Euro reacts to elections
June 10, 2024
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–EUR was 108.93 (ECM4) on Thursday’s close and has now plunged to 107.55 following weekend elections in Europe. In Germany AfD made a strong showing and in France, Macron is calling for snap elections after his party was trounced, while “Italy’s PM Meloni comes out on top in EU vote, strengthening her hand…and boosting her standing both at home and abroad.” (RTRS). US equities are also under profit-taking pressure as are US treasuries, with downside follow-through in the wake of Friday’s higher than expected 272k NFP. Supply is a concern with 3, 10 and 30 year auctions slated this week (Mon, Tues, Thurs).
–Yesterday, “A Ukrainian military source cited by Sky News confirmed this is’ the first Ukrainian Air Force (UAF) air-delivered munition delivered against a target within Russia’.”
–This week’s news includes CPI and FOMC on Wednesday. FOMC dot-plot will shave at least one ease from the estimate for 2024, as we’re already halfway through the year. As of Friday’s settles in December SOFR contracts, the market is pricing between 1 and 2 eases in 2024 and another 3 cuts in 2025. SFRZ4 settled 9505, or 4.95%. Current EFFR is 5.33, one ease would be 5.08% or 9492 while two cuts would equate to 4,83% or 9517. Of course, SOFR contracts also price odds for FOMC meetings embedded in their terms, but for now we can say the market is priced for 1 to 2 cuts in 2024, and SFRZ5 is 9597.5 or 4.025%. Therefore Z4/Z5 is -79.5. The SOFR curve repriced on Friday from a lean toward 4 cuts in a given year to more like 3-3.5.
–Implied vol was hit in rate futures, though the expiring midcurves aren’t particularly cheap. 0QM4 9550^ settled 18 vs SFRM5 9550.5, 2QM4 9600^ settled 18.0 vs SFRM6 9604.5. VIX ended Friday at 12.22, A WSJ article over the weekend: ‘Beneath the calm market, stocks are going haywire’. Here’s a snippet:
“Under the calm surface, however, there is furious paddling. Only once in the past 25 years have stocks swung about like this while the overall market stayed so placid. Traders in the options markets are betting on its continuing: Prices indicate the biggest swings in stocks for at least 10 years relative to the prevailing calm for the S&P 500.”
–Kevin Muir (MacroTourist) had cited the ‘dispersion trade’ as a possible risk some time ago…
