Wrap

It appears that  Italy’s 2 leading political parties have set aside difference and are likely to form a new Government as early as tomorrow.Gone are Italian Worries but now replaced by trade wars.Canada said they will slap a Dollar per Dollar tariff on US goods,Mexico will place tariffs on Pork  and other food  products .The EU said they will retaliate with tariffs of their own but which goods is still to be determined.All Sides outside of President Trump say this is not a good Move.An EU trade Minister said that “Todays Steel tariffs  are a bad day for World trade”. Negative sentiment prevailed  especially for Export  driven sectors such as  Consumer Staples and industrials.Spoos tested the 2700 handle maybe looking for some stops below  but failed to find any and in turn bounced.

The rhetoric is harsh and Sentiment is sour but Canada  and Mexico need US consumers more than US needs them.USA is largest trading partner of both Canada and  Mexico so lets see who blinks first  in this  game of Chicken,The European Union is the Number one trading partner of the US with China Second.

Tomorrow payroll number is an afterthought ,unless something well outside of range of Expectations would occur it very well could be a non event

 

A few notes:

Just what The Doctor ordered for Energy complex as EIA reported a hefty Draw in US oil stocks of 3.6 Mln. the draw actually bigger if we exclude the Padd 5 build of 1 Mln. Oil eXports adding to the Bullish oil environment by Jumping  higher by 14% vs last weeks number. Crude did rally touching new Pit session highs, but problem is Brent did  as well providing only a small boost to the brent/ CL spread.The activity in brent today could make for an interesting  European /London close.

Both Hogs and Cattle trading/trending lower as Fears of Mexican trade retaliation weighs. Mexico Number destination for US pork and #3? for US beef,Soybeans also heavy as retaliation worries persist.

Risk Off!

latest  Risk Off move comes from Comments from Wilbur ross.pay Close attention to NAFTA comments highlighted below. This has caused a leg lower in CAD and MXN

Alerts History

  • 31-May-2018 08:42:58 AM – U.S. COMMERCE SECRETARY ROSS SAYS EUROPEAN UNION, CANADA AND MEXICO WILL FACE STEEL AND ALUMINUM TARIFFS BEGINNING AT MIDNIGHT TONIGHT
  • 31-May-2018 08:42:58 AM – ROSS SAYS EU, CANADA, MEXICO WILL PAY 25 PCT STEEL TARIFF AND 10 PCT ALUMINUM TARIFF
  • 31-May-2018 08:42:58 AM – ROSS SAYS AN ARRANGMENT HAS BEEN MADE FOR ARGENTINA, AUSTRALIA AND BRAZIL TO HAVE NON-TARIFF LIMITS ON THEIR STEEL, ALUMINUM EXPORTS TO UNITED STATES
  • 31-May-2018 08:42:58 AM – ROSS SAYS THERE IS POTENTIAL FLEXIBILITY GOING FORWARD TO MAKE CHANGES; TRUMP HAS ABILITY TO DO ANYTHING HE WISHES ON TRADE
  • 31-May-2018 08:42:58 AM – ROSS SAYS IF ANY PARTY RETALIATES, THAT DOESN’T MEAN THERE CAN’T BE MORE NEGOTIATIONS
  • 31-May-2018 08:42:58 AMROSS SAYS DECISION ON TARIFFS FOR MEXICO AND CANADA WAS TAKEN AFTER NAFTA TALKS TOOK TOO LONG
  • 31-May-2018 08:42:58 AM – ROSS SAYS THERE IS NO LONGER A PRECISE DATE AS TO WHEN NAFTA TALKS WILL CONCLUDE

Morning 5-31

Italian 2-year yield this week, Tuesday +180 bps, biggest rise since 1992, Wednesday -100 bps, biggest fall since 1996, today -45bps.
Two Polls Show between 60-72% Of Italians Want To Stay In Euro, 23-24% Want To Leave Currency – Reuters.
Italian 10 year yields, now trading below Tuesday’s lows, net changes for this week +46 bps on Tuesday, Wednesday -25 bps, and today -13 bps. The take away is that Yields are below Tuesday lows pricing out all the worries of Country leaving Eurozone. In the Futures, complex BTPs experienced a halt in Overnight trade due to a Volatility interrupt as prices jumped 100+ ticks in a minute. Still no new Government formed in Italy so the saga will continue today, markets now accepting some turmoil in Italy but leaving the Euro is priced out for the Moment. The other place of Worry is Spain where the current leader Rojoy will likely fail a Confidence vote on Friday and thus be forced to step down. This is not a referendum or vote on The Euro he is being forced aside due to Political corruption thus little impact on broader markets.Gold steady again,
A minor Surprise in Eurozone inflation as it BEAT consensus 1.1 % vs f/c 1% on the core, headline 1.9% vs. f/c 1.6% a pleasant surprise indeed. Not so much a Surprise is that US will go forward with tariffs on EU steel and Aluminum as final efforts to avert failed. Trumps timeline for a deal expires tomorrow and the EU would not give in to the US demands. Watch for retaliatory moves from EU and increase in Trade War rhetoric. Markets not bothered by trade war talk All European Stock markets higher with Exception of Dax, US indices all steady. Euro With a small Bid, Dollar index down .3% and Jpy little changed as Relief/Risk ON theme settles over markets. As Long as No Surprise tape bombs from Italy or trump, Markets may take on a familiar day before payrolls type trade.
The spread between WTI and Brent has been trending lower for last month touching levels not seen since Mid-2015. Simple explanation WTI=too much supply Brent=not enough Supply. Yesterday’s API report just fed into this narrative as Oil and Distillates showed a surprise Build in Stocks when a draw was expected. The August Spread is shows a $10 difference between the price of the two grades of Oil and it appears that no bottom is in Sight.
US economic Calendar:
• 7:30 Core PCE
• 8:42 Chicago PMI
• 9:30 EIA Oil numbers
• G-7 Finance Ministers meet in Canada
Fed Speak:
11:30 Bostic-voter Centrist
12:00 Brainard –Voter Dove
Some FX Vol Commentary via IFR
[FX OPTIONS SNAPSHOT]
[London, May 31, 09.45GMT] The potential for Italy to form a new government has
Prompted a relief rally in the euro and risk more broadly, with Italian bond
yields and banking stocks off their worst. Shorter dated expiry implied vols
have been hit hard from their spike highs, but there is ongoing demand for
options to protect against any renewed EUR sell off amid fears that Italy could
still go back to the polls. This is certainly apparent when looking at the
limited setbacks in EUR/USD risk reversals falling after 3-month [nL2N1T208A].
EUR/USD is struggling above 1.1700 so far, despite above forecast EZ inflation,
as a huge 10bln of 1.1700-50 expiries and related hedging dominates
[nL2N1T208X]. USD/JPY vols have eased too, but as with EUR/USD, the risk
reversals stay firm for JPY calls to reflect the ongoing downside concerns
[nL2N1T207W]. Cable recovery tracks EUR/USD to regain 1.3300 and press back on
front end implied vols, although GBP put options retain a premium with fears of
any renewed drop targeting huge 1.3000 barriers. Richard.Pace@tr.com

Bank Of Canada

With all the excitement surrounding Italy  and Euro zone,Bank OF Canada Policy statement basically went unnoticed.The BOC  left rates unchanged  but statement that followed turn hawkish as  they Dropped reference to being cautious on rates and Said “higher rates will be needed to keep Inflation near target” Below is 1 minute chart of Canadian Dollar .2 year yields in Canada adjusted moving higher by 6 Bps on the release.

caddd

 

Hedge Fund Blowout

yesterday’s near historic moves in italian Yields may have been helped by stop Loss orders.This note from Bloomberg:

BN) Field Street Macro Fund Is Said to Extend Italy Losses to
50%
Following the market sell-off Tuesday, the firm’s Global
Investments fund extended losses for May to 50 percent from
wagers on Italian debt, said the people, who asked not to be
identified because the matter is private. The firm has since
exited the money-losing position. The fund, which wagers on
macroeconomic trends, had plunged about 15 percent in the first
three weeks of the month, Bloomberg reported late Tuesday. A
spokesman for the New York-based firm, which oversees about $4 Billion

Savona to Withdraw canidiacy

If true one step closer in forming a New italian Government

 

[FOREX WATCH SQUAWK BOX (R)] >>>
[15:40 BUZZ-EUR/USD-5-Star rattles bears further]
* EUR/USD takes out May 29 high and sets a new session high
* Italy’s 5-Star calls for Savona to withdraw candidacy for econ minister
* 5-Star makes request to allow government to be formed
* IT-De and DE-Us yield spreads tighten further to aide EUR/USD’s gains

Risk On! and higher oil

Spoos Traded up above yesterdays pit highs and Filled gap left from Fridays close. Energy XLE  +2.5% as  Comments from Saudi arabia hint towards the Group not cutting production at June meeting thus causing a big Short squeeze in oil and Products.WTI and Brent +2%,HO and Gasoil +1.8% and gasoline +1.6% Russell 2000 another new all time high scored today.Italy’s Mib off session highs but likely to  end session 1.5% higher . No news is good news from Italy as markets optimistic on formation of A new  Government.Treasuries actually cutting some losses not adding to them on the move higher in Spoos/Risk.Maybe yesterday’s market reaction a little over done so a correction today.

In WTI watching 68.94 level as a place where stops maybe centered,a break of this could help push prices higher as shorts provide the fuel.

Grains being sold as the Seasons first Crop progress and condition report  released yesterday  was a surprise to traders as it showed crops doing better than market had forecast. Wheat -2.8%,Corn -1.8% and Soy -1.26%.

Still watching for any Italian headlines that may turn this Bullish Sentiment sour.

Morning 5-30

The storm appears to have passed as Italian Bonds are bid after a successful five and 10-year auction this morning. Bid to cover or demand was good enough to assuage fears of an all-out collapse in Italian bond prices and thus a risk on move occurred post Auction. Change in Bps for Italian Bonds: 2s -117,3s -114,10s -30 and 30s -21 clawing back some of yesterday’s losses, MIB Italy’s benchmark Stock index +2% this morning. Some of the optimism in buying Italian Assets comes from comments from the leader of the five star party, Di Maio who called for collation talks to restart. The five star and the league are the two populous parties who are trying to forge a Government, any comments from these groups that shows cooperation is dead and snap elections must be called will weigh on Euro and BTPs. Bunds -129 ticks and Buxl, 30-year bunds -246 ticks. Both Bunds and Buxl are trading below yesterday’s lows. I will be watching yesterday’s lows in Bonds and 10s to see if any stops lay below. Change in yields for treasuries In Bps 2s +8,3s +9 5s and 10s +10 and 30s +7.
RISK on shows all European Stock markets higher Spain and Portugal +~1%,DAx +.7% Stoxx 50 +.3% and Spoos +.5%.Dolalr Index -.5%, JPY -.5% and Euro +.9%.Unwinding yesterday’s moves. Gold trading steady stuck in a tight range Silver and copper little changed this Morning. Yesterday’s Move Lower in Risk was not just all about Italy recall that Trump sparked some worries about a trade war. From Reuters “In an unexpected change in tone, the United States said on Tuesday that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property.” China as expected said they are willing to fight back if Washington wants a trade war. Commerce Secretary Ross will be heading to China this weekend for another round of trade talks.
US economic calendar shows ADP, second revision of GDP, Trade balance and finally beige book. These numbers are of Secondary importance as all eyes will be on news wires to see if Italy can form an Interim Government and not call for new elections.
One comment Oil. It looks Like Saudi Arabia and Russia did not consult all of the members of the production Cut group before saying they will add production. This has ruffled a few feathers in the group and thus possibly causing some delay in raising output.