US futures were slightly lower, with tech companies indicating declines as the AI-fueled rally showed signs of fading, even as tech funds had their largest weekly inflow on record, which Bank of America’s Michael Harnett said hints at “AI capitulation.” As of 8:00am ET, S&P futures were down 0.1%, with Nasdaq futures also in the red.

As previewed yesterday, Wall Street braced for the biggest triple witching option expiration day on record, where some $5.1 trillion worth of options tied to indexes, stocks, and ETFs mature…

… which could “unclench” record $10 billion in dealer gamma and spark sharp market moves as “pins” expire.

Bond yields are 2-4bp lower this morning, reversing a move higher, after Europe’s ugly PMI prints (see below) which also pushed the EUR lower and the USD higher. Commodities are mixed; oil is modestly lower; base metals are higher. Today’s macro focus will be the flash PMIs at 9.45am ET; consensus expects a mfg print of 51.0 while the PMI-Srvcs is seen printing 54.0 survey vs. 54.8 prior.

In premarket trading, tech names are mostly lower: NVDA -1.8%, QCOM -71bps, MSFT -25bps and AAPL -23bps. Spirit AeroSystems jumped 4% after Reuters reported Boeing is nearing a deal to buy back the aircraft-parts supplier. Here are the other notable premarket movers:

• Abacus Life falls 21% after its offering of 10 million shares priced at $8 per share, representing an 18% discount to last close.
• Gilead advances 3%, extending Thursday’s gains, after interim results from a trial of the firm’s drug lenacapavir showed 100% efficacy for the prevention of HIV in cisgender women.
• Sarepta Therapeutics soars 37% after the FDA approved expanded use of the company’s gene therapy to treat children aged four and above with Duchenne muscular dystrophy.
• Smith & Wesson slips 3% after the gun maker said sales in its first quarter would be about 10% lower year over year.

Risk-off trades were also in vogue in Europe, where the fallout from French President Emmanuel Macron’s decision to call a snap election continued to make itself felt in the region’s economy.  The yield on Germany’s benchmark 10-year bonds tumbled seven basis points after manufacturing and services PMI readings for Europe’s two biggest economies fell short of expectations. The rate on US Treasuries also declined, while the dollar held near a 2024 high after the PMI data, which underscored how French political risk is dragging on growth. Traders now see a second ECB cut by October and an 80% chance of a third this year, up from about 65% on Thursday.

Key numbers:

• Euro Area Composite PMI (June, Flash): 50.8, missing consensus 52.5, last 52.2.
  • Euro Area Manufacturing PMI (June, Flash): 45.6, missing consensus 47.9, last 47.3.
  • Euro Area Services PMI (June, Flash): 52.6, missing consensus 53.4, last 53.2.
• France Composite PMI (June, Flash): 48.2, missing consensus 49.4, last 48.9.
• Germany Composite PMI (June, Flash): 50.6, missing consensus 52.7, last 52.4.
• UK Composite PMI (June, Flash): 51.7, missing consensus 53.0, last 53.0.

Macron’s shock call for a vote has stoked volatility in the region’s markets and left investors worried that an economic rebound could be snuffed out by far-right leaders, should they prevail in elections. European stock funds suffered their fifth week of outflows, according to Bank of America strategists, citing EPFR Global data.

“The most important problem for us is the economic outlook for the euro zone,” said Benoit Peloille, chief investment officer at Natixis Wealth Management. “It really poses a risk.”

And speaking of European stock markets, the Stoxx 600 was on course for its worst day this week, dropping 0.7%,  with banks the worst performers, with construction and tech also falling. Here are the most notable European movers:

• Zealand Pharma shares soar as much as 27% to a record high after the Danish drugmaker’s next-generation weight-loss compound petrelintide showed positive results in an early-stage trial, with analysts noting its impressive tolerability.
• Britvic shares climb as much as 16% after its board unanimously rejected a second takeover proposal from Carlsberg. Shares in the UK beverage maker touch a record-high 1,176p, heading toward Carlsberg’s 1,250p/share offer.
• RENK shares rise as much as 2.4% as analysts presented bullish takeaways from this week’s defense trade show Eurosatory, with Berenberg in particular, highlighting the strong demand outlook for the German defense company’s new ATREX transmission system.
• Informa shares rise as much as 1.6% after the events and publishing firm reported 10.1% underlying revenue growth for the first five months of the year, likely beating consensus estimates that had been expecting around 8% growth in the first-half, Morgan Stanley said. The company maintained guidance that was raised in May.
• ITV shares jump as much as 5.2%, most since March, as JPMorgan analysts say the British broadcaster’s advertising revenue in the current quarter will be much stronger than its previous guidance, thanks to a boost from the European Football Championship.
• Kion shares fall as much as 9.7%, the steepest decline since October 2023. UBS (buy) lowers its price target on the German industrial firm, saying second-half order spikes are always tough to rely on.
• REC Silicon shares drop as much as 15% after the company provided an update on its Washington facility’s delayed clean up process, which caused a setback in the delivery of product.
• Intercos falls as much as 7.5% after holder Innovation Trust completed its accelerated bookbuilding offering of 6.5m shares at €15.20 a share, representing ~8.5% discount to last close.
• Varta shares fall as much as 9.3%, the most in six weeks, after the company warned market conditions in the energy storage system market have deteriorated further, prompting it to lower its annual revenue goal.

Earlier in the session, Asian stocks traded lower, led by losses in Hong Kong, as a global tech-driven rally showed signs of fatigue, while concerns persist over China’s economy. The MSCI Asia Pacific Index fell as much as 0.6%, with TSMC, Samsung and Tencent among the biggest drags. Declines were also notable in South Korea and Taiwan, while a tumble in the Philippines’ main benchmark put it on course to enter a technical correction. For the week, the regional gauge is little changed.
Hong Kong’s Hang Seng dropped as much as 2% while mainland gauges also slid as Beijing is seen as reluctant to step up stimulus. US stocks fell overnight as the high-flying tech group led by Nvidia came under pressure amid signs of overheating.

Canada’s Prime Minister Justin Trudeau is preparing potential new tariffs on Chinese-made electric vehicles to align the nation with actions taken by the US and European Union, Bloomberg reported. The government still has to make final decisions on how to proceed, but it’s likely to announce soon the start of public consultations on tariffs that would hit Chinese exports of EVs into Canada, according to officials. In May the US announced a plan to nearly quadruple tariffs on Chinese-manufactured electric vehicles, up to a final rate of 102.5%, while the European Union said last week it plans to increase tariffs to as high as 48% on some vehicles.

In FX, the Bloomberg Dollar Spot Index was little changed, pulling back from near this year’s high ahead of fresh data later today. Dollar demand over the Tokyo benchmark fix saw spot offers attached to 159 strikes — worth a collective $2.05 billion and expiring between today and June 26 — get taken out, according to an Asia-based FX trader. European political and fiscal risk, an easier stance from BoE and a steady slide in JPY have countered the recent run of softer US data, Tim Riddell, director of strategy at Westpac Banking Corp. wrote in a note. “Despite remaining contained within its range, the sharpness of recent DXY moves suggests that a directional move may be developing.”

• EURUSD, down 0.13%, which has been under pressure since French President Emmanuel Macron’s surprise decision to call a snap election, fell to its lowest in a week.
• GBPUSD +0.1% to 1.2670 after better than expected May UK retail sales data, including revisions. The gain was brief and the cable is now little changed.

In rates, treasuries hold an advance that was led by core European rates, with German bonds outperforming after soft PMI data across Europe and US PMIs due later Friday. US long-end tenors lag slightly, extending the recent steepening in 5s30s spread beyond Thursday’s highs. German 10-year yields fell 6bps to 2.38% while treasury yields were richer by 2bp to 4bp across the curve with front-end- and belly-led gains steepening 5s30s spread by around 1bp on the day; 10-year yields trade around 4.225%, richer by 3bp vs Thursday’s close with bunds outperforming by 4bp in the sector

In commodities, oil prices decline, with WTI falling 0.2% to trade near $81.15 a barrel. Spot gold rises ~$6 to $2,366/oz. Bitcoin continues to slip and now sits beneath USD 64k, with Ethereum also slipping below USD 3.5k.

Looking at today’s calendar, US economic data slate includes June S&P Global manufacturing and services PMIs (9:45am) and May Leading index and existing home sales (10am). No Fed officials scheduled to speak during the session

Market Snapshot

• S&P 500 futures down 0.2% to 5,465.75
• STOXX Europe 600 down 0.5% to 516.50
• MXAP down 0.5% to 179.78
• MXAPJ down 0.7% to 568.66
• Nikkei little changed at 38,596.47
• Topix little changed at 2,724.69
• Hang Seng Index down 1.7% to 18,028.52
• Shanghai Composite down 0.2% to 2,998.14
• Sensex little changed at 77,422.88
• Australia S&P/ASX 200 up 0.3% to 7,795.97
• Kospi down 0.8% to 2,784.26
• German 10Y yield -5 bps at 2.37%
• Euro down 0.1% to $1.0687
• Brent Futures down 0.4% to $85.33/bbl
• Gold spot up 0.3% to $2,366.36
• US Dollar Index up 0.15% to 105.74

Top Overnight News

• Japan’s core national CPI eases to +2.1% in May, down from +2.4% in Apr and below the Street’s +2.2% forecast. RTRS
• China’s 618 online shopping festival saw sales fall Y/Y for the first time, the latest indication of cooling consumer demand and price discounting. FT
• Prime Minister Justin Trudeau’s government is preparing potential new tariffs on Chinese-made electric vehicles to align Canada with actions taken by the US and European Union. BBG
• Europe’s flash PMIs show significant weakness in June, with manufacturing dropping to 45.6 (down from 47.3 in May) and services cooling to 52.6 (down from 53.2 in May), although inflationary pressures eased along with growth (which is a small silver lining). RTRS  
• UK retail sales for May come in solidly above expectations, rising 2.9% M/M (vs. the Street +1.8%), and Apr was revised higher. WSJ
• Trump sees a surge in campaign inflows (his recent conviction helped to fuel donations), all but erasing Biden’s financial advantage. WaPo
• Chicago Fed President Austan Goolsbee said policy makers will be able to cut rates if inflation continues to cool as it did last month. But Richmond Fed boss Thomas Barkin said he needs further clarity. BBG
• Bank capital rules: Fed, OCC, and FDIC at odds over how to release the revised B3 endgame rules (the Fed wants to allow the industry to comment while the OCC and FDIC would prefer to just publish the rules for implementation). RTRS   
• Spirit is nearing a deal to be purchased by Boeing after Airbus-related work issues were resolved, and a formal announcement could arrive within days or weeks. RTRS

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly rangebound with sentiment subdued after the lacklustre handover from Wall St where tech underperformed and risk appetite was sapped as participants reflected on higher yields and soft data releases ahead of quad-witching. ASX 200 was rangebound with upside restricted after weak Australian flash PMI data including a steeper contraction in manufacturing. Nikkei 225 traded indecisively after softer-than-expected National CPI data and weakening PMIs. Hang Seng and Shanghai Comp. were pressured with underperformance in Hong Kong as the local benchmark dipped beneath 18,000 amid losses in property and tech, while the mainland conformed to the glum mood amid ongoing trade-related headwinds with Canada also preparing a tariffs plan on Chinese electric vehicles.

Top Asian News

• Canada is reportedly preparing a tariffs plan on Chinese electric vehicles, according to Bloomberg.
• Japanese PM Kishida is to resume utility and maintain gasoline subsidies, according to FNN. It was separately reported that Japan’s government is in final preparations to adopt additional steps to ease the burden of higher electricity and gas prices, according to NHK.
• Japan’s Chief Cabinet Secretary Hayashi said the inclusion to the US monitoring list does not mean that Japan’s foreign exchange policy is a problem, while he added that stable forex levels are desirable and it is important that forex rates reflect fundamentals.
• BoJ Deputy Governor Uchida says Japan’s economy recovering moderately albeit with some weak signs; underlying inflation likely to gradually accelerate. Uncertainty surrounding Japan’s economic and price outlook remains high. Must be vigilant to financial, FX market developments and their impact on Japan’s economy and prices. BoJ will decide specifics on bond tapering plan and size of reducing in bond buying will be significant. Japan’s financial system remains stable as a whole. BoJ will adjust degree of monetary easing if economy and prices move in line with forecasts.
• BoJ to hold meetings with bond market participants on bond-tapering plan on July 9-10th
• China’s Commerce Ministry says EU continues to escalate trade friction; may “trigger a trade war”; responsibility lies entirely with the EU side; hopes EU would meet China halfway

European bourses, Stoxx 600 (-0.4%) are lower across the board, though with price action fairly rangebound, and generally unreactive to the downbeat EZ PMI data. European sectors are mostly lower, and hold a slight defensive bias, with Utilities and Healthcare towards the top of the pile, whilst Banks are towards the bottom of the pile, alongside Tech. US Equity Futures (ES -0.1%, NQ -0.1%, RTY -0.1%) are very modestly lower, continuing some of the losses seen in the prior session, and in fitting with the broader sentiment in Europe.

Top European News

• UK Conservative MPs have accused the BoE of making a “political decision” after deciding to hold rates, according to The Telegraph.

European PMIs

• French HCOB Composite Flash PMI (Jun) 48.2 vs. Exp. 49.5 (Prev. 48.9); HCOB Services Flash PMI (Jun) 48.8 vs. Exp. 50.0 (Prev. 49.3); HCOB Manufacturing Flash PMI (Jun) 45.3 vs. Exp. 46.8 (Prev. 46.4)
• German HCOB Composite Flash PMI (Jun) 50.6 vs. Exp. 52.7 (Prev. 52.4); HCOB Services Flash PMI (Jun) 53.5 vs. Exp. 54.4 (Prev. 54.2); HCOB Manufacturing Flash PMI (Jun) 43.4 vs. Exp. 46.4 (Prev. 45.4). “This should be a further reason for the ECB to proceed cautiously with interest rate cuts.”
• EU HCOB Composite Flash PMI (Jun) 50.8 vs. Exp. 52.5 (Prev. 52.2); HCOB Manufacturing Flash PMI (Jun) 45.6 vs. Exp. 47.9 (Prev. 47.3); HCOB Services Flash PMI (Jun) 52.6 vs. Exp. 53.5 (Prev. 53.2)
• UK Flash Manufacturing PMI (Jun) 51.4 vs. Exp. 51.3 (Prev. 51.2); Flash Services PMI (Jun) 51.2 vs. Exp. 53.0 (Prev. 52.9); Flash Composite PMI (Jun) 51.7 vs. Exp. 53.1 (Prev. 53.0). “Meanwhile, from an inflation perspective, stubbornly persistent service sector inflation – a major barrier to lower interest rates – remains evident in the survey, but should at least cool further from the current 5.7% pace in coming months. However, companies’ costs are rising, most notably in manufacturing, where shipping costs in particular are spiking again and adding to a renewed rise in inflationary pressures from goods.”

FX

• DXY is slightly firmer amid the risk aversion which emanated from yesterday’s US session, with the index also benefiting from the weaker EUR following the downbeat EZ PMIs.
• EUR is softer after France, Germany and the EZ all reported soft PMI figures, though with the accompanying release suggesting “the HCOB PMI do not provide ammunition for another rate cut in July by the ECB.” EUR/USD sits in a 1.0672-0720 range after testing levels near the 14th June low.
• GBP is also losing vs the Dollar, with the hotter-than-expected UK Retail Sales providing fleeting upside for Cable, before edging lower ahead of the region’s own PMI data, which was mixed. Cable fell from 1.2649 to 1.2630 before paring the entirety of the move and lifting incrementally to 1.2653.
• JPY is flat in the European morning following APAC weakness which saw softer-than-expected Japanese CPI and weaker PMI. USD/JPY briefly topped 159.00 to a 159.12 peak (vs low 158.68), with European strength possibly emanating from the risk aversion and a pullback in bond yields.
• Mild divergence between the Antipodeans but largely flat trade with upside capped by the risk aversion (and decline in base metals).

Fixed Income

• USTs are modestly firmer and at the top-end of 110-12+ to 110-23 parameters into US PMI data and Fed’s Barkin.
• Bunds are firmer, with price action dominated by EZ PMIs; French numbers missed and remained in contraction with the election perhaps factoring, with Germany and the EZ-wide figure also lower than expected. The metrics have lifted Bunds from c. 132.50 to a peak of 133.00, before stabilising around 132.80.
• Gilts opened modestly firmer with impetus from benchmarks more broadly somewhat capped by a hawkish UK retail sales number. Tracking EGBs into the UK’s own PMIs which came in mixed and saw a knee-jerk spike to 99.14, before swiftly paring to below 99.00.

Commodities

• Crude is lower amid the stronger Dollar and the broadly downbeat risk tone across the market which reverberated from a lacklustre US performance. WTI August found some support at USD 81/bbl while Brent dipped under USD 85.50/bbl.
• Mixed trade across precious metals with spot gold holding onto gains despite the stronger Dollar, with newsflow also relatively quiet this morning. Spot silver lags following yesterday’s outperformance. Spot gold resides near yesterday’s peak (USD 2,365.59/oz).
• Copper futures pulled back from yesterday’s advances with demand sapped by the subdued risk tone.
• Goldman Sachs sees minimal impact from new EU restrictions on Russian LNG. GS says the latest EU package of sanctions impacting Russia bans the transshipment of Russian LNG by member countries, but the measures do not block EU member states from importing Russian LNG.
• Citi says crude markets are showing tightness, sees Brent picking up in Q3, but notes opportunities to sell into the strength
• Global crude steel output rises 1.5% to 165.1mln tonnes in May 2024 vs May 2023; China crude steel output rises 2.7% Y/Y to 92.9mln tonnes in May 2024

Geopolitics: Middle East

• “The IDF wants to declare the end of the war after the Rafah operation”, according to Sky News Arabia citing Israeli press Haaretz
• Israel will reportedly step up attempts to assassinate Hamas leaders in a bid to force Hamas to accept the ceasefire deal, according to a senior Israeli official cited by The Times.
• US Secretary of State Blinken underscored the importance of avoiding further escalation in Lebanon and reaching a diplomatic resolution in the meeting with Israeli officials, while he emphasised the need to take additional steps to surge humanitarian aid into Gaza and plan for post-conflict governance, security, and reconstruction, according to the State Department.

Geopolitics: Other

• UK is reportedly at loggerheads with the US and Germany over Ukraine joining NATO as the US and Germany have derailed a European plan to grant Ukraine an “irreversible” path to NATO membership and instead support offering Ukraine a lighter commitment to membership of the military alliance, according to The Telegraph.
• Russian President Putin said Russia is ready to start talks on a settlement of the Ukrainian conflict even as early as tomorrow but all parties should study its peace proposals and it is up to them when they bother to do it, while he added Russia never rejected the idea of negotiations and that the Ukrainian side has forbidden itself to negotiate, according to TASS.
• Japan imposed sanctions against China-based companies in connection to the Ukraine war with sanctions placed on China-based Yilufa Electronics and Shenzhen 5G High-Tech Innovation Co.
• South Korean military fired warning shots after North Korean soldiers crossed the border on Thursday, according to Yonhap.

US Event Calendar

• 09:45: June S&P Global US Services PMI, est. 54.0, prior 54.8
  • June S&P Global US Manufacturing PM, est. 51.0, prior 51.3
  • June S&P Global US Composite PMI, est. 53.5, prior 54.5
• 10:00: May Existing Home Sales MoM, est. -1.0%, prior -1.9%
• 10:00: May Leading Index, est. -0.3%, prior -0.6%

DB’s Jim Reid concludes the overnight wrap

Not to depress you but enjoy today while you can if you’re in the northern hemisphere as tomorrow will have a little less daylight as a slippery dark slope to Xmas begins. I’m currently writing this on the longest day in Watford in the middle of a large longstanding annual 2-day DB Macro conference. Maybe we should have held it at Stonehenge this year given the date.

On that theme it feels like you have to go back to the Neolithic period to find a day when the US significantly underperformed Europe but that’s what happened yesterday. The S&P 500 (-0.25%) opened around a third of a percent higher and above 5500 for the first time before slipping as the session progressed with even Nvidia, on its first day as the largest company in the world, slipping from +3.82% at the day’s early highs to close -3.54% and losing its largest company crown back to Microsoft . The recent rally in US stocks has been very narrow with only 2% of the 503 constituents currently at all-time highs and 7% at one-month lows. So we are seemingly in the hands of tech and particular Nvidia at the moment.

Over the other side of the Atlantic, sentiment was helped by a strong bond auction in France , suggesting that investors were still willing to buy OATs despite the political uncertainty. But on top of that, there was growing hope among investors about the chance of rate cuts ahead, as the Swiss National Bank marginally surprised markets by cutting rates for the second time this year, and the Bank of England made some dovish noises as well. So that offered fresh signs that the global monetary policy cycle was turning, with further rate cuts on the horizon.

That narrative got going after the SNB’s decision, where they delivered a 25bp cut in their policy rate to 1.25%. A narrow majority of economists in Bloomberg’s survey had expected them to remain on hold. They also lowered their inflation forecasts compared to March, which now see it falling from 1.3% in 2024, to 1.1% in 2025, and 1.0% in 2026. In turn, the Swiss Franc weakened by -0.80% against the US Dollar yesterday, making it the worst-performing G10 currency on the day.

That was then followed up by a dovish hold from the Bank of England. They kept the Bank Rate at 5.25% as expected, and the decision was split 7-2 with the two preferring a 25bp rate cut. But even though 7 wanted to stay on hold, the statement pointed out that for some of that group, “ the policy decision at this meeting was finely balanced ”, and investors dialled up the chance of a rate cuts in response. For instance, the chance of a cut by the next meeting in August rose from 34% the previous day to 62% by the close. That helped gilts to outperform, with the 10yr yield down -1.1bps on the day to 4.055%.

European markets got a further boost from the situation in France, where the Treasury raised €10.5bn in an auction of 3-8yr debt. That auction had been in the spotlight, as there were concerns about how much demand there’d be given the political uncertainty. But in reality it went smoothly, and the Franco-German 10yr spread came down by -2.2bps on the day to 77bps. That supportive backdrop helped French equities to recover as well, and the CAC 40 (+1.34%) posted its strongest daily performance since January.

That strength was echoed across European equities, where the STOXX 600 (+0.93%), the DAX (+1.03%) and the FTSE MIB (+1.37%) all posted solid gains. Over in the US, the S&P 500 (-0.25%) weakness after the holiday was driven by the information technology sector (-1.60%). The NASDAQ (-0.79%) and the Magnificent 7 (-0.85%) in turn posted sizeable declines. In addition to Nvidia’s reversal, Apple fell -2.15%, allowing Microsoft (-0.14%) to sneak back in as the world’s most valuable company. The equity mood was slightly more positive otherwise, with 58% of S&P 500 constituents higher on the day. Energy stocks led on the upside (+1.86%), amid a boost from the latest rise in oil prices, with Brent crude (+0.75%) closing at a 7-week high of $85.71/bbl.

The US session was punctuated by largely weaker data releases yesterday. For example, the continuing jobless claims were up to 1.828m in the week ending June 8 (vs. 1.810m expected), which is their highest level since January. And the initial jobless claims were at 238k over the week ending June 15 (vs. 235k expected), which pushed the 4-week moving average up to a 9-month high of 232.75k. However, note that claims can be distorted this time of year by the timing of the end of the school year so we’re not yet reading too much into the recent climb. At the same time though, data also showed that housing starts fell to an annualised rate of 1.277m in May (vs. 1.370m expected), which is their lowest rate since June 2020. But even with the weaker data, the Atlanta Fed’s GDPNow estimate only ticked down a tenth in the latest update, and now points to annualised growth in Q2 at +3.0%.

That subdued data failed to stop sovereign bond yields from moving higher yesterday, which took place on both sides of the Atlantic. Indeed, yields on 10yr Treasuries were up +3.7bps to 4.26%, whilst those on bunds (+2.8bps), OATs (+0.6bps) and BTPs (+0.8bps) all moved higher as well. The only major exceptions to that were in the UK (-1.1bps) and Switzerland (-5.0bps), who both had dovish-leaning central bank decisions yesterday.

Asian equity markets are mostly trading lower this morning with Chinese stocks the major underperformers. The Hang Seng (-1.72%) is leading losses while the CSI (-0.60%) and the Shanghai Composite (-0.40%) are also edging lower. Elsewhere, the KOSPI (-0.88%) is also drifting lower in early trade with the Nikkei 225 (-0.12%) swinging between gains and losses after Japan’s inflation data (more on this below). S&P 500 (+0.02%) and NASDAQ 100 (+0.08%) futures are slightly higher.

Coming back to Japan, consumer prices ex fresh food accelerated for the first time in a couple of months, advancing +2.5% y/y in May (v/s +2.2% in April, +2.6% consensus) even if it was slightly below consensus. Headline consumer inflation also advanced at a faster pace in May, rising +2.8% y/y (+2.9% expected) and compared with the +2.5% recorded in April, partly due to higher energy bills. However, the core-core CPI, which strips away both energy and fresh food, increased +2.1% y/y in May (v/s +2.2% expected) down from a +2.4% gain in the previous month.

Separately, reports showed that Japan’s factory activity expanded for a second straight month in June but the pace of growth eased. The au Jibun Bank flash manufacturing PMI came in at 50.1 in June slightly down from 50.4 in May. Meanwhile, services sector activity contracted in June for the first time in about two years amid subdued new business as the flash services PMI slipped to 49.8 in June from 53.8 in May.

In FX, the Japanese yen (+0.03%) is trading around 159 versus the dollar, its weakest level in two-months and near the lows again, thus ramping up expectations that the authorities will again intervene in the FX market. Meanwhile, Masato Kanda, the top currency diplomat, reiterated that the authorities are prepared to take necessary measures if there are any highly volatile moves in currency markets.

To the day ahead now, and the main data highlight will be the flash PMIs for June from the US and Europe. Otherwise in the US we’ll get existing home sales for May and the Conference Board’s leading index for May, and in the UK there’s retail sales for May. From central banks, we’ll hear from the ECB’s Nagel and Simkus.

Brent crude futures were flat on Friday amid rising geopolitical tensions in Eastern Europe, which seems counterintuitive as escalating war risks could result in supply disruptions. 

In the overnight hours, four refineries in southern Russia were targeted, with one facility damaged, in one of the largest drone swarm attacks since the war in Ukraine began, Bloomberg reports. 

Seventy drones were intercepted and destroyed over Crimea and the Black Sea and 43 over the Krasnodar region, the Russian Defense Ministry said on Telegram, without saying how many drones took part in the attack. The Afipsky, Ilsky, Krasnodar and Astrakhan refineries were attacked, Ukraine’s General Staff said later in a Facebook post.

In the Seversky district of the Krasnodar region, where the Afipsky and Ilsky refineries are located, “administrative buildings were damaged on the territory of an oil refinery” as a result of the attack, local governor Veniamin Kondratyev said on Telegram. Interfax earlier reported that a fire affecting area of ​​50 square meters (538 square feet) was extinguished by morning, with two people injured. -BBG

Ukraine’s military claimed responsibility for the drone swarm attack, saying it launched drones against “the Afipskiy, Ilskiy, Krasnodar and Astrakhan oil refineries.” They also said an intelligence center in southern Russia was targeted.

BREAKING:

Ukraine launches the largest drone swarm attack against Russia so far

Ca. 100 drones launched & hit:

– Krasnodarekoneft oil refinery
– military airfield in Yeisk
– 726 air defense center in Yeysk
– Ilsky Oil Refinery
– Volgograd Oil Refinery pic.twitter.com/AL7T4yJe9u

— Visegrád 24 (@visegrad24) June 21, 2024

Drones also targeted a “preparation and storage area” in the Krasnodar region, resulting in a “series of explosions and a fire with subsequent detonation,” Ukraine said.

More than two years since the war began, Ukraine is ramping up cross-border drone attacks on Russian energy infrastructure as conflict spillover risks soar. Kyiv and its Western backers aim to paralyze one of Russia’s most important industries: oil refining.

In recent days, Ukrainian drone attacks have damaged several oil storage facilities. Last month, two other refineries in southern Russia, including Rosneft’s large Tuapse facility on the Black Sea, were targeted.

In March, Ukraine’s Deputy Prime Minister Olha Stefanishyna said oil refineries in Russia are “absolutely legitimate targets” from a military point of view.

Recall that the Biden administration has freaked out about Ukrainian drone strikes in Russia. This was primarily because of the risk of driving Brent crude prices north of $100/bbl. However, in recent weeks, Biden ‘greenlighted‘ Ukraine to attack deep within Russia with US weapons.

In markets, Brent crude prices headed for the first back-to-back weekly gain since early April. Prices are ending the week around the $85/bbl handle. Escalating conflicts in Eastern Europe and the Middle East reflect a higher war risk premium that should be added to Brent crude prices.

Meanwhile… 

One major issue is if Ukraine continues targeting Russian oil infrastructure, Moscow could retaliate by lashing out at energy infrastructure relied on by the West. As we recently noted, this includes the “CPC pipeline carrying oil from Kazakhstan through Russia to the global market.”

Given all the conflict, the Biden team continues to be very concerned because an energy shock could send domestic gasoline prices at the pump to the politically sensitive $4-a-gallon level.

Via SchiffGold.com,

China’s recent attempt to secure a rare earth minerals stockpile ended in failure when a competitor stepped in to snag the deal…

Vital Metals, a mining firm based in Australia, announced Monday that minerals collected from its Saskatchewan-based Nechalacho Project will remain within Canadian borders.

“We were presented with a case of elevated interest for Canada,” Vital’s managing director Geordie Mark told The Northern Miner, later adding:

“This agreement highlights the strategic value and importance of the Nechalacho rare earths project and the prioritization of a rare earths value chain in Canada.”

According to Vital, the Nechalacho site in northern Canada could hold more than 200 million tons of rare earth elements (REEs), which are used in green energy production and weapons manufacturing. Right now, China dominates the industry despite its comparatively small natural stock, clinching 75% of the global market with only 35% of the global REE reserves.

“China was only able to establish such dominance over the REE industry in part because of lax environmental regulations,” said Harvard Independent Review’s Jaya Nayar.

“Low cost, high pollution methods enabled China to outpace competitors and create a stronghold in the international REE market.”

That’s because rare earths can indeed produce green energy—but only after generating 2,000 times their weight in catastrophically toxic waste. Many Western nations refuse to accept this tradeoff inside their own borders, imposing heavy regulations on domestic REE producers that keep exporters like China competitive despite high asking prices.

What’s pushing Canada to allow REE mining and reap the profits, despite environmental risks?

The answer lies within the Canadian critical minerals list, which includes REEs and 33 other elements/elemental groups deemed strategically and economically significant. A recent expansion of the list added high-purity iron, phosphorus, and silicon, which—like REEs and 20 other elements on the list—are key components of the green energy transition. This update, plus the last-minute swoop to protect REE supplies, gives a glimpse into the role “green” policy will play and foreshadows increasing pressure on component supply chains. If other countries follow Canada’s example, prices of related metals on that critical list—including cobalt, platinum group metals, REEs, silicon, and copper—could see significant boosts. That’s a bet Canada is placing early by securing its access to REEs while cutting China out of the deal.

The recent Canadian purchase from Vital is also part of a larger economic and political salvo led by Prime Minister Justin Trudeau, who told reporters there will be no reconciliation between Canada and China following accusations of election meddling. On the mining stage, Canada is marketing itself as a direct competitor to China, flaunting its enormous mineral reserves as an alternative source for wary European countries afraid to rely on Chinese producers. China’s dominance won’t be shaken by missing a single deal with the Australian firm, though the move certainly sends a message calculated to exacerbate already strained relations between China and the West.

As if its challenge weren’t clear enough, Canada recently joined the U.S., Japan, and the Philippines to conduct military exercises in the South China Sea. Tensions between the four countries are on the rise, and economics is the prime battlefield. With REEs as a strategic focus and green energy policies on the Western docket, nations may put pressure on each other by sanctioning or otherwise straining metals supply chains—a move strategists on both sides will surely consider. With two of the world’s largest holders of rare earths reserves vying for stockpiles, the pressure on consumer countries to pick sides is growing, and this new symptom of conflict in the metals market will likely boost REE and related metal prices as countries stock up while supplies last.

It’s not just rare earths that will see gains. Silver, though not deemed “critical,” is a component of electric vehicles and other “green” technologies that governments (and private investors) will likely snap up in anticipation of tighter supply. Stress on metals supply chains is part of gold’s lifeblood, suggesting higher prices for this metal as well.

Good news for investors looking to shoot straight for the heart: REE prices bottomed out last year, indicating they’re due for revival and primed for a low buy.

“I’ve seen forward-looking studies that … don’t even factor in demand from defense sectors that push [the global annual turnover for REEs] well over a trillion dollars by the time we reach 2050,” said Melissa Sanderson, a consultant at American Rare Earths. “It’s a good, strong market now, and it’s one that appears to have healthy legs under it.”

This wasn’t supposed to happen… or rather this wasn’t supposed to happen outside of a crisis (and certainly not with stocks at all time highs).

Sure, the “impossible” did happen back back in April 2020, just as the world was about to break and the Fed was injecting trillions into the system. That’s when we first reported that “Something Impossible Just Happened: A CLO Failed Its AAA Overcollateralization Test.” So yes, while the AAA tranche of any structured vehicle is supposed to be guaranteed from impairments even in a 6-sigma event (not really: it happened quite frequently during the global financial crisis) that was hardly the case four years ago, but then again, with the world locked down for covid, the S&P crashing 30% in a week, and amid general panic, it’s safe to say that nobody noticed.

But then it happened again and this time there was no crisis: in the last week of May we learned that for the first time since the Lehman bankruptcy, Investors holding the top-most tranche debt backed by commercial real estate have suffered losses for the first time since the housing meltdown collapsed the economy 16 years ago. According to CMBS strategists at Barclays, buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan received less than three-quarters of their initial investment in recent weeks after the loan was dumped at a sizeable discount. All low-tier creditors were wiped out.

So let’s recap: while a CLO AAA-tranche was impaired back in April 2020 – the first time this happened since the global financial crisis – one could at least understand why: the economy was literally halted, the Fed was pumping trillions into the economy every day to keep the zombified patient from dying, and nobody knew where their toilet paper would come from tomorrow, let alone their next structured finance paycheck.

But for this to happen in May of 2024, when the S&P was hitting record high after record high  an AAA tranche to see a 25% haircut, that signals something is very broken with the system.

And then it happened again.

According to Bank of America, investors in the AAA tranche of a loan backed by UK shopping malls are facing losses, in what may be the first such impairment since the global financial crisis. In a Wednesday note by Mark Nichol (available to pro subscribers in the usual place) he estimates that Class A noteholders of commercial mortgage-backed security Elizabeth Finance 2018 could suffer a partial principal loss based on the amount that is expected to be recouped from the disposal sale of the underlying properties.

As BofA explains, Mount Street, the special servicer of the UK loan called Elizabeth Finance 2018 which has been in default  since 2020, announced it has decided to accept a cash bid of £35.0mn for the Maroon properties, which was the highest of the portfolio bids received. Mount Street estimates net proceeds of around £31.5mn, which is less than the £33.6mn principal balance of the class A notes. And based on Mount Street’s estimate, BofA projects that the class A notes will suffer a 6% principal loss.

As Bloomberg notes, as recently as April, ratings agency Morningstar DBRS estimated the value of the three retail properties underlying the loan at £50.4 million, which set the loan-to-value at 125%. However, the agency noted that there was “uncertainty around the outcome of the sales process against the backdrop of challenging market conditions”.

Well, in the two months since market conditions must have imploded because according to BogA, “the decline in the Maroon property values has been striking and exceeded our 2021 projection that principal losses would reach the class B notes.” As it turns out, the principal losses will reach class A notes, which are currently rated A (sf) by DBRS and BBB- (sf) by S&P. Both agencies took downgrade actions earlier this year.

As the BofA analyst further notes, and to nobody’s surprise, Goldman Sachs was the originator and arranger of Elizabeth Finance 2018, which initially included two loans. At the time of issuance, Fitch voiced concerns that the class A notes did not merit AAA or AA ratings, regardless of leverage, owing to the pro-rata repayment structure. That is, “were either loan to be refinanced, the class A notes would remain outstanding and therefore reliant on the performance of the remaining loan.”

It turns out that Fitch was right, for once, it now appears that the Class A noteholders, i.e. the AAA tranche, of Elizabeth Finance 2018 will suffer a partial principal loss: “It would be the first CMBS initially rated AAA in a post-financial crisis in Europe, to our knowledge.”

And while the Elizabeth Finance 2018 loss is not the first – it follows just one month after the first AAA loss in US CMBS, which as noted above occurred in a transaction backed by a single office property, 1740 Broadway, the European AAA-impairment is the first one to focus on the retail property sector.

The Maroon loan was backed by three shopping centers located in England and Scotland. But it wasn’t meant to last: the loan breached its default covenant in 2019, just one year after inception, and in 2020 was transferred to special servicing and accelerated. Under the deal’s pro-rata waterfall, £9mn of principal proceeds was paid to the subordinated notes from a prior loan redemption.

As Bloomberg details, UK regional malls that relied on department stores and fashion retailers — among the most vulnerable to the rise of online shopping — were already suffering before the coronavirus pandemic forced them to close. Vacancy rates are yet to recover in some areas, with higher financing costs adding to an already challenging situation.

“This property sale price shows that declines may be more severe than thought, but it could be specific to this particular portfolio,” Cas Bonsema, ABS and covered bond analyst at Rabobank, said. “CMBS is always very specific and in this case the properties got hit hard by the pandemic.”

“There have been some signs of distress in the CMBS market, particularly around shopping malls, some of which haven’t really recovered from the pandemic era,” said Harjeet Lall, a securitization partner at law firm Pinsent Masons LLP. “Many malls are struggling because of reduced consumer spending and a drop in occupancy levels.”

And so, after years of sanctity for the AAA-class, in the span of just one month we have seen not only but two AAA impairments, one in an office-backed loan and another in a European loan CMBS. They are just the the tip of the formerly invincible iceberg, especially since these take place with stocks at all time high. Imagine what happens when stocks enter a bear market after the coming post-election crash? The bigger problem is that the money that was allocated to these AAA tranches was not sourced from billionaires who can afford to blow a few million on some financial speculation; this particular money comes literally from “widows and orphans” since it was supposed to be safe from impairment come hell or high water. The question now is how does society react when some of the most vulnerable members realize that what little money they had has just vaporized because their financial advisor was certain, absolutely certain that the AAA tranche can never suffer a loss.

More in the full BofA note available to pro subs.

By Chad Hemenway of Insurance Journal

Allstate Corp. on Thursday reported May pretax catastrophe losses of about $1.4 billion.

The Northbrook, Illinois-based insurer said 14 events contributed to nearly $1.5 billion in catastrophe losses for May, with 70% attributable to five wind and hail events mostly in the states of Texas, Colorado, and Illinois.

A year ago Allstate recorded pretax catastrophe losses for May of about $885 million.

Allstate reached its $150 million threshold to report catastrophe losses in May, as it did in April when the company announced estimated catastrophe losses of $494 million from 11 events.

Losses for May were about $1.1 billion after tax, Allstate said. Total year-to-date pretax catastrophe losses were about $2.6 billion, the insurer added.

The insurer’s catastrophe losses for the first quarter fell 56.8% to $731 million.

Second quarter 2023 financial results for Allstate included net catastrophe losses of $2.7 billion, resulting in a net loss for the period of $1.4 billion.

With monthly catastrophe losses, the insurer had also been giving monthly updates on implemented home and auto insurance rate increases.

The practice ended with the March report.

Competitor Progressive late last week said severe storms mostly in Texas and the Midwest caused about $722 million in net catastrophe losses in May.

Bloomberg obtained a notice earlier this week from the United States Department of Agriculture (USDA) stating that some imports of Mexican avocados from the Michoacan region will be suspended after two agency workers were reportedly assaulted and detained by assailants.

USDA told Avocado Exporting Producers and Packers of Mexico (APEAM) of the decision to suspend new exports out of the Michoacan region last Friday. The notice didn’t describe the security incident, though local media outlets say that two USDA inspectors were ‘attacked amid a protest over police pay.’ 

APEAM officials said the USDA inspectors were released and that the detention was unrelated to the avocado industry.

Sure… 

The nonprofit organization represents over 34,000 avocado farmers and more than 84 packing houses nationwide. 

“The interruption of avocado exports from Michoacan was due to an incident unrelated to the avocado industry, also affecting other agricultural exports in the state,” the group told CNN. 

The incident has immediately impacted the ag market, with prices of a 20-pound box of avocados from the state of Michoacan skyrocketing by 58% this week, from about $29.50 to $46.15.

Michoacan, one of only two Mexican states permitted to produce and export avocados to the US, is a key player in the global avocado market. It is responsible for growing more than 80% of the exported avocados. The other Mexican state, Jalisco, also exports avocados to the US. 

“This pause does not affect other Mexican states, where USDA inspections continue,” US Ambassador to Mexico Ken Salazar said, adding that avocado and mango inspections in the Michoacan area will remain suspended until security concerns are addressed. 

Maybe the White House can release some of its ‘Strategic Avocado Reserve’ (if it has one) before the presidential election to alleviate the cost of guac for Gen-Zers and millennials. 

You got this Joe.

Authored by Tsvetana Paraskova via OilPrice.com,

The European Union is set to ban the re-export of Russian LNG in the bloc’s waters in a first sanctions measure targeting Russia’s gas, EU diplomats told Reuters on Thursday.

The EU has been debating the 14th sanctions package against Russia over its invasion of Ukraine for a month, including proposals to ban LNG trans-shipments in EU waters and ways to address Russia’s shadow fleet of oil tankers.

“EU Ambassadors just agreed on a powerful and substantial 14th package of sanctions in reaction to the Russian aggression against Ukraine,” Belgium, which holds the rotating EU presidency, said on Thursday.

“This package provides new targeted measures and maximizes the impact of existing sanctions by closing loopholes,” the Belgian Presidency of the Council of the EU said.

European Commission President Ursula von der Leyen commented,

“This hard-hitting package will further deny Russia access to key technologies. It will strip Russia of further energy revenues. And tackle Putin’s shadow fleet and shadow banking network abroad.”

Trans-shipment of LNG within the EU has been a widespread practice so far, although the volumes don’t represent a large part of Russia’s LNG exports.

The EU, however, is stopping short of outright banning imports of Russian LNG, as it did with oil and oil products.  

The EU’s imports of LNG from Russia have jumped in the past two years since Russia cut off some EU countries from pipeline gas in the spring and summer of 2022, and the Nord Stream pipeline was blown up in September that year. Some of the LNG import terminals in Western Europe, including in Belgium, have been re-exporting to Spain and China.

An analysis by the Institute for Energy Economics & Financial Analysis (IEEFA) showed at the end of last year that around 21% of Russia’s LNG volumes bound for the European Union are transshipments, which are not included in official import figures and thus ignored by EU policymakers.

The EU’s 14th sanctions package also targets three Russian LNG projects and contains a clause allowing EU member states Sweden and Finland to cancel LNG contracts with Russia, diplomats told Reuters.

Authored by Paul Joseph Watson via Modernity.news,

The president of the German Teachers Association has warned that the country’s education system is being overwhelmed with migrant students, many of whom are illiterate and can barely speak the language.

“Due to immigration in 2015, the war in Ukraine and other immigration, new people are constantly coming into the system, but the system is slow to keep up because it is moving too fast,” said Stefan Düll.

Düll warned that a massive burden was being placed on educators because many of the children speak little or no German whatsoever.

“After all, they don’t speak Farsi or Ukrainian. How are they supposed to teach them?” he asked.

Given that around a quarter of 4th grade students in the country can’t speak German, Düll said the high number of immigrant children means “the group of illiterates becoming larger.”

“The higher the percentage of immigrants, the more difficult it is to motivate the class,” he added.

Susanne Lin-Klitzing, the chairwoman of the German Association of Philologists, also highlighted how, “In the end, the lack of reading skills not only endangers the social participation of many people but also Germany as a whole as a business location.”

School principal Norma Grube emphasized how diversity was very much not a strength when it came to the sheer number of students from different countries flooding into the system.

“Twenty-three different nations meet in the schoolyard, some of whom cannot understand each other at all and who sometimes come from hostile regions, such as Russia and Ukraine. We need a lot of parent-teacher talks, which mostly take place with interpreters. And that brings us to one of the reasons why the teaching profession has become less and less attractive: The psychological stress is enormous and it has increased significantly,” she said.

Social dislocation caused by unintegrated migrant youths is also leading to huge increases in violent confrontations in schools, with more teachers facing abuse and attacks. In Berlin, police needed to be called into schools an average five times a day in 2023.

“In Berlin, 40 percent of students do not speak German as their native language, and in cities like Hamburg, the majority of students have a migrant background. Overall, an astounding 38 percent of all children in elementary schools in Germany have migrant backgrounds,” reports Remix News.

Independent Mayor of Tübingen Boris Palmer noted how many Germans are turning to the right-wing AfD party because, “They experience what irregular migration means on a daily basis.”

“Above all, the young men who have arrived alone are changing the living environment of young people. In the park, in the club, on the street, on the bus, at the train station, in the schoolyard,” he said.

As we highlight in the video above, while all of these issues are being highlighted by the AfD, Germany’s second most popular political party, instead of addressing the problems, the political establishment is trying to ban the AfD instead.

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