MNI EUROPEAN MARKETS ANALYSIS: Further Weakness For Core FI Markets

US TSYS: Off Worst Levels Into Europe, Bear Flattening Again

A combination of spill over from Thursday’s cheapening, hawkish sell-side calls (Nomura now look for back-to-back 75bp rate hikes from the Fed in June & July after a “likely” 50bp move in May), hawkish BoC speak and weakness in Aussie bonds applied pressure to Tsys in the Asia-Pac session, although the space has corrected from worst levels of the day ahead of London dealing.

• TYM2 trades -0-05 at 118-19, 0-11 off fresh cycle lows, on volume of ~155K. Note that TU-UXY contracts showed through their Thursday lows after the Nomura Fed call hit the wider wires, with a flow-drive element likely exacerbating weakness at that time.
• Cash Tsys sit 1.5-3.5bp cheaper across the curve, bear flattening.
• FOMC meeting dated OIS now prices a cumulative ~151bp of tightening across the next 3 Fed meetings i.e. 3 consecutive 50bp hikes are fully priced.
• The Eurodollar strip moved with the wider bond market gyrations, trading 2.0-3.0 ticks lower through the reds at typing, also off of worst levels.
• Flash PMI data from across the globe headlines the broader docket on Friday.

JGBS: Resilience Evident

JGB futures have exhibited resilience when it comes to withstanding the wider pressures observed in core global FI markets. Participants never looked to force a challenge of overnight session lows, even with the likes of U.S. Tsys coming under pressure. That left the contract to operate around late overnight levels during the morning session, before a light uptick was seen in the afternoon, with the contract trading closer to unchanged levels ahead of the bell.

• The BoJ’s presence in the 10-Year zone of the curve is limiting the pressure in paper out to 10s/in futures, although the overnight downtick in futures applied some pressure to 7s, which underperform surrounding tenors (cheapening by ~1bp vs. 0.5bp in other tenors out to 10s). Meanwhile, the longer end of the JGB curve has provided some more notable weakening given the gyrations in wider core global FI markets since Thursday’s Tokyo close, with super-long JGBs cheapening by ~2.5bp on the day. The steepening of the curve is also facilitated by the relative lack of BoJ control further out the curve.
• Japanese officials (from both the government & BoJ) have added little fresh when it comes to discussions re: FX, with Finance Minister Suzuki confirming that Japan and the U.S. have agreed to uphold existing agreements re: FX, while he provided no comment on the prospect of FX intervention, noting that Japan will respond to FX moves with a sense of urgency. Source reports in the local media have indicated that discussions between Suzuki & U.S. counterpart Yellen were received positively by the U.S., providing some modest JPY strength, although the Japanese MoF once again provided no comment as to whether such discussions took place post-reports.

AUSSIE BONDS: Bear Flattening, Westpac Look For 40bp June RBA Liftoff

Cross-market spill over allowed the space to extend on its overnight weakness during the early rounds of Sydney dealing, with breaks below previous cycle lows in YM & XM generating fresh rounds of selling later in the day. YM -10.0 & XM -5.0 at typing.

• Note that Westpac chief economist Bill Evans has adjusted his RBA call, now looking for a 40bp cash rate lift off in June, which triggered further weakness in the space.
• Bear flattening was already in play before that view was provided, with the curve off session flats at typing.
• Bills run 15-20 ticks lower through the reds as a result. Note that today’s 3-month BBSW fixing set ~5.2bp higher. There is a near 60bp spread between the current 3-month BBSW fixing and the implied rate observed in IRM2.
• The latest round of S&P flash PMI data revealed slightly faster than expected rates of expansion across the 3 headline metrics, will the details revealing familiar stories when it comes to the Australian labour market and inflation.
• A quick reminder that ACGB markets will be closed on Monday as Australia observes the ANZAC day holiday. The AOFM’s weekly issuance schedule is light as a result, with A$1.0bn of ACGB Sep-26 providing the only round of coupon bearing supply next week.

FOREX: Antipodeans Stay Heavy, Yen Gets Reprieve From Intervention Chatter

Antipodean currencies came under pressure ahead of the weekend elongated by the ANZAC day. The prospect of more aggressive global monetary policy tightening continued to spook markets, dissuading participants from taking more risk, after Fed Chair Powell noted that a 50bp move in May is on the table.

• NZD/USD pierced Apr 18 low of $0.6715 and probed the water under the round figure of $0.6700 on its way to levels not seen in some two months.
• AUD/USD was old on the breach of its 50-DMA, which provided support earlier this week. The rate faltered to its worst levels since mid-March.
• Offshore yuan continued to weaken in defiance of a firmer than expected PBOC fix, which saw the mid-point of permitted USD/CNY trading band set ~50 pips below the sell-side estimate. Spot USD/CNH had a brief look above the CNH6.5000 figure and is heading for its best week in a few years.
• The yen firmed a tad as TBS reported that the U.S. positively responded to the idea of a joint currency intervention floated by Japanese FinMin Suzuki during his talks with Tsy Sec Yellen. The report did not outline any specific parameters (e.g. price trigger for intervention), but at least confirmed that such discussion took place, after FinMin Suzuki chose to remain tight-lipped on the matter.
• Global PMI data will hit the wires today alongside UK & Canadian retail sales. Comments are due from ECB & BoE chiefs.

FOREX OPTIONS: Expiries for Apr22 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0700(E814mln), $1.0850(E640mln), $1.0900(E1.4bln), $1.0925-30(E554mln)
• GBP/USD: $1.2900(Gbp1.1bln), $1.3000(Gbp1.2bln)
• USD/CAD: C$1.2500($514mln), C$1.2540-60($1.2bln)
• USD/CNY: Cny6.4000($529mln)

ASIA FX: KRW Leads Losses As Fed Tightening Looms Large, CNH Dips Despite Firmer PBOC Fix

Unfavourable risk backdrop kept demand for Asia EM currencies at bay. Fed Chair Powell said Thursday that a 50bp rate hike is on the table for the May FOMC meeting, as the hawkish Fed drumbeat kept growing louder.

• CNH: Offshore yuan extended its sharp sell-off despite a pushback from the PBOC, who set the mid-point of permitted USD/CNY trading range ~50 pips below expectations. Spot USD/CNH briefly showed above the CNH6.5000 mark and is heading for its strongest week since August 2019, with 1-month implied volatility touching best levels since Jan 2021. The PBOC's promises of more support for SMEs had no effect on the redback.
• KRW: The won went offered amid firmer U.S. Tsy yields. Spot USD/KRW punched through key resistance from Mar 15 high of KRW1,244.00 before backing off its fresh cycle high at KRW1,245.05.
• IDR: Spot USD/IDR was northbound but held a familiar range. Bank Indonesia Snr Dep Gov Damayanti said that the central bank could further increase the RRR to curb inflation if needed, signalling caution about any imminent hike to the benchmark policy rate.
• MYR: Spot USD/MYR soared through the psychologically significant MYR4.3000 level, with its RSI creeping further into overbought territory. The ringgit ignored Malaysia's CPI data, which showed that inflation stayed at +2.2% Y/Y in March (BBG median estimate: +2.3%).
• PHP: Spot USD/PHP continued to oscillate within touching distance from the PHP52.500 figure, which has kept a lid on gains over the past few days. BSP minutes released Thursday showed that policymakers expect 2022 GDP growth to be slower than forecast before, without giving specific numbers.
• THB: Spot USD/THB rallied to fresh YtD highs, which draws attention to the approaching THB33.990 resistance. BoT Gov Sethaput argued that inflation expectations remain anchored, while FinMin Arkhom said that the government will now focus on maintaining financial and fiscal discipline.

EQUITIES: Mostly Lower In Asia; Chinese Equities To End Week Lower As Easing Disappointment Lingers

Most major Asia-Pac equity indices are softer at typing following a negative lead on Wall St., after well-covered comments from Fed Chair Powell on a possible 50bp rate hike for the May FOMC saw U.S. equity benchmarks dive below neutral levels in Thursday’s session. Japanese and Australian equity benchmarks lead losses, with EM indices faring a little better across the board.

• The Chinese CSI300 outperformed (relatively) regional peers, sitting a little above neutral levels at typing after paring earlier losses from as low as 1.1%, putting it possibly on track to break a five-session streak of daily lower closes. The move to reverse losses came after reports of China’s securities regulator issuing guidance for institutional investors on to buy more stocks crossed the wires, adding to a speech from PBoC Gov Yi Gang pledging to keep policy accomodative in view of softer economic conditions. The Financials sub-index outperformed, neutralising broad weakness in high-beta equities, with consumer staples (particularly Chinese liquor stocks) and healthcare names leading losses in that sphere. Tech-related names struggled as well, with the ChiNext and STAR50 indices trading 1.0% and 1.6% lower at typing.
• The Hang Seng is 0.6% worse off at typing, on track to close lower on every single day this week. Steep losses were again seen in China-based tech names, with debate re: the de-listing of Chinese equities from U.S. exchanges again doing the rounds in Asia.
• U.S. e-mini equity index futures are 0.2% to 0.3% weaker at typing, rising off their respective worst levels heading into European hours.

GOLD: Slightly Lower As Powell Blesses Possibility Of 50bp Hike For May

Gold is ~$3/oz weaker to print $1,948/oz, operating a touch above the session’s worst levels at typing, and remaining clear of Thursday’s two-week lows. The precious metal has declined after struggling for direction earlier in the session as nominal U.S. Tsy yields have pushed higher in Asia-Pac dealing, with 2-Year Tsy yields resuming a climb above recent cycle highs.

• To recap, the precious metal hit session lows (@ $1,936.8/oz) on Thursday amidst a rise in nominal U.S. Tsy yields, with the move in the latter facilitated by the latest in hawkish remarks from central bank speakers on both sides of the pond. Looking to the Fed, Chairman Powell on Thursday signalled support for a 50bp hike for the May FOMC, while hinting at further 50bp hikes for following meetings as a form of “front-end loading” of hikes.
• May FOMC dated OIS are now fully pricing in a 50bp hike for that meeting in the wake of Powell’s comments, with pricing for the next two meetings (in mid-June and end-July) pointing to consecutive 50bp hikes as well. Pricing to end ‘22 has firmed to ~250bp at writing, easily surpassing highs seen earlier this month.
• From a technical perspective, gold’s failure to hold on to recent highs signals the potential for further bearishness in the near-term. Initial support is seen at around ~$1,926.5/oz (50-Day EMA), while resistance is located at $1,998.4/oz (Apr 18 high and bull trigger).

OIL: On Track For Lower Weekly Close As Supply Worry Takes Back Seat

WTI and Brent are ~$1.20 worse off, operating around session lows, and a touch above their respective worst levels on Thursday at typing.

• Both benchmarks are on track for a lower weekly close particularly after Tuesday’s ~$6 decline, with the move lower coming as well-documented worry re: demand destruction due to China’s ongoing COVID outbreak, and continued debate over the possibility of stagflation has taken focus over the past week.
• Looking to China, fresh COVID case counts nationwide and in the city of Shanghai appear to have plateaued for now, with reported daily case counts in the latter coming in below 20K for a second consecutive day (a note that new cases “outside quarantined areas” in the city continue to number in the low hundreds). The pace of relaxation in citywide lockdowns remains abundantly cautious, with focus turning to the re-opening of factories through “closed-loops” after around three weeks of closures. City authorities have so far declared that around 70% of the city’s industrial companies have resumed operations to date, although previously flagged source reports have pointed to possible issues some companies have faced in restarting operations.
• Recent Dollar strength has also helped limit gains in crude, with the DXY operating a touch below 2-year highs made earlier this week.
• Elsewhere, RTRS source reports have highlighted the European Commission’s efforts to “cut the cost” of banning Russian oil such as through exploring national-level deals with oil-producing countries, likely targeting well-documented resistance from EU members such as Germany and Austria. Looking at timelines, POLITICO reports are pointing to details of an EU-wide ban on Russian oil imports possibly emerging early next week, although evidence so far points to the likelihood of any embargo being proposed in phases (as with coal), as opposed to an outright ban.