MNI EUROPEAN MARKETS ANALYSIS: Cautious Tone On Familiar Themes

Core FI Bid, As E-Minis Tick Lower, Familiar Risks Eyed

Several pockets of TY futures purchases & a downtick for e-minis provided Tsys with some support overnight. There was some focus on the COVID situation in the U.S., as well as ongoing Sino-U.S. & Sino-Aussie tensions. It could also be a case of the Asia-Pac region being willing to buy the recent dip in the space again. 10s outperform on the curve, richening by 4.1bp, with T-Notes +0-07 on the day at 137-26+, a shade shy of best levels. A note from Credit Suisse's Zoltan Pozsar, pushing back against the idea of year end funding pressure surrounding G-SIB dynamics, triggered a flurry of purchases in the front end of the Eurodollar strip, which runs 0.5-1.0 tick higher through the reds. Elsewhere on the flow side there was a ~16K screen sale of the EDM2 99.00 puts.

• The broader defensive feel to Asia-Pac trade, coupled with reports suggesting that the Japanese government could step up measures to fight COVID clusters, supported the JGB space, with futures adding 15 ticks to settlement levels ahead of the close as bulls look for a clear break above 152.00. Cash trade has seen modest richening across the curve, although the super-long end underperformed, even with receiving in that zone of the swaps curve, resulting in longer dated swap spread tightening. There was a slide in the cover ratio at the latest 5-Year JGB auction as the recent cheapening of the line didn't do enough to entice solid demand, with clearing yields a touch richer than the previous auction. Pricing was firm, with the low price coming in just above dealer expectations and no price tail.
• Aussie bonds wobbled early on in Sydney trade, after some long interest in XM around the 1.00% implied yield level. The wobble came despite the RBA stepping in to reinforce its 3-Year ACGB yield target, with A$2.0bn worth of ACGB April '24 purchases, which came in addition to the already scheduled purchase of A$2.0bn of 8-12 Year ACGBs. Long positioning and jitters surrounding trans-Tasman developments at the RBNZ were seemingly the drivers here. The space then regained some poise with little else to really attribute the resumption of the bid to, outside of the broader tone and aforementioned headline flow. YM +1.5, XM +8.0 come the bell, as the cash curve bull flattened and swap spreads widened from 5 years out.

Defensive Flows Negate Early Demand For NZD

Lack of any notable news flow kept focus on the global Covid-19 situation and China's tensions with Australia & the U.S., inspiring a degree of risk aversion. Safe havens gradually garnered strength and JPY climbed to the top the G10 scoreboard, building on an earlier round of purchases into the Tokyo fix.

• Risk-off flows undermined NZD, which had picked up a bid after BBG published an interview with RBNZ Asst Gov Hawkesby, who downplayed the need for deploying negative interest rates if banks make use of the new FLP facility, although stressed that it remains an option. He added that "less stimulus is required than we thought in August", but also pushed back against that the central bank's most recent decision was a surprise, attributing market reaction to sell-side analysts changing their calls. NZD/USD swung to a loss after printing a fresh 20-month high, while AUD/NZD backed off a 7-month low.
• Coming up today, we have UK quarterly GDP & monthly economic activity indicators, U.S. initial jobless claims, EZ industrial output as well as U.S., Swedish & German CPIs. Speeches are due from Fed's Powell & Evans, BoE's Bailey & Cunliffe, ECB's Lagarde & de Guindos, BoC's Wilkins & Riksbank's Breman.

Expiries for Nov12 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1765(E688mln), $1.1795-05(E1.3bln),
  $1.1825-30(E744mln), $1.1925-30(E640mln)
• USD/JPY: Y103.00($1.9bln-USD puts), Y103.50-55($793mln), Y105.40-50($1.55bln), Y106.20($610mln), Y106.55-60($690mln)
• EUR/GBP: Gbp0.8900-10(E709mln)
• USD/CHF: Chf0.9225($450mln)
• EUR/AUD: A$1.6520(E973mln)
• AUD/JPY: Y74.00(A$603mln-AUD puts)
• USD/CNY: Cny6.64($900mln), Cny6.75($860mln)

Caution Creeps In

There was little in the way of notable headline flow during Asia-Pac hours, although e-minis were biased lower as participants looked to the COVID-19 situation in the U.S., Sino-U.S. and Sino-Aussie tensions. The COVID-19 situation in Japan also got attention in some quarters, with talk surrounding the potential for broader containment measures evident there. As a reminder, Wednesday saw the NASDAQ 100 outperform on Wall St., while the Dow lagged, reversing the dynamic witnessed in recent sessions.

• The major Asia-Pac indices trade within close proximity of unchanged levels at typing, although the trajectory was generally lower as we moved through the session, given the aforementioned risk tone.
• Nikkei 225 +0.1%, Hang Seng -0.4%, CSI 300 -0.1%, ASX 200 -0.5%.
• S&P 500 futures -23, DJIA futures -173, NASDAQ 100 futures -75.

Nothing New

Bullion operates within the confines of the range established over the last couple of sessions, with spot +$5/oz at $1,870/oz at typing. Little to note on the fundamental/technical front, after Wednesday's Veterans Day holiday limited liquidity and the scope for broader developments over the last ~24 hours or so.

Back From Best Levels

WTI & Brent sit $0.25 below settlement levels, after lodging the most modest of gains on Wednesday, edging back from best levels in Asia-Pac hours as a broader defensive feel crept into the timezone.

• Wednesday saw the release of the latest monthly OPEC report, which saw the cartel slash its expectations for global crude demand in both '20 and '21.
• Elsewhere, a BBG sources piece noted that "talks between OPEC and its allies are zeroing in on a delay to next year's planned oil-output increase of three to six months, according to several delegates... This idea hasn't garnered widespread support so far among members, one delegate said." Earlier in the day we saw the Algerian Energy Minister flag an extension/deepening of production cuts as possibilities.
• Also on the supply front, Wednesday saw source reports pointing to yet another uptick in Libyan crude production, although current levels still remain shy of target levels outlined by the country's oil officials in recent days.

Decent Enough Buying Of Foreign Bonds Last Week

The most notable round of flows in the latest weekly Japanese international security flow data saw Japanese investors record a chunky round of net foreign bond purchases, which were likely FX-hedged (as per recent lifer comments). We flagged the potential for such a move earlier this week, given the dynamic surrounding U.S. 10—Year FX-hedged yield levels for Japanese investors.

• Elsewhere, the latest week saw foreign investors revert to net purchases of both Japanese bonds and equities.