MPs calling publicly for Johnson to go at 27, with 12 more questioning the PM's position.
• If/when the threshold (equating to 15% of the parliamentary party) is hit, there is no rule as to when 1922 chair Sir Graham Brady has to announce that a confidence vote would take place. There is general expectation that even if the threshold has already been hit, or is done in the next two days, no announcement would take place before the Platinum Jubilee celebrations for HM Queen Elizabeth II taking place this weekend.
• There is also speculation of 'tripwire letters' having been sent in by Johnson loyalists. Once the threshold is hit, these MPs would be notified by Brady before any public announcement (as they are entitled to request), at which point they withdraw their letters and notify No.10 that a breach of the threshold is imminent. At this point Johnson's supporters can launch into a full charm offensive to try to avoid further letters or encourage withdrawals.
• In the event a confidence vote is publicly called it would likely take place in short time. All 359 Conservative MPs can vote. If Johnson retains the confidence of 50%+1 of his party (180 MPs) then he remains in office and cannot be challenged for the next 12 months. If 180 or more MPs vote they do not have confidence in his leadership then a leadership contest is called and Johnson is ineligible to take part.

FOREX: Greenback Back Above 50-DMA Support

• The greenback is clawing back recent losses in Tuesday trade, with the USD Index back above the 50-dma - which remains a key support with the level not convincingly broken so far this cycle. As a result, the USD is the firmest in G10, while NZD, SEK and the EUR are among the weakest.
• Eurozone May CPI estimate was the data highlight - mimicking the Spanish, German and Italian inflation readings in coming in ahead of expectations: 8.1% vs. Exp. 7.8%. The release resulted in pressure on core Eurozone bond markets, with Bund futures and Italian BTPs both dropping lower upon release. EUR, however, has failed to follow suit, with the single currency drifting against most others in G10. EUR/USD has erased the Monday upside, with EUR/GBP narrowing the gap with support at 0.8500 and Friday's 0.8481.
• MNI Chicago PMI is the data highlight going forward, with markets expecting the figure to moderate to 55.1 fom 56.4 previously. May consumer confidence follows, with Canadian GDP also due.

Expiries for May31 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0590-00(E8.3bln), $1.0625-30(E1.6bln), $1.0645-50(E1.1bln), $1.0740-60(E1.3bln), $1.0800(E1.1bln), $1.0875-00(E1.6bln)
• USD/JPY: Y127.75-85($739mln)
• GBP/USD: $1.2550(Gbp3.5bln), $1.2645(Gbp2.2bln), $1.2680(Gbp827mln)
• AUD/USD: $0.7000(A$616mln), $0.7118-25(A$662mln)
• USD/CNY: Cny6.7200($709mln)

Price Signal Summary - S&P E-Minis Arrives At The 50-Day EMA

• In the equity space, S&P E-Minis remain firm following last week’s gains. The contract has traded above the 50-day EMA, at 4190.56. A clear break of this average would strengthen current bullish conditions and open a key resistance at 4303.50, the Apr 26/28 high. The recent climb is still considered corrective and the primary trend is down. A reversal lower would refocus attention on the bear trigger 3807.50, May 20 low. EUROSTOXX 50 futures maintain a firmer short-term tone following recent gains and the break above the 50-day EMA. Gains are still considered corrective. However, attention is on resistance at 3883.00, Apr 21 high and, the key resistance at 3944.00, the Mar 29 high. A break of the latter would strengthen current bullish conditions. Short-term support has been defined at 3576.00, May 19 low.
• In FX, EURUSD is trading near the top of its bear channel. The channel is drawn from the Feb 10 high and intersects at 1.0804. It marks a key short-term resistance where a break would strengthen bullish conditions and highlight a stronger short-term outlook. A reversal lower would reinforce a bearish theme. This would open 1.0533 initially, the May 20 low. GBPUSD maintains a firmer tone and the current corrective bull cycle is still in play. Attention is on the 50-day EMA at 1.2724. Initial firm support lies at 1.2472, May 24 low. USDJPY has recently traded through support at 126.95, the Apr 27 low and an important short-term pivot level. The breach suggests scope for a continuation lower, however, a break of the 50-day EMA, at 126.10, is required to strengthen a bearish threat.
• On the commodity front, Gold is holding on to its recent gains. The yellow metal is testing the 20-day EMA. This has exposed the 50-day EMA at $1879.9. Recent gains are still considered corrective and the broader trend direction remains down. A resumption of bearish activity would refocus attention on $1787.0, May 16 low. In the Oil space, WTI futures have started the week on a firm note. The contract has breached resistance at $116.43, the Mar 7 high and the former contract high. This confirms a resumption of the underlying uptrend and opens the $120.00 handle, and potentially beyond. Initial firm support is seen at $108.25, the 20-day EMA.
• In the FI space, resistance in Bund futures is at $155.33 May 12 high. The trend direction remains down and an extension lower would open 150.49, the May 9 low and the bear trigger. Gilts have traded below initial support. The primary trend direction is down and the pullback from recent highs marks a bearish development. Attention is on the key support and bear trigger at 115.70, May 9 low.

EQUITIES: Mixed European morning session for stocks

• Japan's NIKKEI down 89.63 pts or -0.33% at 27279.8 and the TOPIX down 9.77 pts or -0.51% at 1912.67
• China's SHANGHAI closed up 37.366 pts or +1.19% at 3186.427 and the HANG SENG ended 291.27 pts higher or +1.38% at 21415.2
• German Dax down 43.63 pts or -0.3% at 14533.43, FTSE 100 up 44.47 pts or +0.59% at 7643.72, CAC 40 down 32.53 pts or -0.5% at 6529.83 and Euro Stoxx 50 down 10.21 pts or -0.27% at 3831.08.
• Dow Jones mini up 25 pts or +0.08% at 33179, S&P 500 mini up 2.75 pts or +0.07% at 4159.25, NASDAQ mini up 48.75 pts or +0.38% at 12729.

COMMODITIES: Oil leading gains after EU agrees further sanctions

• WTI Crude up $4.23 or +3.68% at $119.19
• Natural Gas (NYM) up $0.02 or +0.26% at $8.747
• Natural Gas (ICE Dutch TTF) up $1.96 or +2.15% at $93.13
• Gold spot down $2.03 or -0.11% at $1852.53
• Copper up $5.3 or +1.23% at $436.05
• Silver down $0.1 or -0.44% at $21.8809
• Platinum up $3.03 or +0.32% at $963.57