HIGHLIGHTS
- Treasuries reversed course Tuesday, futures nearly back to Friday's pre-NFP levels as recession cares cooled.
- Curves bear steepened (2s10s +3.244 at -10.344) while projected rate cuts retraced to pre-jobs gains.
- Q2 delinquencies still elevated but nothing troubling from NY Fed debt report.
US TSYS Back Near Pre-Jobs Data Lows
- Treasuries are broadly lower after the bell, futures nearly back to Friday's pre-jobs levels as imminent recession concerns continued to cool Tuesday. In turn -- projected rate cut pricing into year end continue to cool, current vs. early Tuesday levels (*): Sep'24 cumulative -44.3bp (-45.3bp), Nov'24 cumulative -75.9bp (-80.8bp), Dec'24 -105.8bp (-110.8bp).
- The NY Fed’s Q2 household debt & credit report showed only a modest increase in transition rates to delinquency and serious delinquency after more marked increases in Q1, ruling out a sharper increase that could have been associated with more recessionary conditions.
- The trade deficit narrowed by less than expected in June to a seasonally adjusted $73.1bn (cons $72.5bn) after $75.0bn. It leaves a deficit still tracking at the ~3.1% GDP seen in May for a widening from the 2.9% GDP in Q1.
- Treasury futures held near lows (TYU4 113-11, -23.5) after $58B 3Y note auction (91282CLG4) came out on the screws: 3.810% high yield vs. 3.809% WI; 2.55x bid-to-cover vs. 2.67x prior.
- Look ahead: limited data Wednesday includes MBA Mortgage Apps and Consumer Credit, Boston Fed Collins roadshow not expected to discuss policy, no Q&A, US Tsy $42B 10Y Note auction (91282CLF6).
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
SOFR Benchmark Settlements:
- 1M -0.03788 to 5.28952 (-0.06252/wk)
- 3M -0.07590 to 5.05651 (-0.17122/wk)
- 6M -0.13020 to 4.65546 (-0.35217/wk)
- 12M -0.14659 to 4.14598 (-0.45010/wk)
- Secured Overnight Financing Rate (SOFR): 5.32% (-0.03), volume: $2.199T
- Broad General Collateral Rate (BGCR): 5.32% (-0.01), volume: $809B
- Tri-Party General Collateral Rate (TGCR): 5.32% (-0.01), volume: $789B
- (rate, volume levels reflect prior session)
- Daily Effective Fed Funds Rate: 5.33% (+0.00), volume: $86B
- Daily Overnight Bank Funding Rate: 5.32% (+0.00), volume: $231B
FED Reverse Repo Operation: Dips Below $300B
NY Federal Reserve/MNI
RRP usage falls below $300B for the first time since mid-May 2021 to $291.958B vs. $316.246B on Monday. Number of counterparties slips to 60 from 63 prior.
SOFR/TEASURY OPTION SUMMARY
SOFR and Treasury options leaned towards puts as underlying futures fell back near Friday's pre-NFP levels. Projected rate cut pricing into year end continue to cool, current vs. early Tuesday levels (*): Sep'24 cumulative -44.3bp (-45.3bp), Nov'24 cumulative -75.9bp (-80.8bp), Dec'24 -105.8bp (-110.8bp).- SOFR Options:
- Block, 6,000 SFRZ4 98.00/98.12/98.50/99.00 broken call condors, 0.0
- -20,000 0QZ4 96.25/96.75 call spds v 2QZ4 96.37/96.75 call spds 6.0
- +5,000 SFRU4 95.18/95.31/95.43 call flys, 2.0 ref 95.24
- -20,000 SFRX4/SFRZ4 95.31/95.43/95.56 call fly strip, 3.25
- 5,000 SFRU4 94.75/94.87/95.00 put trees ref 95.23
- 6,000 SFRU4 95.00/95.06 put spds ref 95.255
- 6,250 SFRZ4 95.56/95.87/95.62 call flys ref 95.855 to -.86
- 5,300 SFRQ4 95.25 calls ref 95.245 to -.25
- 6,700 SFRQ4 94.87/95.06 put spds vs. 95.43/95.56 call spds ref 95.245
- 4,000 SFRX4 95.12/95.25 put spds ref 95.56
- 4,000 0QZ4/3QZ4 97.25/98.00 call spds
- 3,000 SFRV4 95.50 puts vs. 2QV4 96.00/96.50 put spds
- 7,000 SFRZ4 95.62/96.00 call spds ref 95.84
- 2,000 SFRU4 95.00/95.06 put spds ref 95.28
- Treasury Options:
- Block, -12,500 TYU4 114 calls, 29 vs. 113-11.5/0.40%
- -7,000 TYU4 112 calls, 159 vs. 113-25.5/0.85%
- 3,000 TYU4 112.5 calls vs. TYV4 116 calls
- 1,100 USU4 127/129/131 call flys
- 6,000 TYU4 109/110 put spds ref 113-17
- over 5,300 FVU4 108.75 puts, 22.5 last
- over 5,400 FVU4 109 calls, 35 last
- 4,900 FVU4 110 calls ref 109-03.75
- 4,200 wk2 TY 113 puts vs. 114/114.5 call spds ref 113-22
- 7,500 TYU4 115/115.5 call spds ref 113-24
FOREX Risk Stabilization Prompts Relatively Contained Currency Ranges
- The more stable session for risk sentiment and slightly firmer equity benchmarks have prompted less volatility in currency markets on Tuesday. Ranges throughout the US session have been relatively contained, with the Japanese yen on the back foot following yesterday’s surge higher.
- USDJPY stands 0.85% on the day and after a strong rally overnight, the pair has been confined within its APAC trading range. 144.00 appears to be offering some short-term support with price action consolidating above 145.00 as we approach Wednesday’s APAC crossover.
- The bounce off Monday lows for USD/JPY has provided a sense of stability in the pair, but prices remain at risk of a resumption of the short-covering JPY rally, with both leveraged funds and asset managers still maintaining a deep net short JPY position.
- The likes of AUD and NZD have recovered around half a percent, with the former relatively outperforming following a modest hawkish lean to Tuesday’s RBA meeting.
- Despite RBA Governor Bullock downplaying this week's financial market volatility, Monday’s price action emphasised the Aussie’s sensitivity to a turn in risk, with AUDJPY exhibiting a huge 5.75% range. Furthermore, price action across several AUD crosses highlight the vulnerability to a further deterioration for global market sentiment.
- EURUSD sits 0.25% in the red, which reinforces the close negative correlation with the DXY this week, whereas GBP has underperformed on the session. Cable is down 0.6% and given the extreme focus on the yen Monday, today’s move might reflect positioning dynamics, with GBP still the standout bullish bet among investors, according to CFTC data.
- This has helped EURGBP climb back above 0.8600, as the cross remains in bull mode following the weekly close back above the 0.8500 pivot area.
- New Zealand employment and China trade data in focus on Wednesday, before German IP and the BOC minutes highlight a relatively quiet economic calendar.
FX OPTIONS: High Beta, Haven Hedging Dominate Option Flows
- Monday's FX vol spike helped trigger option flows of north of $160bln for the first time in over three months, via DTCC data - with JPY, EUR, CHF and EUR/JPY hedges dominating proceedings.
- Options activity is similarly busy so far today, with trade in havens and high beta currencies seeing the most interest: JPY, GBP and CHF volumes are well ahead of average for this time of day.
- GBP/USD downside insurance remains in demand, typified by trades consistent with a 2x1 1.21/1.24 put spread trading at the NY crossover. Position rolls off in early December, capturing both the Sept and Nov BoE decisions, and breaking-even on a move below ~1.2390 in spot at expiry.
- Amid frenetic vol in JPY markets, upside in USD/JPY via ITM call buying has proved popular, evident in the put/call ratio hitting ~0.6 when capturing both Monday and Tuesday trade. Call options expiring between 142.50-142.60 saw particular interest, with $4.7bln notional trading across those strikes so far this week.
Late Equities Roundup: Chip Makers, REITS Outperform
- Stocks continued to gain, S&P Eminis unwinding most of the week opener's sell-off to near Friday's close in late Tuesday trade. Cautious risk-on tone gained momentum after Monday's ISM services data helped cool imminent economic recession concerns.
- Currently, the DJIA trades up 694.34 points (1.79%) at 39388.68, S&P E-Minis up 117 points (2.24%) at 5333, Nasdaq up 396.3 points (2.4%) at 16592.2.
- Real Estate and Information Technology sector shares led gainers in late trade, office and health care investment trust shares supporting the former: BXP Inc +5.91%, Alexandria Real Estate +3.93%, Welltower Inc +3.83%. Semiconductor shares live to fight another day: Nvidia +6.64%, Texas Instruments +4.58%, Broadcom +4.51%.
- Energy and Consumer Staples sectors underperformed in the second half, oil and gas shares mildly weaker: Hess -1.03%, Chevron -0.95%, APA -0.80%. Meanwhile, food and beverage shares weighed on Staples: Tyson -0.82%, JM Smucker -0.59%, Hormel -0.44%.
- Expected earnings announcements after the close include the following: Illumina Inc, Devon Energy Corp, Fortinet Inc, Rivian Automotive, Astera Labs, Lumen Technologies, International Flavors, Reddit, Permian Resources, Wynn Resorts, Amgen Inc, Airbnb Inc and Super Micro Computer.
EQUITY TECHNICALS: Correction Or Reversal In The S&P 500?
A steep and impulsive bear cycle has dominated price action in the equity space. This has confirmed a bearish short-term trend condition. A look at longer-term charts highlight some important technical considerations.
S&P 500 Index (SPX)
- Looking at MA studies, the medium and long-term trend remains up. In the chart attached, the 200-day EMA - a long-term trend identifier - maintains a positive slope and for now at least, price continues to trade above this average.
- Furthermore, the 20- and 50-day EMAs are in a bull-mode set-up - 20 day EMA above the 50-day EMA. This relationship highlights the medium-term trend structure.
- The chart also highlights an important support - the Apr 19 low of 4953.56.
- A clear break of the 200-day EMA and support at 4956.56, would be regarded as an important bearish development.
- The last time price tested support at the 200-day EMA, was Oct-Nov 2023. This example illustrates an additional key technical feature - if price is unable to remain below the EMA once breached, a false break is likely to lead to a resumption of the uptrend.
- While support holds, there is a strong likelihood that the recent steep drop in price is part of a fast correction.
NASDAQ 100 Index (NDX)
- The MA structure is very similar in the Nasdaq index.
- MA studies are in a bull-mode set-up, however, the Aug 5 sell-off has resulted in a break of the 200-day EMA. A clear break is still required and price will need to remain below EMA and extend lower to highlight a more important medium-term reversal threat.
- The 200-day EMA currently lies at 17919.38. A key support has also been defined at 16973.94, the Apr 19 low. The area between these two price points represents a key support zone.
Short-Term Considerations
- Both Indices are oversold and a recovery would allow this condition to unwind.
- Key resistance is seen at:
- SPX: 5425.40 - the 50-day EMA
- NDX: 19298.07 - the 50-day EMA
- The 50-day EMA is an important resistance where a break would highlight a bullish development and a potential resumption of the primary uptrend.
COMMODITIES Crude Rises, Gold Declines Further
- WTI is headed for close trading higher, supported by concerns of Middle East conflict escalation, stronger US services sector data and a cut in production at Libya's Sharara oilfield.
- WTI Sep 24 is up 0.5% at $73.3/bbl.
- The EIA has kept its forecast for global oil demand in 2024 stable at 102.9m b/d in its August Short Term Energy Outlook.
- For WTI futures, sights remain on the next key support at $72.23, the Jun 4 low, which has recently been pierced. A clear break would open $70.73, the Feb 5 low.
- Meanwhile, Henry Hub has extended its gains today as US close approaches. Front month is supported by a recovery in the global gas markets and continued warmer weather.
- US Natgas Sep 24 is up 4.2% at $2.02/mmbtu.
- Spot gold has fallen by another 0.7% today to $2,394/oz, leaving the yellow metal 3.4% down from last Friday’s high.
- Commerzbank says that along with overblown expectations of Fed rate cuts, selling to compensate for losses in other assets may have also been behind gold’s recent weakness.
- From a technical perspective, this recent weakness appears to be a correction, for now. However, a clear break of support at the 50-day EMA at $2,375.4 would signal scope for a deeper retracement towards $2277.4, the May 3 low.
WEDNESDAY DATA CALENDAR
| Date | GMT/Local | Impact | Flag | Country | Event |
| 07/08/2024 | 0600/0800 | ** |  | DE | Trade Balance |
| 07/08/2024 | 0600/0800 | ** | | DE | Industrial Production |
| 07/08/2024 | 0645/0845 | * |  | FR | Foreign Trade |
| 07/08/2024 | 0900/1000 | ** |  | UK | Gilt Outright Auction Result |
| 07/08/2024 | 1100/0700 | ** |  | US | MBA Weekly Applications Index |
| 07/08/2024 | - | *** |  | CN | Trade |
| 07/08/2024 | 1400/1000 | * |  | CA | Ivey PMI |
| 07/08/2024 | 1430/1030 | ** | | US | DOE Weekly Crude Oil Stocks |
| 07/08/2024 | 1700/1300 | ** | | US | US Note 10 Year Treasury Auction Result |
| 07/08/2024 | 1730/1330 | | CA | BOC Minutes (Summary of Deliberations) | |
| 07/08/2024 | 1900/1500 | * | | US | Consumer Credit |
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