MNI ASIA MARKETS ANALYSIS - Modest Risk Recovery

US TSY SUMMARY: Partial Retracement Of Last Week’s Recession-Focused Rally

• Treasuries have more closely followed the risk-on moves implied in FX rather than falling equities, where tech companies appear to weigh on performance with Nasdaq seeing larger declines than SPX.
• Accelerated cheapening in the front-end, despite a brief pause for a solid 2Y auction stopping through 0.6bps with reasonable internals, has seen parallel shift higher in the yield curve (2YY +6.3bps, 10YY +6.6bps) from the early session bear steepening as both breakevens and real yields increase.
• That only sees a partial reversal of Friday’s rally, with yields still some 20bps below mid-last week levels before growth indicators started to roll heavily.
• Plenty of growth-related triggers tomorrow, with a heavy earnings week (50% of S&P market cap) beginning in earnest, the Richmond Fed manufacturing and Conf. Board consumer surveys plus the $46B 5Y auction. They all come with an eye on Wednesday's FOMC decision, MNI's Preview of which can be found here: https://marketnews.com/mni-fed-preview-july-2022

US TSYS/SUPPLY: Review 2Y Auction, Stops Through

• Solid $45B 2Y auction: 3.105% high yields vs 3.021% WI; 2.58x bid-to-cover vs last month 2.51 and 5 auction average of 2.59.
• Stops through 0.6bps after last month’s 0.7bp tail, albeit after selling off 2bps into the auction. It builds on the strong seasonal June performance for 2Y auctions, with 5 of the prior previous 17 stopping through and 8 on the screws.
• Indirect bounces back to 62.04% after last month’s drop to 51.5% (5 auction av 60.1%) with primary dealer take falling back close to prior average (17.95% vs 17.25% av). Direct lowest since Feb auction at 20.01%.

US Eurodollars Futures: Front Rates Firm, Further Increasing Inversion

• Eurodollars yields have continued to trend lower through the US session despite the e-mini S&P sitting flat and the Dallas Fed survey joining the Philly Fed in showing weaker than expected activity and with a particularly notable cooling in price and wage components.
• Nevertheless, the largest increase of 7-7.5bps is seen in late whites/front reds but tail off with little change on the day in greens onwards, further increasing EDZ2/EDZ3 inversion to 74bps whilst EDZ2/EDH3 sticks to 20bps.
• The moves are mirrored in hike expectations for near-term meetings, with 75bp still locked in for Wed (78bps) but firming thereafter with a cumulative 139bp for Sep (+3bps) and 182bp for Dec (+4bp) in only a slow clawing back of last week’s slide in FOMC-dated Fed Funds implied hikes.

FOREX: Citi Month-End Model Points to Net USD Selling for July

Citi's prelim month-end FX rebalancing model sees net USD sales into the end of July:

• Model points to a net need to sell USD this month, with a signal strength inline with the historical norm.
• Gains in US assets leave foreign investors under-hedged, fuelling the net USD sell signal this month.
• EURUSD signal is the one stand-out, with the buy EURUSD signal the weakest due to the strength of Eurozone fixed income markets.
• On potential front-loading of month-end flows, their model has not seen signs of real money buying of any FX other than NZD and GBP, which suggests little front-loading of rebalancing trades so far.
• On asset rebalancing, their model signals selling of equities and buying of bonds. Outflows from US equity markets make up most of the need, with most other equity and bond markets seeing rebalancing inflows.

FOREX SUMMARY: G10 FX Mixed To Start The Week As Markets Await FOMC

• G10 currencies have traded in mixed fashion on Monday, as global markets continue to ponder ongoing growth concerns and exercise caution ahead of Wednesday’s FOMC rate decision.
• This sentiment is keeping the dollar off its highs as investors remain eager to see if the run of softer US data has in any way altered the Fed’s hawkish rate path. Additionally, market participants may have one eye on Thursday’s advance reading of second quarter GDP.
• Overall, notorious safe havens have underperformed to start the week, with the Japanese Yen at the bottom of the G10 leaderboard. Conversely, AUD, GBP and CAD are the best performers, all rising the best part of 1% against the Yen and recovering the entirety of Friday’s retreat in the process.
• An unchanged NZD is slightly contrary to broader moves, potentially explained by AUD/NZD creeping higher, in tandem with Australia/New Zealand 2-year swap rate gap.
• The Euro was pulled in both directions as the initial IFO business sentiment survey indicated that business morale in Germany fell more than expected in July to its lowest in more than two years.
• Initial weakness, however, was short-lived and EURUSD gradually reversed higher towards 1.0250, where a sizeable volume of option expiries for the NY cut kept price action muted around this level. After expiries, aided by a negative Gazprom headline relating to the NordStream 1 Gas pipeline, EURUSD fell roughly 40 pips to 1.0210, trading close to unchanged from Friday’s close.
• An initial month-end model from Citi points to a net need to sell USD this month, with a signal strength in-line with the historical norm.
• Some second tier US data highlights the docket on Tuesday in the form of consumer confidence and the Richmond manufacturing index. Focus remains firmly on Wednesday’s Federal Reserve decision and press conference.

FX OPTIONS: Expiries for Jul26 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0190-00(E623mln), $1.0260-65(E896mln)
• USD/JPY: Y139.00($970mln)
• EUR/JPY: Y141.00(E727mln), Y143.00(E734mln)
• USD/CAD: C$1.2750($700mln), C$1.2900($763mln)

Price Signal Summary - USDJPY Approaches Key Short-Term Support

• In the equity space, S&P E-Minis are holding on to the bulk of recent gains. Last week’s bullish extension confirmed a break above the 50-day EMA. This reinforces short-term bullish conditions and suggests scope for a climb towards 4145.75 next, the Jun 9 high. On the downside, the 50-day EMA, at 3890.70, is the first support to watch. EUROSTOXX 50 futures touched a new high Friday at 3620.00, but the price has moved back into its recent range and the contract continues to consolidate. This pause in the bull cycle appears to be a bull flag. If correct, it reinforces current bullish conditions and suggests scope for a stronger recovery towards 3689.00, the Jun 10 high. The key support and bear trigger is unchanged at 3343.00, Jul 5 low. Initial support is at 3467.00, Jul 18 low.
• In FX, EURUSD remains in a S/T bull cycle following the recent recovery from the base of a bear channel drawn from the Feb 10 high. The current consolidation appears to be a bull flag formation and this reinforces bullish conditions. The focus is on 1.0359 next, the Jun 15 low. GBPUSD is consolidating and holding onto its recent gains. An extension would signal potential for a climb towards 1.2227, the 50-day EMA. The recent move lower in USDJPY is still considered corrective and attention is on two key support levels; 134.90, the base of a bull channel drawn from the Mar 4 low, and 134.27, the Jun 23 low. A break of this support zone would signal scope for stronger reversal. The primary uptrend remains intact, 139.39 is the bull trigger, Jul 14 high.
• On the commodity front, Gold is consolidating. The yellow metal remains in a downtrend and the latest recovery is considered corrective. The bear trigger is $1681.0, the Jul 21 low and key short-term resistance is at $1747.7, the 20-day EMA. In the Oil space, WTI futures trend conditions remain bearish. The contract continues to trade below the 50-day EMA that intersects at $101.62. A continuation lower would open $88.23, the Jul 14 low and bear trigger. A break of the 50-day EMA would signal a strong bullish reversal.
• In the FI space, a short-term bull cycle in Bund futures remains in play. Friday’s gains confirmed a resumption of the uptrend. The focus is on 155.27 next, the May 26 high. The trend condition in Gilts remains bullish and Friday’s rally reinforced this theme. The focus is on 118.16, 1.382 projection of the Jun 16 - 24- 29 price swing.

COMMODITIES: Risk-On Of Sorts Supports Oil

• Crude oil has generally trended higher through the US session, with forward curve backwardation strengthening. It comes with a cheapening in Treasuries and support for high beta FX majors even if equities haven't followed suit ahead of the FOMC's expected 75bp hike on Wednesday.
• The Biden-Xi call expected within the next week or so is eyed for implications on potential Chinese demand and an unlikely willingness to curb Russian purchases. Nearer-term, Nord Stream gas issues remain heavily in focus, with Gazprom once again set to cut shipments to about 20% of capacity from 7am Moscow on Wednesday claiming maintenance issues.
• Latest CFTC data meanwhile show managed money net longs have recovered after hitting the lowest levels in 18 months in prior weeks, but bullish bets on Nymex Brent and ICE WTI are still low due to recessionary risks and as high fuel pump prices are impacting demand.
• WTI is +2.24% at $96.79, moving back closer to resistance at the 20-day EMA of $99.58 in a move against bearish trend conditions. Support is seen at $91.64 (Jul 15 low).
• Brent is +1.88% at $105.14 as it moves back closer to the 50-day EMA of $107.21 with further resistance just higher at $107.61 (Jul 19 high).
• Gold is -0.6% at $1717.24, pushing back against what had been seen as a corrective bounce. Support is seen at $1681.0 (Jul 21 low).

US: FED Reverse Repo Operation

• NY Fed reverse repo usage falls $37B to $2192B, moving further from the recent high of Thursday’s $2272B, as expected with GSE cash exiting with those outflows in theory now finished for the month. It’s down from the record month-end surge of $2330B on Jun 30.
• Consistent with that seasonal pattern, the number of counterparties dipped from 101 to 100 although still above the mid-to-high-90s the prior week.