Russell 2000 Leads Lower as European Risks Spill Over

Also, 10-year T-Note, Gold Crude Oil, and Japanese Yen Futures 

1. Russell 2000 e-mini futures (/RTY): -1.43% 

2. 10-year T-note futures (/ZN): +0.08% 

3. Gold futures (/GC): +1.22% 

4. Crude oil futures (/CL): +0.32% 

5. Japanese yen futures (/6J): -0.27% 

While the U.S. economy may still be experiencing robust growth, a healthy-enough labor market and declining inflation pressures, global financial markets are increasingly focused on the fractured European political landscape.

French President Emmanuel Macron’s decision to call snap parliamentary elections has seen French OAT-German Bund yield spreads widen out sharply this week, with the move overnight provoking a sell-off in European banks. U.S. markets are not immune to the fears of what feels like an echo of the Eurozone debt crisis of the 2010s.

U.S. stocks slip

U.S. stock futures fell Friday morning as earlier optimism from this week’s inflation data points fade, leaving traders focused on the Fed’s updated outlook, which leaves rate cut changes at one for the year. The Russell (RTYM4) fell 1.43%, dragging the contract into negative territory for the week.

Consumer sentiment data due out this morning may not change much in the way of risk appetite but it offers the chance for a price shift over the short term. Adobe (ADBE) rose more than 14% in pre-market trading after the software company reported better-than-expected results after the close yesterday.

Treasuries move up

Treasuries moved higher this morning, following the overnight move in European markets where investors are seeking safety amid shifting political winds.

European short-term yields were on track to record some of the steepest losses since earlier this year. The U.S. 10-year T-note futures (/ZNM4) rose 0.08% ahead of the opening bell, temporarily clearing a swing high from late March.

The 30-year bond auction yesterday was met with strong demand, with the auction clearing a high yield of 4.403%, marking a lower yield than the when-issued number—a signal that there was healthy appetite from primary markets. Indirect bidders commanded a higher-than-usual average of the bids, which is likely to be a sign from European investors moving out of equities.  

Gold rebounds

Gold prices (/GCQ4) rebounded from yesterday’s selloff. The dollar’s strength isn’t dissuading precious metals traders who are focused more on the global pullback in yields, declining stock prices and a weaker Japanese Yen. This week’s data from the Commodity Futures Trading Commission (CFTC) is in focus, as traders wait to see if shorts continue to pull out of speculative positions in the asset.  

Crude oil rises

Energy markets seem unbothered by the risk-off impulse making its way through other corners of markets on Friday.

Crude oil prices (/CLQ4) have completely shaken off concerns around the early-June OPEC+ announcement, and gains in downstream products have boosted the 3-2-1 crack spread by +3.73% today.

Peace talks floated by Russian President Vladimir Putin could become a salient catalyst if an end to the Russian invasion of Ukraine appears plausible.  

Currency news

The euro (/6EU4) has been sold consistently since Fed Chair Powell’s press conference on Wednesday. Emerging banking sector risks may provoke deleveraging in FX markets, where the carry trade is under immense pressure.

Elsewhere, the Bank of Japan’s vague policy decision did little to convince markets that the period of Japanese Yen (/6JU4) weakness is ending. The lack of positive reaction and sport USD/JPY’s encroachment of the 1990 high at 160.40 leaves open intervention risk. 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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