MNI ASIA MARKETS ANALYSIS - FI Fades EU Gas Hit Ahead Of Fed

US TSYS: Treasuries Square Up Ahead Of FOMC

• Treasuries have reversed course today ever since TYU2 cleared support at 120-11 (Jul 22 high) and stopped just short of the bull trigger at 120-16+ (Jul 6 high), touching an intraday high of 120-15+ in the process but now up just 4+ ticks at 119-25+, all on below average volumes ahead of tomorrow's FOMC. The initial rally was led by growth fears with a follow-on from yesterday's after close weak Walmart earnings plus also spillovers from weaker growth implications of EU gas curbs.
• The sell-off in the second half of the session extended through the latest second tier data, possibly putting more weight on the beat for the Richmond Fed manufacturing index despite misses for Conf. Board consumer confidence and new home sales, before slowing somewhat after the 5Y auction stopped through. More likely was the fact the clearance of prior levels seen after Friday's significant US PMI miss was a step too far.
• In cash space, the twist flattening around 7s, with 2YY +3bps and 10YY -1.5bps, drives inversion in 2s10s to -25.5bps (-4bps) just off earlier new post-2000 lows. The 3M to 10Y spread saw a modestly larger bounce off intraday lows of 16.5bps but at 24bps is still at pre-pandemic flats.
• Finally, there has ultimately been little change in breakevens on the day, leaving the 5Y at 2.59%, off early July lows of circa 2.50% but still down 40bps since the June FOMC.
• Earnings releases from Microsoft and Visa due after close today before preliminary durable goods and then obviously the FOMC decision tomorrow.

UST 2Y (white), 10Y (yellow), 2s10s (green) and 3M to 10Y (pink)Source: Bloomberg

EURODOLLARS/FED FUNDS: Red Pack Inversion Retreats From Near Record Levels Intraday

• Front Eurodollars are back where they started the session but the red pack and beyond has more than unwound the sizeable early rally. The rally had been put down to spillover from gas curbs hitting EU growth plus a softer US retail backdrop, with that still being a key factor behind the day's slide in equities and few clear drivers of the subsequent sell-off in rates.
• Near-term ED yields are relatively pinned ahead of tomorrow's FOMC (EDZ2 -1.5bps) with Fed Funds implied hikes relatively little changed on the day at a cumulative 180bps of hikes over the four meetings to year-end to a terminal 3.38%.
• A 3.5bp increase for EDZ3 sees an unwinding of particularly steep inversion through 2023, but at -0.69, EDZ2/EDZ3 is still close to the lows seen both this cycle and historically when looking at 2nd vs 6th contracts over time, with building inversion through EDZ3/EDZ4 at -0.39. See chart.

FOREX: Gas Uncertainties Prompt Renewed Euro Weakness

• EU energy ministers agreed Tuesday on a voluntary reduction in gas consumption of 15% ahead of the 2022-23 winter, as well as a mechanism to trigger a Union Alert if there is a risk to supply, in which case reductions would become mandatory.
• The decision comes amid ongoing concerns over Russia’s potential gas supply cuts to EU countries, adding to the growing recessionary fears throughout the continent.
• Euro weakness was broad based, falling roughly one percent against the greenback as well as the JPY, GBP and CHF. EURUSD downward momentum picked up speed below the Monday lows at 1.0179 and the single currency moved steadily lower throughout Tuesday.
• Approaching the APAC crossover and tomorrow’s FOMC decision, EURUSD is hovering just North of the 1.01 mark at a one-week low. The breach of initial support at 1.0120 will be monitored with the focus turning to the next support points at 1.0064/0.9952 Low Jul 18 / 14 and the bear trigger.
• EURCHF’s break below 0.9807 and the 0.98 handle sparked a wave of selling as the pair continues to make fresh cycle lows and print at the lowest levels since the removal of the floor in January 2015.
• Mostly a product of the weaker Euro, the USD index has risen 0.7% and combined with the weaker price action across major equity indices, the likes of AUD, NZD and CAD have fallen between 0.4-0.6%.
• Focus on July FOMC: With firm consensus for a 75bp Fed hike, focus at the July meeting will be on Powell and the Statement. The key immediate question is the FOMC’s thinking on the magnitude of the next hike.
• A reduction in the size of hikes is likely starting in September, especially given weakening economic data and the ongoing moderation in inflation expectations. However, for now the FOMC is likely to be non-committal, apart from saying it anticipates ongoing hikes are appropriate.

EQUITIES: S&P E-mini Eyes Support At 20-day EMA On Retail Pressure

• S&P 500 extends its decline to -1.3% with outsized losses again for the Nasdaq 100 (-1.9%). SPX is led lower by consumer discretionary (-3.3%) after Walmart’s (-8.3%) disappointing earnings along with a notable slide in Amazon (-5.3%) ahead of earnings on Jul 28. The underperforming retail theme hasn’t been helped by Shopify axing 10% of its workforce on a fading post-pandemic e-commerce boom across the border.
• Gains meanwhile are led by 3M Co (+7%) on plans to spin off its multibillion-dollar health-care operations, helping health care (+0.4%) see one of the few gains on the day.
• ESU2 is just off new session lows of 3916.0 (-1.4%), moving closer to initial support at the 20-day EMA of 3898.26. Clearance would open 3723.75 (Jul 14 low) in a reversal of the recent bullish extension after last week’s break above the 50-day EMA, whilst a resumption of this trend would see initial resistance at 4016.25 (Jul 22 high).

FX OPTIONS: Expiries for Jul27 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E1.5bln), $1.0125(E650mln), $1.0197-10(E1.7bln), $1.0250-55(E1.2bln), $1.0270(E533mln), $1.0300(E1.1bln)
• EUR/JPY: Y142.40(E1.4bln)
• USD/CAD: C$1.2750($590mln), C$1.2850-55($850mln), C$1.2910-25($648mln)
• USD/CNY: Cny6.7000($1.2bln), Cny6.7500($617mln)

Price Signal Summary - Flag Formation In EURUSD Reinforces Current Bull Cycle

• In the equity space, S&P E-Minis are unchanged and the contract is holding on to the bulk of its recent gains. Last week’s climb resulted in a move above the 50-day EMA. This reinforces short-term bullish conditions and a resumption of gains would open 4145.75 next, the Jun 9 high. The 20-day EMA, at 3898.26, is the first support to watch. EUROSTOXX 50 futures are consolidating. This pause in the current bull cycle appears to be a bull flag. If correct, it reinforces short-term bullish conditions and suggests scope for a stronger recovery towards 3689.00, Jun 10 high. Initial support is at 3467.00, Jul 18 / 19 low.
• In FX, the short-term outlook in EURUSD remains bullish following the recent recovery from the base of its bear channel, drawn from the Feb 10 high. The current consolidation appears to be a bull flag and this reinforces the current uptrend. The focus is on 1.0359 next, the Jun 15 low. GBPUSD is consolidating and holding onto its recent gains. A continuation higher would signal potential for a climb towards 1.2220, the 50-day EMA. Key support and the bear trigger is at 1.1760, the Jul 14 low. The recent move lower in USDJPY is still considered corrective and attention is on two key support levels; 135.10, 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 and 139.39 is the bull trigger, Jul 14 high.

• On the commodity front, Gold remains in a downtrend and the latest recovery is considered corrective. The bear trigger is $1681.0, the Jul 21 low. Key short-term resistance to watch is at $1745.4, the Jul 13 high. In the Oil space, WTI futures trend conditions remain bearish. The contract continues to trade below the 50-day EMA that intersects at $101.43. The average represents an important pivot point - if breached, the move higher would signal scope for a stronger rally. On the downside, first support to watch is $93.01, the Jul 25 low.
• In the FI space, a short-term bull cycle in Bund futures remains in play, and the contract has traded higher today to once again confirm a resumption of the upleg. The focus is on 155.87, the May 12 high. The trend condition in Gilts remains bullish. The focus is on 118.16, 1.382 projection of the Jun 16 - 24- 29 price swing.