Daily Market Outlook, May 30, 2024

Munnelly’s Macro Minute…

“Markets Jittery On US Yield Rise Ahead Of Auctions & Inflation Data”

Asian stocks and currencies fell on Thursday due to restrained risk appetite from US Treasury yields near this year's peak. The MSCI Asia Pacific Index dropped to a three-week low, with South Korea and Japan being the most affected. US stock futures contracts also declined in Asian trading. Hong Kong-based Chinese technology shares approached a technical correction. Treasury bonds fell across the curve following weak demand in the $44 billion auction of seven-year securities. Concerns increased about rising yields in an environment where the Federal Reserve is not rushing to lower rates to finance the US deficit.

With the absence of new significant market-moving events on Thursday the expectation of higher interest rates for a longer period of time is likely to continue, unless upcoming economic data proves otherwise. It is doubtful that the highly anticipated data releases at the end of the week, including euro zone inflation and the U.S. PCE report, will have a substantial impact on the global monetary policy outlook, particularly as inflation in major economies remains inconsistent. The unexpected increase in consumer prices in Germany has drawn more attention to the upcoming bloc-wide inflation data on Friday, which precedes the anticipated rate cut by the European Central Bank next week. Although a rate cut in June is widely expected, the lack of clear guidance from ECB policy makers on the extent and pace of future rate cuts is causing unease in the markets. As investors prepare for the important releases on Friday, market conditions are becoming increasingly nervous. The two-year U.S. Treasury yield is trading just shy of the 5% mark, while the 10-year yield also remains elevated compared to recent weeks. Although U.S. yield spreads compared to other countries may not be widening significantly in favor of the dollar, they are still wide enough to maintain the dollar as the preferred currency for investors.

Overnight Newswire Updates of Note

Fed’s Bostic Says Many Inflation Measures Moving To Target Range
RBA Sees Some Households Struggling, Suggesting Rate-Hike Limits
Australian Building Approvals Muted And To Stay Subdued All Year
New Zealand Building Permits Issuance Declines -1.9% In April
Fed’s Beige Book Points To Modest Growth In US Economy, Prices
Japanese Yen Appreciates As Traders Bet On Another Rate Hike By BoJ
Oil Steadies As Traders Look To OPEC+ Meeting, US Inventories
Salesforce Drops On First-Ever Single Digit Sales Growth Outlook
HP Reports Sales That Top Estimates On First PC Boost Since 2022

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0750 (1.4BLN), 1.0775-85 (1.6BLN), 1.0800 (1.2BLN)
1.0815-25 (2.6BLN), 1.0830-40 (1BLN), 1.0850 (2BLN)
USD/CHF: 0.9100 (353M), 0.9150 (310M), 0.9225-30 (480M)
GBP/USD: 1.2660 (547M), 1.2700 (300M), 1.2730-40 (430M), 1.2775 (518M)
EUR/GBP: 0.8500 (500M)
AUD/USD: 0.6525 (877M), 0.6560-80 (807M), 0.6600 (488M), 0.6625 (484M)
USD/CAD: 1.3695-1.3700 (1BLN), 1.3800 (247M)
USD/JPY: 156.00 (1.9BLN), 156.05-15 (1.4BLN), 156.50-55 (1.2BLN)
157.00 (800M), 157.50 (531M), 158.00 (891M)
EUR/JPY: 169.00 (549M), 169.70 (646M), 170.00 (730M), 170.25 (500M)
FX options with one-week expiry are now factoring in the risk from the European Central Bank (ECB) and Non-Farm Payrolls (NFP) data. The implied volatility indicates a risk-off sentiment and also recognizes the volatility risk. The implied volatility for EUR/USD 1-week FX options has increased by 1.0 to 5.9 since the ECB inclusion. Despite the broader FX risk-off boost, this increase is not significant. The market has already priced in a 25 basis points ECB cut for next Thursday. It is expected that further gains in 1-week implied volatility will reflect the NFP risk from Friday.

CFTC Data As Of 24/05/24

Japanese Yen net short position is -144,367 contracts
British Pound net long position is 1,053 contracts
Euro net long position is 41,475 contracts
Bitcoin net short position is -890 contracts
Swiss Franc posts net short position of 40,645 contracts
Equity fund managers raise S&P 500 CME net long position by 25,714 contracts to 946,576
Equity fund speculators increase S&P 500 CME net short position by 38,575 contracts to 317,912
Gold NC Net Positions: $229.8K vs $204.5K