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MNI ASIA MARKETS ANALYSIS: "Transitory" Thy Days Are Numbered

US TSYS: Fed Chair Powell Roils Policy Waters Ahead Friday Blackout

So much for not roiling the waters ahead late Friday's media blackout on monetary policy. Likely under pressure to allay higher and/or entrenched inflation concerns, Fed Chair Powell surprised mkts at Tue's Cares Act testimony when he suggested it was "TIME TO RETIRE THE WORD TRANSITORY REGARDING INFLATION" while the "THREAT OF PERSISTENTLY HIGHER INFLATION HAS GROWN."
  • Yld curves flattened as Tsys reversed course/sold off, short end hammered, bonds bounced back to session highs within an hour (30YY 1.7745L).
  • Fed Chair comments on wrapping up tapering a "few months sooner" took a toll on short end, Sep'22 Eurodollar futures fell appr 12bps to 99.30 low, VIX vol index spiked to 28.56 (+5.7), put volumes surged and equities sold off (ESZ1 -80.0 at 4571.0). Significant Block 5s/ultra 10s flattener: -14,021 FVH2 vs. +5,650 UXYH2.
  • Long end outperformed amid flurry of steepener stop-outs, general view of economy, uncertainty over Covid variants etc. 5s30s almost dipped below 59.0 -- lowest since March 2020, drew spec and fast$ buying with spd back to 63.5 late.
  • Data on tap Wed includes ADP private jobs (+525k est vs. +571k prior) may give some indication on employ conditions ahead Fri' NFP (+535k est vs. +531k prior).
  • The 2-Yr yield is up 3.9bps at 0.5236%, 5-Yr is down 0.3bps at 1.1468%, 10-Yr is down 6.1bps at 1.4375%, and 30-Yr is down 7.3bps at 1.7818%.


US DOLLAR LIBOR: Latest settlements

  • O/N +0.00012 at 0.07650% (+0.00238/wk)
  • 1 Month -0.00525 to 0.09400% (+0.00362/wk)
  • 3 Month +0.00238 to 0.17325% (-0.00212/wk) ** Record Low 0.11413% on 9/12/21
  • 6 Month -0.00275 to 0.24325% (-0.00275/wk)
  • 1 Year -0.03750 to 0.38238% (-0.02800/wk)
STIR: FRBNY EFFR for prior session:
  • Daily Effective Fed Funds Rate: 0.08% volume: $85B
  • Daily Overnight Bank Funding Rate: 0.07% volume: $279B
US TSYS: Repo Reference Rates
  • Secured Overnight Financing Rate (SOFR): 0.05%, $953B
  • Broad General Collateral Rate (BGCR): 0.05%, $350B
  • Tri-Party General Collateral Rate (TGCR): 0.05%, $328B
  • (rate, volume levels reflect prior session)
FED: NY Fed Operational Purchases
  • Tsy 22.5Y-30Y, $1.574B accepted vs. $2.555B submission
  • Tsy 7Y-10Y, $2.801B accepted vs. $7.360B submission earlier
  • Next scheduled purchases
  • Wed 12/01 1100-1120ET: Tsy 4.5Y-7Y, appr $5.275B
  • Thu 12/02 1010-1030ET: TIPS 7.5Y-30Y, appr $1.075B
  • Fri 12/03 1100-1120ET: Tsy 10Y-22.5Y, appr $1.425B

FED Reverse Repo Operation

NY Federal Reserve/MNI

Still a little off mid-November highs, NY Fed reverse repo usage climbs to $1,517.956B from 84 counterparties vs. $1,459.339B on Monday. Record high remains at 1,604.881B from Thursday, September 30.


Eurodollar Options
  • Block, 20,000 short Mar 99.50/99.75 call spds, 2.0
  • +35,000 Jun 99.37 puts, 9.
  • +10,000 short Sep 97.50 puts, 8.5
  • +5,000 Sep 99.00 puts, 12.0
  • Block, +10,000 Green Dec 98.12/98.25/98.37 put flys, 1.5
  • 5,000 Jun 98.25/98.50 put spds
  • 15,000 Blue Dec 98.50/98.62 call spds
  • Overnight trade
  • -38,000 short Dec 99.18/99.25 call spds, 2.5
  • 25,250 Jun 99.43/99.56 put spds
  • 5,000 Jun 99.37/99.50 put spds
  • 5,750 Jun 99.93 calls
  • 10,000 Red Dec'22 98.87/99.12 put spds
  • 3,500 short Dec 98.93/99.00/99.06/99.12 put condors
  • 5,000 short Mar 98.62/98.75 put spds
  • 2,300 Mar 99.37/99.56/99.75 put flys
  • 5,000 Green Dec 98.37/98.50 2x1 put spds
  • 3,200 Green Jan 98.00/98.25 put spds
  • 4,000 Blue Dec 98.37 calls, 8.5
Treasury Options:
  • 10,000 TYF 129/130 put spds, 16
  • -18,000 FVF 122.25 calls, 13-13.5
  • -30,000 FVF 121 puts, 11-10.5
  • -20,000 TYF 129.5 puts, 13-12
  • +5,000 TYG 135 calls, 8
  • Overnight trade
  • over 55,000 TYF 127.5 puts, 2 largely from
  • 30,000 TYF 127.5/128 put spds, 3
  • 8,000 TYF 133 calls, 10
  • 2,500 TYF 127/129/130 put flys, 6
  • 2,000 USF 157/159/161 put flys

EGBs-GILTS CASH CLOSE: Significant Flattening

Bunds and Gilts outperformed Treasuries Tuesday, with the long ends of the curves enjoying a strong rally despite a near-30Y high eurozone inflation reading.

  • Though the overall tone was bullish, with equities tumbling amid fears over the Omicron Covid variant/lockdowns, short-end USTsys sold off on Fed Chair Powell's signalling a quicker taper pace may be imminent; 2Y UK and German yields rose sharply in tandem.
  • Overall, curves ended much flatter - UK 5s30s and 10s30s flattest since 2008.
  • Periphery EGB spreads widened after enjoying some compression Monday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

  • Germany: The 2-Yr yield is up 1.4bps at -0.737%, 5-Yr is up 0.7bps at -0.618%, 10-Yr is down 3.2bps at -0.349%, and 30-Yr is down 7.7bps at -0.058%.
  • UK: The 2-Yr yield is down 2.1bps at 0.484%, 5-Yr is down 3.2bps at 0.62%, 10-Yr is down 5.2bps at 0.809%, and 30-Yr is down 9.3bps at 0.853%.
  • Italian BTP spread up 2.4bps at 131.8bps / Spanish up 0.9bps at 74.8bps

EGB Options: Repeat SONIA Fly Buyer

Tuesday's Europe rates /bonds options flow included:

  • RXF2 174/176.5cs 1x2, sold at 62 in 1k
  • RXF2 171.5/170/169.5p ladder, sold at 5 in 1k
  • RXF2 176/177/177.5c fly, bought for 13 in 5.7k
  • RXF2 176/177/177.5c fly, bought for 13 and 13.5 in 12k
  • RXF2 172/171ps, bought for 14/15.5/16 in 22k
  • DUH2 112.30/112.10/111.90p fly, bought for 4 in 2k
  • OEG2 133.5/132ps 1x1.5, bought for 18 in 1.5k
  • OEF2 135/135.5cs 1x2, bought for 4.5 in 1k
  • SFIF2 99.55/99.65/99.70c fly, bought for 3.5 in 4k and 4k, 8k on the day

FOREX: Dollar Whipsaws On Omicron/Fed’s Powell Headlines

  • The greenback spent the early part of Tuesday in a steady downtrend as Moderna's CEO poured some water on hopes that the current suite of vaccines would retain effectiveness in the face of new variants.
  • Just as wires reported the U.S. dollar was posting its biggest drop since early May, Fed Chair Powell shocked the markets by stating the FOMC can consider wrapping up the taper “a few months early” as well as commenting that it may be time to retire the word transitory regarding inflation.
  • The headlines culminated in an immediate spike in the dollar and an entire reversal of the day’s losses. The dollar index rallied a little over 1% amid the pressure in equities and front-end US yields shifting higher. EURUSD sold off from 1.1375 to 1.1236 and USDJPY rose back above the 1.13 mark to print highs at 1.1370.
  • Despite the powerful move higher for broad dollar indices, follow through was short-lived and momentum quickly subsided. The dollar index spent the next few hours grinding lower, back into negative territory. As of writing, the DXY resides down 0.25%.
  • Overall, there are mixed performances in G10 FX. With EURUSD and USDJPY broadly tracking the dollar index performance, risk/commodity tied currencies such as AUD and CAD have actually weakened around 0.5% against the greenback – continuing their November downtrends.
  • On the technical front it is worth pointing out that initial firm resistance in EURUSD at 1.1374, Nov 18 high and the 20-day EMA at 1.1383. have held at the first time of asking amid the volatile price action.
  • In emerging markets, USDTRY made another all-time-high at 13.6820 as reports emanated that a central bank executive director had left his post and Lira losses extended amid the late hit to global risk sentiment.
  • December kicks off with Australian Q3 GDP overnight before final European PMI prints. US ADP and Ism Manufacturing PMI headline the US docket ahead of Fridays NFP report.

FX: Expiries for Dec01 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.1400(E1.0bln)
  • EUR/GBP: Gbp0.8400(E1.7bln)
  • AUD/USD: $0.7165(A$782mln)

EQUITIES: Stocks Sink as Powell, Omicron Hammer Sentiment

  • Equity markets opened lower and deteriorated from there, with concerns surrounding the spread of the new omicron COVID variant compounded by a persistent hawkish tone from the Fed chair Powell. The twin headwinds pressured all three major US indices, with losses of 1.6-1.7% across the Street.
  • The e-mini S&P sank through the Friday lows of 4577.25 as Fed Chair Powell appeared to mark the end of the use of the phrase 'transitory' when referring to inflation, adding that the FOMC will investigate accelerating a taper in December, which could bring forward an end to the asset purchase program in 2022.
  • Growth stocks fell most sharply, with communication services the underperforming sector for the session. Banks and financials also sank as a marked flattening in the US yield curve crimped expected lending margins. Lastly, energy names added to the weight as the WTI and Brent crude price sank to fresh trend lows, with the active WTI contract taking out key support at the $67.43 200-dma.
  • Continental markets traded similarly lower, with the Spanish IBEX-35 at the bottom of the pile - having dropped 1.8%.

COMMODITIES: Oil Hit By Omicron And Powell

  • Oil is down again after yesterday’s tentative stabilisation, at lows since Aug on renewed Omicron fears and gathering pace on Powell’s recent accelerated taper comments.
  • WTI is down -5.1% at $66.35 and remains bearish, very close to testing the support level at $66.21, the 76.4% retracement of the Aug-Oct rally.
  • $60/bbl puts have been the most active strikes today for the F2 (Jan'22) contract, followed by $55/bbl puts and then closely $65/bbl puts.
  • Brent is down -3.8% at $70.62, a bearish extension. Attention is on $69.57 next, the Sep 9 low, whilst initial firm resistance is up at $77.58.
  • The White House will provide updates on Covid-19 efforts shortly at 1230ET whilst Biden yesterday suggested he will unveil a strategy for dealing with the Omicron variant on Thu.
  • Weekly DOE inventories tomorrow plus key US macro data including ADP employment and the ISM manufacturing survey for Nov.
  • Gold has slipped in recent trading on Powell’s comments on sticking with an accelerated taper and is now -0.5% lower today at $1775.5. It is through last week’s low with a key support next at $1759 (Nov 3 low).

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