MNI US MARKETS ANALYSIS - French Spreads Re-Approach Crisis Levels

Highlights: 

• French sovereign still in focus as spreads take on further weight
• UMich sentiment could show slowing inflation bleeding into expectations
• JPY recovers off post-intervention low as Ueda eyes trims to bond plan, possible July hike

US TSYS: Tsys Extend Highs Amid Ongoing French Political Uncertainty

• Treasuries are higher, taking cues from EGBs again amid ongoing political uncertainty in France after Pres Macron announced a snap election in the aftermath of last Sunday's EU parliamentary elections. Weaker stocks weighed by European banks adding to the bid in rates.
• Heavy Treasury futures volumes (TYU4>670k), as the Sep'24 10Y contract currently trades +7 at 110-30 vs. 110-31 high. Technical resistance at 111-09 (April 1 high) followed by 111-17.5 (1.236 projection of the Apr 25-May 16-29 price swing).
• On the flipside, support holds at 109-17.5/109-00.5 (50-day EMA / Low Jun 10 and key support).
• Cash yields are running mildly lower: 5s -.0337 at 4.2103, 10s -.0368 at 4.2074%, 30s -.0403 at 4.3561%, while curves look flatter: 2s10s -1.463 at -46.942, 5s30s -0.481 at 14.578.
• This morning's data calendar includes Import/Export price index at 0830ET, followed by UofM Sentiment/inflation expectations at 1000ET.
• Meanwhile, the Federal Reserve is out of policy blackout, scheduled speakers include Cleveland Fed Mester (three separate appearances at 0830ET, 1315ET and 1600ET), Chicago Fed Goolsbee and Fed Gov Cook later this evening.

US TSY FUTURES: OI Data Points To Meaningful Long Setting On Thursday

The combination of yesterday’s rally (driven by softer-than-expected PPI data, a well received 30-Year Tsy auction and heightened political uncertainty surrounding France) and preliminary OI data, points to net long setting across the curve on Thursday.

• A little over $10mn of net DV01 adjusted OI exposure was added across the curve on the day, with the most pronounced net long setting coming in TY futures. Adjustments across the remainder of the curve were relatively sizeable as well, outside of a small movement in net positioning in TU futures.
• A reminder that Tsy futures positioning screened as net short across the board in last week’s CFTC CoT (albeit with likely skew from basis trade positions noted), with this week’s inflation data outcomes and the French political situation allowing bonds to recover from last Friday’s post-NFP sell off.

STIR: OI Points To Further Short Cover In SOFR Whites & Reds On Thursday

The combination of yesterday’s rally in most SOFR futures and preliminary OI data points to another round of net short cover in the front end of the SOFR strip, with positioning moves in most of the whites and all of the reds biased in that direction.

• Further out, net pack OIs were essentially flat in the greens and blues, as long setting and short cover essentially offset.
• Unease surrounding French politics and a softer-than-expected PPI report generally drove the rally.
• This week’s CPI and PPI data, which provided the softest readings that we have seen in years, have resulted in downward revisions to sell-side PCE forecasts and a dovish move in the market-implied path for Fed policy rates.
• 48bp of Fed cuts are now priced through ’24, which compares to 35bp late last Friday, reversing the hawkish impact of last week’s labour market report in the process. We believe that this week’s data keeps the door open for a September rate cut.
• A reminder that last week’s CFTC CoT showed that hedge funds flipped to net short in SOFR futures for the first time since May ’23. This is probably playing into this week’s short cover.

G7: Draft Statement-G7 'Not Trying To Harm China', But Threatens More Tariffs

(MNI) London - Headlines from the draft G7 communique crossing wires at regular intervals. As would be expected, a significant number relate to the G7's economic, political, and security interactions with China.

• Regarding the war in Ukraine, the draft statement says the G7 "will continue taking measures against actors in China and third countries that metarially support Russia's war machine. [...] We will restrict access to our financial systems for targeted entities, including Chinese, that support Russia's war effort."
• Referring to China, the draft statement says "We will continue to take actions to protect our businesses from unfair practices, to levely the playing field and remedy ongoing harm." Adds that the G7 expresses concern over China's "persistent industrial targeting and comprehensive non-market policies and practicses that are leading to global spillovers...We call on China to refrain from adopting export control measures, particularly on critical minerals."
• Draft statement: "We oppose China's militarisation, and coercive and intimidation activities in the South China Sea." Goes on to claim that "We are not trying to harm China or thwart its economic development."
• These comments come as former ECB president and Italian PM Mario Draghi, in a change of tack from his usual moderate stance, calls for tariffs and subsidies to '"ffset unfair advantages created by industrial policies and real exchange rate devaluations abroad." (see 'MNI BRIEF: Draghi Calls For Tariffs, Subsidies Against China' 1126BST).

FRANCE: Leftist Alliance Set To Unveil Policy Plans In Presser

The left-wing New Popular Front (NFP) is set to present its policy objectives if it forms the next gov't in a press conference taking place around 1130CET (0530ET, 1030BST). The NFP was raised as a prospect in very short order after President Emmanuel Macron announced the snap elections on 9 June, but was confirmed as an electoral alliance in a statement on 13 June. It is formed by four parties that formed the 'NUPES' alliance in the 2022 elections: the extreme-left Communist Party, the far-left La France Insoumise (LFI), the green Ecologists, and the centre-left Socialist Party (PS), and is expanded by additions from the 'miscellaneous left' group of small leftist parties.

• Le Monde reportsthat some of the 150 policy proposals from NFP include: a repeal of Macron's unemployment insurance reform, a repeal of the hugely-controverisal pension reform that raised the retirement age to 64, the 'unwavering support' for Ukraine's resistance but no French troops on the ground, and the indexation of salaries and retirement pensions, to inflation.
• Economy Minister Bruno Le Maire called the NFP's aims 'complete madness', adding that if they form the next gov't it risks economic collapse, mass unemployment and France leaving the EU.
• The latest opinion poll from Elabe(11-12 June) did not prompt for the NFP as an alliance, instead giving support for NUPES and the miscellaneous left separately. Combined, their support totals 33%, ahead of the far-right Rassembelement National (National Rally, RN) on 31%.

USD Trades New Monthly High as EUR Stress Stems From EGBs

• The greenback trades well, firmer against all others ahead of the NY crossover as volatility stemming from European bond markets works its way into currency markets. The USD Index has cleared resistance at the weekly highs, hitting the best levels since early May and extending the rally off the post-CPI lows to 1.3%.
• The widening German/French bond yield spread has weighed heavily on the single currency, as concerns around Macron's popularity are compounded by an election pact formed among the left wing - providing another hurdle to the centrist alliance parties to retain power after the two election phases later this month.
• JPY intraday vol has picked up. While the BoJ kept policy unchanged, the press conference with Ueda was of the most interest, who triggered a phase of JPY weakness by failing to disclose the specifics around the trimming of bond buys - helping tip USD/JPY back above Y158.00 and to another post-intervention high of 158.26. The backtrack in USD/JPY only came as the BoJ governor talked up the possibility of a July rate hike, should data prove supportive.
• Import/export price indices cross later today ahead of the prelim University of Michigan sentiment survey. Markets may be particularly sensitive to any unexpected step lower in inflation expectations as part of this release, a weak number would add to the dovish pressure stemming from the PPI, CPI prints earlier in the week. 

Expiries for Jun14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0660-65(E1.0bln), $1.0700(E625mln), $1.0795-10(E2.0bln), $1.0900(E1.4bln)
• USD/JPY: Y154.00($1.1bln) 
• EUR/GBP: Gbp0.8440(E1.1bln)
• AUD/USD: $0.6615-20(A$1.2bln), $0.6640-50(A$739mln)
• USD/CAD: C$1.3740-60($2.8bln)

E-Mini S&P Remains Close to Wednesday's High

• The trend condition in Eurostoxx 50 futures remains bullish and the recent pullback is considered corrective. Yesterday’s sell-off resulted in a break of support at 4943.00, the Jun 11 low. This highlights potential for a deeper short-term retracement and sights are on 4894.90, a Fibonacci retracement. Initial resistance is seen at 5046.00, the Jun 12 high. A break of this hurdle would signal a resumption of the uptrend.
• The uptrend in S&P E-Minis remains intact and the contract traded higher Wednesday. Price has recently cleared 5368.25, the May 23 high and bull trigger. The move confirmed a resumption of the uptrend. The continuation higher has resulted in a break of the 5400.00 handle. This opens 5462.77 next, a Fibonacci projection. Key short-term support has been defined at 5205.50, the May 31 low. Initial support lies at 5333.75, the 20-day EMA.

This Week's Gains in WTI Futures Considered Technically Corrective

• WTI futures have traded higher this week. For now, short-term gains are considered corrective and the trend direction remains bearish. However, resistance at $78.38, the 50-day EMA, has been pierced. A clear break of this average would expose the key short-term resistance at $80.62, the May 1 high, where a break is required to cancel a bear theme. On the downside, a resumption of weakness would open $71.33, the Feb 5 low.
• Gold is trading closer to its recent lows. A sharp sell-off on Jun 7 reinforces a short-term bearish theme. The yellow metal has traded below the 50-day EMA, at 2313.7. The break confirms a resumption of the reversal that started May 20 and signals scope for a deeper correction. This has opened $2277.4, the May 3 low. Clearance of this price point would strengthen a bearish theme. Initial firm resistance to watch is $2387.8, the Jun 7 high. 

Date	GMT/Local	Impact	Country	Event
14/06/2024	1230/0830	**	US	Import/Export Price Index
14/06/2024	1230/0830	**	CA	Monthly Survey of Manufacturing
14/06/2024	1230/0830	**	CA	Wholesale Trade
14/06/2024	1330/1530		EU	ECB's Schnabel in European Fiscal Board Meeting
14/06/2024	1400/1000	**	US	U. Mich. Survey of Consumers
14/06/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly
14/06/2024	1730/1930		EU	ECB's Lagarde Speech at Dubrovnik Economic Conference
14/06/2024	1800/1400		US	Chicago Fed's Austan Goolsbee
14/06/2024	2300/1900		US	Fed Governor Lisa Cook
15/06/2024	1615/1815		EU	ECB's Schnabel Speech at Lions Club Dortmund