LNG Prices Poised to Surge Amid Weather, U.S. Storms

Key Takeaway

• LNG prices are set to rise due to hotter weather in China and Japan, and potential hurricane disruptions in the US.
• European bond markets face volatility from snap French elections, with widening spreads between German and French 10-year debt.
• Asian FX markets brace for volatility amid US Treasury selloff, European political upheaval, and potential BOJ policy changes.

LNG Prices Outlook

Global prices of liquefied natural gas (LNG) are poised for potential increases as traders shift their focus to summer weather patterns and the risk of hurricanes. Over the past week, gas benchmarks in both Europe and Asia have declined by nearly 10%, partly due to the resolution of supply disruptions. Norwegian gas flows have resumed following an unplanned outage, and LNG outages in Brunei and Australia have also been resolved.

However, the outlook for hotter weather in China and Japan, the two largest LNG importers, could drive up gas demand as summer begins. This increased demand risks diverting more fuel away from Europe, where LNG deliveries are currently at their lowest levels since early 2022. The European gas futures market is already reflecting these concerns, with the premium of the 1Q 2025 contract over the 3Q 2024 contract shrinking, indicating a tightening market.

Additionally, an active hurricane season poses a threat to supply from the United States, the world's top LNG exporter. This combination of factors suggests that the market is finely balanced with limited buffer, increasing the risk of greater volatility and higher prices this summer.

European Bond Market Impact

The European bond market is experiencing early weakness in bond futures following the announcement of snap French elections. This development adds to the existing risks from the upcoming Federal Open Market Committee (FOMC) and Bank of Japan (BOJ) meetings, as well as the US inflation report. Early movements in bond futures suggest a widening spread between German and French 10-year debt, which will serve as a sentiment indicator for European risk assets.

Trading volumes are currently modest, but a clearer picture will emerge once European cash markets open. Should OAT futures drop below the May nadir of 123.66, it would be broadly negative for G-10 bonds.

Asian FX and Equities Volatility

Asian foreign exchange (FX) markets are likely to face increased volatility this week due to a selloff in US Treasuries and political upheaval in Europe. The market is leaning towards a US interest rate cut in December, and the FOMC's dot plot will reveal how recent data has influenced official thinking. The release of US Consumer Price Index (CPI) data will also be closely watched.

The euro is under pressure following French President Emmanuel Macron's call for a snap parliamentary vote, prompted by significant gains by far-right parties in the European Parliamentary elections. This political uncertainty adds to the challenges facing the euro.

Japan's yen remains vulnerable as the BOJ may discuss scaling back bond-buying operations and hint at a potential rate hike in July. While these moves could support the yen, its trajectory will ultimately depend on the FOMC's decisions.

In India, the reappointment of Prime Minister Narendra Modi is expected to stabilize the nation's assets. Foreign investors will be looking for continued commitment to economic reforms and a pro-growth agenda. Data as of June 6 indicates that investors remain cautious on equities, but bond market flows and currency stability are positive tailwinds.