MNI US MARKETS ANALYSIS - Markets See Johnson Surviving Vote

US TSYS SUMMARY: Cheapening With Broad Risk-On Sentiment

• Cash Tsys have cheapened through European hours with a re-firming in S&P E-minis and oil broadly holding to gains made late last week.
• There are few obvious drivers although it does follow a shift in CFTC positioning with hedge funds last week flipping to net short 10-year note futures for the first time since Jun’21, along with some sellside analysts shifting to more aggressive ECB rate forecasts.
• 2YY +2.5bps at 2.677%, +1.7bps 2.951%, 10YY +1.8bps at 2.952% and 30YY +2.0bps at 3.106%.
• TYU2 is unchanged on the day at 118-17+, towards the low end of Friday’s range amidst below average volumes. Having moved further away from the 50-day EMA of 120-07+ last week, the corrective cycle appears over as it next eyes a key short-term support at 118-01+ (May 18 low).
• No data of note today and FOMC in media blackout ahead of the Jun 14-15 meeting.
• Bill issuance: US Tsy $45B 13W, $42B 26W Bill auctions – 1130ET

STIR FUTURES: Fed Hike Pricing Continues Post-Payrolls Nudge Higher

• Fed Funds futures have ground higher overnight and through the European morning on broader risk-on sentiment with E-minis firming rather than any obvious drivers.
• It’s broadly a continuation of the small firming seen post-payrolls as the UK returns from the Jubilee bank holiday, with limited moves over immediate meetings (52bp Jun, 102bp Jul) but beyond that firming nearer post-May FOMC highs with 144bp for Sep and 200bps to year-end (five meetings).
• Limited scheduled drivers today: the FOMC is now in media blackout ahead of the Jun 14-15 meeting and no data of note.

Cumulative hikes implied by FOMC-dated Fed Funds futures (%pts)Source: Bloomberg

MNI POV: The ECB Is Crystal Clear: It's Time To Act

• The ECB is now clear that the APP will end in early July, policy rate lift-off will occur later in the same month and policy rates will reach zero by September.
• While GC members have signalled consensus around President Lagarde's recent blog post (signposting the path for policy normalisation in the coming months), there seems to be some disagreement over whether policy normalisation is recognition that negative rates are no longer appropriate (but that some degree of policy support is still necessary), or whether it should usher in a significantly more restrictive monetary policy.
• As such, while a 50bp hike in July is a low risk scenario, it is nonetheless a risk. However, the probability is rising of a one-off 50bp hike or series of such hikes from September onward.
• Baseline Scenario: The ECB announces that net purchases under the APP will end in July and will indicate that policy rate liftoff will occur later in the same month. Policy rates will reach zero by September and the ECB will signal that it stands ready to raise rates further at subsequent meetings, provided that the data is supportive
• Hawkish Scenario: In addition to announcing the end of the APP and indicating rate liftoff in July, the ECB signals that it is willing to hike rates more aggressively, perhaps by explicitly referring to the 'magnitude' of future rate increases being data dependent. Furthermore, the ECB stresses that second round risks are intensifying and that it stands ready to adjust all policy instruments as necessary to return inflation to target.
• In a very hawkish scenario, the ECB could indicate the possibility of a 50bp rate hike in July, and even signpost the pace and scale of normalisation after Q3.
• Dovish Scenario: The ECB still announces the end of APP and rate liftoff for July, but stresses that any policy normalisation will be gradual, effectively quashing the prospect of 50bp hikes further down the road. The ECB is seen to shift the balance (slightly) away from inflation risks to economic growth risks in light of the ongoing Russian-Ukraine war.

UK: No Confidence Vote in PM Johnson Triggered

• The timeline for a no confidence vote in PM Johnson has accelerated quickly - weekend press had touted Wednesday as the most likely day for a vote, but that's been brought forward to today, with BBC reporting the vote will take place at 1800BST/1300ET.
• Parliament returns today from the extended Bank Holiday weekend and 1922 committee head Graham Brady has announced the 15% threshold of no confidence letters has been reached, triggering a vote.
• Half +1 of sitting Conservative MPs need to vote against Boris Johnson to trigger a leadership election, making 180 MPs the threshold for today's vote.
• If this figure is reaching, a multi-round leadership contest follows (which Johnson is not allowed to enter), which could include the party membership (around 200,000) depending on who enters the race. This process usually takes weeks/a month, during which Dominic Raab (deputy PM) would lead the government.
• If the 180 threshold is not reached, Boris Johnson remains PM and leader of the Conservative Party. He is also immune from further no confidence votes for 12 months.
• Is he likely to survive the vote? The BBC write "most seem to think there isn't a huge amount of coordination between those trying to oust Mr Johnson. this means "there isn't a plan, a strategy or a candidate". In other words, they agree on wanting Boris Johnson out, but they don't agree on much else."
• Boris Johnson is highly favoured to win this evening, with betting markets pricing a ~73%chance of victory for the Prime Minister.
• Nonetheless, the betting markets surrounding an exit date for the PM make for pessimistic reading for No.10. The most likely exit date for Boris remains '2023 or later', but the implied odds have fallen sharply - to ~51% from over 80% in mid-May.
• The implied odds for Q3 this year have been rising steadily, and are now at ~30% from ~15% in mid-May.

FOREX: GBP on Top Ahead of No Confidence Vote

• GBP has been the focal point for G10 currency markets so far Monday, with the PM Boris Johnson facing a no confidence vote from his lawmakers this evening. Johnson is expected to win the vote, which requires 180 of his lawmakers voting against him to be upheld. This would make the PM immune from further no confidence votes for the next 12 months - potentially removing an element of political uncertainty.
• EUR/GBP has reversed off this morning's 0.8590 multi-week high to turn lower - narrowing in on the Friday low of 0.8540. A break below here opens the next key levels of support at 0.8506/8433, marking the 20-day EMA and May 23 low.
• The greenback is the weakest currency in G10, prompting the USD Index to partially reverse last Friday's gains. This puts the index back on course to test the key support at the 50-dma, which today sits at 101.71.
• Lastly, commodity-tied currencies are trading well, putting CAD and NOK near the top of the G10 pile. Oil-tied FX continue to take a lead from oil prices, with Brent futures holding either side of the $120/bbl level.
• Looking ahead, data and central bank speakers are few and far between, with markets now in the media blackout periods for both the ECB as well as the Fed.

FX OPTIONS: Expiries for Jun06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0647-50(E1.6bln), $1.0675(E743mln), $1.0700(E1.4bln), $1.0800(E1.5bln)
• USD/JPY: Y127.00($1.2bln), Y129.00-05($540mln), Y130.00($545mln)
• EUR/GBP: Gbp0.8750-75(E516mln)
• USD/CAD: C$1.2500($600mln), C$1.2650($600mln), C$1.2725-35($1.7bln)
• USD/CNY: Cny6.80($1.2bln)

Price Signal Summary - FI Futures Remain Vulnerable

• In the equity space, S&P E-Minis are unchanged and futures maintain a bullish short-term tone. Attention is on the 50-day EMA that intersects at 4181.33 today. A clear break of this average would strengthen short-term bullish conditions and signal scope for a climb towards key resistance at 4303.50, the Apr 26/28 high. Gains are still considered corrective and the primary trend direction is down. First support to watch is 3960.50, May 26 low. The short-term outlook in EUROSTOXX 50 futures remain bullish following recent gains and the break above the 50-day EMA. Scope is seen for a climb towards 3883.00, Apr 21 high and the key resistance at 3944.00, Mar 29 high. A break of the latter would strengthen bullish conditions. Short-term support has been defined at 3576.00, May 19 low. Initial support lies at 3725.80, the 20-day EMA.
• In FX, EURUSD continues to trade just ahead of resistance at 1.0769. This is where the top of a bear channel, drawn from the Feb 10 high, intersects today. The channel top marks a key short-term resistance where a break would highlight a strong bullish outlook. A reversal lower would instead open support at 1.0533 initially, the May 20 low. GBPUSD maintains a firmer short-term tone and attention is still on the key resistance at the 50-day EMA, at 1.2696 today. This level represents an important pivot level. Initial firm support is at 1.2438, May 20 low. USDJPY is bullish. Sights are on the bull trigger at 131.35, May 9 high where a break would confirm a resumption of the primary uptrend. Key S/T trend support has been defined at 126.36, May 24 low.
• On the commodity front, Gold traded higher Friday, before pulling back. A firm resistance is at the 50-day EMA, which intersects at $1875.6 today. A break of this average is required to suggest scope for a stronger recovery. For bears, a reversal lower would refocus attention on the key support and bear trigger at $1787.0, May 16 low. Initial support to watch is at $1828.6, Jun 1 low. In the Oil space, WTI futures remain in an uptrend. The contract last week cleared resistance at $116.43, Mar 7 high and the former contract high. This confirmed a resumption of the primary uptrend. $120.00 is being challenged, a clear break would strengthen bullish conditions and open $122.00.
• In the FI space, Bund futures remain soft. Price has cleared support at 150.97, May 9 low and a recent bear trigger. The contract has also breached 150.00. This opens 148.85, 1.236 projection of the Apr 28 - May 9 - 12 price swing. Gilts have started the week on a softer note and the contract gapped lower at the open. This confirms a resumption of the downtrend. The contract has also traded through 115.00, 2.00 projection of the May 19 - 24 - 26 price swing.

EQUITIES: Tech Stocks Rallying

• Asian markets closed stronger: Japan's NIKKEI closed up 154.32 pts or +0.56% at 27915.89 and the TOPIX ended 5.97 pts higher or +0.31% at 1939.11. China's SHANGHAI closed up 40.914 pts or +1.28% at 3236.372 and the HANG SENG ended 571.77 pts higher or +2.71% at 21653.9.
• European equities have posted strong gains, with tech stocks (and to a lesser extent energy) leading the way on speculation that the China tech company crackdown is past the worst: the German Dax up 151.79 pts or +1.05% at 14605.84, FTSE 100 up 91.83 pts or +1.22% at 7629.64, CAC 40 up 74.45 pts or +1.15% at 6559.77 and Euro Stoxx 50 up 51.48 pts or +1.36% at 3834.75.
• U.S. futures are higher, also led by tech, with the Dow Jones mini up 283 pts or +0.86% at 33171, S&P 500 mini up 46.75 pts or +1.14% at 4153.75, NASDAQ mini up 189.75 pts or +1.51% at 12743.

COMMODITIES: Silver Leads Gains As Dollar Slips

• WTI Crude up $0.42 or +0.35% at $119.9
• Natural Gas up $0.31 or +3.58% at $8.84
• Gold spot up $0.36 or +0.02% at $1851.32
• Copper down $3.35 or -0.75% at $443.6
• Silver up $0.32 or +1.47% at $22.2412
• Platinum up $12.43 or +1.22% at $1028.87