MNI ASIA MARKETS ANALYSIS: Late Risk-Off, Eqs Erase Early Gains

Tsy/Eurodollar Roundup: Taking Geopol Tension Seriously

Rates held stubbornly to a narrow range Thursday as rising geopolitical tensions between the US and China as well as Russia helped reverse decent first half gains in equities: ESH2 4594.0 late morning highs vs. 4499.0 after the FI close.

• Equities started to trim gains following headlines that the US Senate panel approved an "anti-trust bill restricting big-tech platforms" WSJ.
• Sell-off accelerated after WSJ headlines on US/Russia tensions over Ukraine providing arms definitely turning up the heat: "U.S. Gives Baltic States Approval to Send U.S.-Made Weapons to Ukraine, Sources Say; Decision Will Enable Estonia, Lithuania, Latvia to Send Anti-Tank Weapons, Air Defense Systems to Ukraine", WSJ.
• Additional tension remains with China: Chinese military spokesperson Colonel Tian Junli has said that China has issued an 'eviction warning' to US warship USS Benfold operating in disputed waters around the Xisha island chain in the South China Sea
• Markets largely shrugged off early data: weekly claims gained 55k to 286k, higher than est 225k, continuing claims 1.635M vs. 1.563M est. Trade desks noted better buying from fast$, prop and option trading accts, carry-over real$ selling 10s and 30s.
• Selling Into Session Highs: Intermediates still outperforming short/long-end rates while trading desks reporting pick-up in sell interest: along with deal-tied rate-lock selling in 3s-10s, real$ and leveraged acct selling 5s, real$ selling 20s and 30s while central bank buying noted in 10s. Two-way option-related flow noted ahead Fri's Feb option expiration.
• The 2-Yr yield is down 0.8bps at 1.0494%, 5-Yr is down 3.2bps at 1.6165%, 10-Yr is down 3.2bps at 1.8326%, and 30-Yr is down 3.7bps at 2.1389%.

SHORT TERM RATES

US DOLLAR LIBOR: Settlement resumes:

• O/N +0.00029 at 0.07843% (+0.00443/wk)
• 1 Month +0.00015 to 0.10929% (+0.00600/wk)
• 3 Month +0.00372 to 0.25886% (+0.01757/wk) ** Record Low 0.11413% on 9/12/21
• 6 Month -0.00085 to 0.44629% (+0.05129/wk)
• 1 Year -0.00514 to 0.79843% (+0.07272/wk)

• Daily Effective Fed Funds Rate: 0.08% volume: $73B
• Daily Overnight Bank Funding Rate: 0.07% volume: $262B

• Secured Overnight Financing Rate (SOFR): 0.05%, $917B
• Broad General Collateral Rate (BGCR): 0.05%, $351B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $339B
• (rate, volume levels reflect prior session)

• Tsy 10Y-22.5Y, $1.601B accepted vs. $4.062B submission
• Next scheduled purchases:
• Fri 01/21 1010-1030ET: Tsy 0Y-2.25Y, appr $12.425B vs. $9.325B prior
• Tue 01/25 1010-1030ET: TIPS 1Y-7.5Y, appr $2.025B vs. $1.525B prior
• Pause for FOMC policy annc on Jan 26
• Thu 01/27 1010-1030ET: Tsy 22.5Y-30Y, appr $1.825B steady
• Mon 01/31 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.425B vs. $6.325B prior
• Tue 02/01 1100-1120ET: TIPS 7.5Y-30Y, appr $1.225B vs. $0.925B prior
• Thu 02/03 1100-1120ET: Tsy 10Y-22.5Y, appr $1.625B steady
• Tue 02/08 1010-1030ET: Tsy 22.5Y-30Y, appr $1.825B steady
• Thu 02/10 1010-1030ET: Tsy 7Y-10Y, appr $3.225B vs. $2.425B prior

FED Reverse Repo Operation

Second consecutive new high: NY Fed reverse repo usage climbs to $1,678.931B w/82 counterparties today vs. $1,656.576B prior session -- still well off all-time high of $1,904.582B on Friday, December 31.

EURODOLLAR/TREASURY OPTIONS SUMMARY

• +10,000 short Feb 98.50/98.62/98.75 put trees, 2.0
• 11,600 Mar 99.75 calls, .75
• 7,000 Apr 99.62 calls, .75
• +30,000 Mar 99.87 calls, 0.25, large open interest just over 400k
• 10,000 Apr 99.00/Jun 98.87 put spds, 0.5 net, Jun sold over
• +5,000 May 99.06/99.25 put spds 3.0 over 99.37 calls
• 5,000 May 99.50/99.68 call spds
• Overnight trade
• 4,400 May 99.06/99.25 put spds vs. 99.50/99.68 call spds
• 2,000 Feb/Mar 99.37/99.43 put spd spd

• 5,000 TYH 127/128.5/130 put flys, 29
• 5,000 FVH 118.5/119.25 2x1 put spds, 4
• +10,000 TYH 127 puts, 30 ongoing buyer total session volume >77k
• -8,000 FVH 119.5/120 1x2 call spds, 1 vsd. 119-08.5/0.07%
• 7,100 TYG 127 puts and 6,700 TYG 125.5 puts
• 14,700 TYH 127 puts, mostly 31
• 12,800 TYH 126.5 puts, 21 last
• 10,100 TYH 128.5 puts
• 5,000 TYJ 126.5 puts, 49 last
• 11,000 wk4 TY 126/126.5 put spds
• 2,000 FVG 119.5/119.75/120.25 broken put flys

EGBs-GILTS CASH CLOSE: Lagarde Keeps Hawks At Bay

Dovish, if not particularly surprising, comments on inflation by ECB President Lagarde early Thursday resulted in a constructive session across the European FI space.

• Periphery yields compressed as well on the ECB pushback on tightening (de Cos also appeared, reiterating no hikes expected in 2022); Italy outperformed.
• Data wasn't much of a market mover (incl weak French confidence data), but record-high German PPI was of some note.
• Last major data point of the week is UK retail sales first thing Friday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 0.7bps at -0.577%, 5-Yr is up 4.5bps at -0.296%, 10-Yr is down 1.2bps at -0.024%, and 30-Yr is down 2.1bps at 0.272%.
• UK: The 2-Yr yield is down 0.9bps at 0.899%, 5-Yr is down 1.4bps at 1.043%, 10-Yr is down 3.1bps at 1.225%, and 30-Yr is down 2.5bps at 1.347%.
• Italian BTP spread down 2.5bps at 132.6bps / Greek down 1.2bps at 173.1bps

EGB Options: Large Bund Unwind Features

Thursday's Europe rates / bond options flow included:

• RXH2 172c, bought for 24 in 3
• RXG2 171.50p, sold at 177 in 30k total (vs 30k futures - unwind of risk reversal leg)
• DUH2 111.80/111.60ps, bought for 2.75 in 5k
• 0NH2 98.90/98.70/98.50 put ladder sold at 7.25 in 5k
• 0NK2 98.40/98.20 ps vs 98.90c, bought the ps for 2 in 6k
• SFIK2 99.00/99.10/99.20/99.30c condor, bought for 3 in 1.5k

FOREX: Greenback Regains Poise As Equities Fade From Highs

• The US dollar had initially been trading on the weaker side approaching the London WMR fix, as equities extended gains from their Wednesday trough. However, ongoing tensions surrounding the Russia/Ukraine situation along with firm rhetoric from the US has weighed on equity indices in the latter half of the US session.
• In turn the US dollar has strengthened and the USD Index has risen to fresh session highs, up 0.2% for Thursday, looking set to erode yesterday’s retreat.
• While the likes of AUD and CAD have pared some gains, they still remain the strongest across G10 currencies, rising just shy of 0.5%. USDCAD continues to hover near recent trend lows as we approach a very live BoC meeting next week. A move through 1.2448 support, 76.4% of the Oct - Dec rally, would open 1.2387, the Nov 10 low.
• EURUSD had been consolidating for the majority of the session around 1.1350, however, eventually succumbed to the greenback strength, making new lows for the week as of writing below 1.1315.
• This week’s price action threatens the recent bullish theme and suggests that at this stage, last week’s range and bear channel breakout appears to have been a false one and has failed to deliver a bullish reversal. Next level in focus remains 1.1272, Jan 4 low.
• Worth noting EURGBP made another session low and is eyeing a test of immediate support at 0.8300. Below this level opens up the potential for a test of significant support - 2019/2020 double bottom 0.828222/0.82769. A close below 0.83 would be the lowest daily close since 2016, with many also referencing the significance of a close above 1.20 in GBP/EUR.
• Geopolitical focus undoubtedly on Blinken/Lavrov in Geneva tomorrow with the potential press conference starting around 1300 CET.
• BoJ minutes are scheduled overnight before UK retail sales kick off the European session on Friday. ECB’s LaGarde participating in further panel discussions at the WEF, before Canadian retail sales close out the data for the week.

EQUITIES: Paring Gains, US Turns Up Heat On Russia/Ukraine Tensions

Equities started to trim gains following latest WSJ headlines on US/Russia tensions over Ukraine providing arms definitely turning up the heat:

• U.S. Gives Baltic States Approval to Send U.S.-Made Weapons to Ukraine, Sources Say -- WSJ
• Decision Will Enable Estonia, Lithuania, Latvia to Send Anti-Tank Weapons, Air Defense Systems to Ukraine -- WSJ
• U.S. Has Notified Congress It Intends to Send Five Mi-17 Transport Helicopters to Ukraine, Officials Say -- WSJ

COMMODITIES: Oil Ends A Mixed Day Softer

• Crude oil prices have had a mixed day but are ending below yesterday’s settlement. Comments on the US working to accelerate the strategic oil reserve release saw prices soften before rising strongly with US equities and largely ignoring a surprie rise in US DOE crude inventories (+515k vs -1331k expected).
• Sentiment has since soured and oil moved with it, with seemingly little reaction to the US giving approval to Baltic States to send US-made weapons to Ukraine.
• WTI is -1.0% at $84.99 having earlier briefly cleared resistance at $86.79 (Jan 19 high) before retracing. Support is seen at $82.93 (Jan 18 low).
• Brent is -0.8% at $87.72, also having earlier briefly cleared resistance at $89.17 (Jan 19 high) whilst support is seen at $85.54 (Jan 15 low).
• Gold ends the day almost unchanged, -0.1% at $1839 at its recently found higher level. Resistance is seen at $1849.1 (Nov 22 high) and support $1805.9 (Jan 18 low).