MNI EUROPEAN MARKETS ANALYSIS: USD Demand To Start The Week

US TSYS: Tight Ranges In Play In Asia, Chinese Equity Weakness Limits Losses

The previously outlined weakness in Chinese equities (based on COVID worry and fines for big tech names), which weighed on broader risk appetite, allowed Tsys to tick away from worst levels of the session, after early Asia-Pac trade saw regional participants undertake some light selling as they reacted to Friday’s post NFP front end-led cheapening. TYU2 last deals +0-02 at 117-22, just off the peak of its very tight 0-04 Asia range, with a lack of fresh headline flow since the Asia re-open and diminished liquidity on the back of a holiday in Singapore hampering activity (TYU2 operates on ~60K lots in volume terms). Cash Tsys run little changed to 1bp cheaper across the curve at typing.

• Note that the US contract was the only major Tsy futures contract to show through its Friday low in overnight dealing (albeit only marginally, with the move short-lived).
• Monday’s NY docket includes another appearance from NY Fed President Williams (with the address set to focus on the LIBOR transition) and 3-Year Tsy supply. The European gas situation will also be eyed, with the annual maintenance period of the Nord Stream pipeline getting underway today.

JGBS: Cheaper On Local Political Matters, But Off Worst Levels

JGB futures moved lower during the Tokyo morning, with domestic equities pushing higher in the wake of Japan’s ruling coalition tightening its grip on power in the weekend’s upper house elections, which will allow PM Kishida to continue to push forward his idea of modern capitalism, while participants also continue to speculate on the future shape of Japanese defence and monetary policy. Press reports noted that Kishida is set to conduct a cabinet reshuffle in August or September, with subsequent comments from Kishida pointing to a reshuffle that will focus on party unity. He also noted that there will be lively debate on constitutional changes in the Autumn, while flagging imminent talks on fiscal measures to combat inflation (which will seemingly be based on “flexible” use of the country’s budget reserves).

• This mix of domestic political matters, coupled with wider weakness in global core fixed income markets in the wake of Friday’s U.S. NFP print, has allowed the space to cheapen.
• Elsewhere, comments from BoJ Governor Kuroda reaffirmed the Bank’s stance, while the latest Sakura report saw the BoJ upgrade its assessment of 9 areas of the country, while the other 2 saw their assessment remain as was.
• Futures last deal -28, off worst levels of the session as the wider equity sphere comes under some pressure (although the Nikkei 225 outperforms post-elections, last +1.2%, albeit shy of best levels). Cash JGBs are little changed to ~4bp cheaper across the curve, bear steepening (although 7s were softer than directly surrounding lines on the weakness in futures). Note that the 10-Year JGB yield was limited by the upper boundary of the BoJ’s permitted -/+0.25% trading band during the Tokyo morning. Swaps out to 10s were generally wider on the day (excluding 7s given the futures-related weakness), while 20+-Year swap spreads were narrower on the day.
• Looking ahead, PPI data and 5-Year JGB supply headline Tuesday’s domestic docket.

AUSSIE BONDS: Tracking Tsys In Muted Start To The Week

Aussie bond futures followed a similar patten to U.S. Tsys, initially shifting lower at the re-open as Sydney participants reacted to the post-NFP gyrations that were led by weakness in U.S. Tsys, although both YM & XM failed to break below their respective overnight session bases. The contracts then backed away from worst levels on the previously alluded to weakness in Chinese equities, with little In the way of domestic catalysts to trade off. YM sits -4.0 & XM -5.5 at typing, with tight ranges in play, while cash ACGBs sit 4-6bp cheaper across the curve after some catchup to overnight moves. EFPs have continued their recent march wider, to the tune of 3.5bp in both the 3- & 10-Year metrics. Bills run 6-10bp cheaper through the reds. Note that participants are also on the lookout for the launch and pricing of SAFA’s May ’36 tap, which will come at some point this week, per after-market guidance on Friday. Looking ahead, the NAB business survey, Westpac consumer confidence reading and CBA household spending data headline domestic matters on Tuesday.

FOREX: Wider Aversion To Risk Underpins USD Outperformance, Yen Fails To Benefit

The overhang from expectation-beating NFP report released out of the U.S. in local hours Friday supported the greenback at the start to the week, with participants converting data signals into hawkish Fed bets ahead of this week's CPI figures. Headwinds for the equity space nudged investors towards safer assets, amplifying appetite for the U.S. dollar.

• Offshore yuan went offered, testing the prior trading day's lows against the dollar, as China COVID-19 worry lingered, while local antitrust regulator took action against Alibaba & Tencent. Shanghai outbreak continued to spread, while Macau shut almost all of local business premises.
• The yen failed to benefit from cautious mood music as BoJ Gov Kuroda stuck with his usual lines on monetary policy despite speculation that the death of ex-PM Abe might undermine political support for the Bank's ultra-loose stance in the longer term.
• On top of that, a strong mandate handed to the ruling LDP-Komeito coalition in this weekend's Upper House election has been interpreted as a promise of stabilisation in domestic politics, allowing Japanese equities to outperform.
• Demand for USD/JPY emerged after the Tokyo fix, driving the pair above its recent cyclical high (Y137.00) and to its best levels since 1998, with the yen landing at the bottom of the G10 pile. USD/JPY 1-month risk reversal climbed to a fresh monthly high.
• Risk-off price action was evident across European FX space. Recessionary fears were fuelled by the prospect of continued weaponization of gas supplies by Russia.
• Focus turns to Norwegian CPI and a handful of second-tier releases from across the Eurozone, while ECB's Nagel is due to speak.

FOREX OPTIONS: Expiries for Jul11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0050(E897mln), $1.0225(E559mln), $1.0250(E1.3bln), $1.0300(E1.2bln), $1.0400(E1.0bln)
• USD/JPY: Y133.50($1.6bln), Y136.50($855mln)
• AUD/USD: $0.6250(A$1.0bln)
• USD/CNY: Cny6.5484($1.4bln)

ASIA FX: USD/CNH Back Above 6.7000, Rupee Weakens To Record Lows

Most USD/Asia pairs are higher, due to weaker equities and a stronger USD against the majors. USD/CNH is back above 6.7000, but remains within recent ranges. Domestic covid cases are trending higher in Shanghai. USD/KRW is back above 1300, while the rupee has weakened to fresh record lows. PHP and IDR have seen modest outperformance, while THB is higher on BoT policy rhetoric.

• CNH: USD/CNH has moved up firmly today, +0.3% on closing levels from last week to the high 6.7000 region. We remain well within recent ranges though. Part of this is broader USD strength, but fresh Covid concerns on rising cases numbers in Shanghai and tech equity led weakness have also weighed. Higher USD/JPY levels (through 137.00) have likely added to CNH weakness at the margin.
• KRW: USD/KRW started the session lower but that proved to be short lived. The pair is back above 1301 at the time of writing. Local equities couldn't hold gains, while offshore investors have sold nearly $123mn in local stocks.
• INR: USD/INR is pushing higher to fresh record highs close to 79.40. RBI board member Bhida stated that larger rate hikes may be needed to cool inflation. Also, a weaker rupee is preventing feed through of lower commodity prices into domestic inflation pressures. Note over the weekend RBI Governor Das stated that inflation pressures are expected to cool from October.
• IDR: Spot USD/IDR has shed 13 figs and last deals at IDR14,964 as the rupiah shows resilience in the face of general greenback strength. Indonesia's 5-Year CDS premium (one of the rupiah stability indicators watched by Bank Indonesia) extends its pullback from a two-year high printed just above 150bps last Thursday. Also, worth flagging that Indonesia will tighten COVID-19 rules from next week. Domestic travellers who have not received their booster jabs will be required to present a negative pre-departure test.
• PHP: USD/PHP is unchanged on the day, just under 55.94. There appears to be some near term resistance above 56.00 in the pair. Note the Philippines' Development Budget Coordination Committee (DBCC) expects USD/PHP to be within the PHP51-55 from 2023 through the end of President Marcos' term in 2028. The FX forecast for this year was kept unchanged at PHP51-53. Domestic data highlights this week include monthly trade report, due for release tomorrow.
• THB: Spot USD/THB is weaker on the day, sub 36.00, bucking the stronger USD trend. The BoT Governor stated that monetary policy has been very accommodative and stimulus needs to be withdrawn gradually. The BoT MPC is also putting more emphasis on rising inflation pressures (as opposed to the growth backdrop). Such commentary raises the prospect of an August lift off for the BoT.

EQUITIES: China COVID & Fines At Centre Of Risk-Negative Feel, Japan Bucks Trend

Worries from several areas weighed on most of the major equity benchmarks that were open for dealing during Asia-Pac hours.

• Chinese COVID fear (centring on Shanghai detecting the BA.5 variant for the first time & Macau shuttering most of its businesses for a week) coupled with a fresh round of fines for some of the tech giants (Alibaba & Tencent) meant that Chinese & Hong Kong equities underperformed the wider equity space, with the Hang Seng Tech index trading the best part of 4% softer at typing, while the benchmark CSI 300 sits ~2% worse off. Travel-related names and casinos struggled, as you would expect when assessing the aforementioned news flow.
• Worries surrounding the European gas supply saga continue to feed into the risk-negative narrative (even with Canada returning a repaired Nord Stream turbine back to Germany), while Tesla CEO Musk’s attempt to pull out of a takeover of Twitter applied further pressure to the space. The S&P 500 contract last deals 0.6% softer on the day.
• Japan was the exception to the broader rule, with the reaction to the country’s ruling coalition extending its grip on power via the latest round of upper house elections initially generating a positive market reaction, before the wider spread risk aversion pulled Japanese equities back from best levels (Nikkei 225 +0.9% at typing).

GOLD: Outperforming Other Commodities

Gold has spent the start of this week respecting recent ranges. Dips below $1740 have been supported, but we haven't been able to muster a re-test above $1745. We last tracked just under $1742

• In terms of cross asset drivers today, a firmer USD has helped cap any upside impetus for gold. The DXY is back above 107.30, +0.30% on closing levels from the end of last week.
• US yield momentum has stayed positive, but there hasn't been a great deal of follow through, with the 2yr yield up less than +1bp at this stage to 3.11%, following a strong bounce during Friday’s domestic US session.
• The trend last week was for higher US real yields, as Fed rhetoric remained hawkish and US NFP data painted to a strong labor market picture on Friday. The US 10yr real yield ended last week at +72bps. Arguably though golds dip through $1750, from earlier last week, had already arguably discounted such a move.
• Equity sentiment is more supportive for the precious metal, with falls in China related bourses, on renewed Covid concerns evident. This has also weighed on US equity futures, which are now comfortably in the red.
• Such a backdrop has likely helped gold outperform other commodities on the day, with oil, copper and iron ore lower on demand concerns.

OIL: Dips On Demand Concerns

Brent crude has started the week modestly lower, back to the low $106/bbl region (-0.5% on the day), after ending last week at $107/bbl. WTI is also weaker, now back to $104/bbl. The tug of war between supply and demand factors driving sentiment continues. Weekend Covid developments in China add downside risks to the demand outlook, which explains most of today's move.

• Rising covid cases in Shanghai, including the discovery of the BA.5 variant and mass testing this week is raising concerns around the demand outlook for broader commodities. Fresh lockdowns are also taking place in Haikou, the capital of Hainan and Macau.
• Elsewhere the focus will be on US President Biden's visit to Saudi Arabia this week. However, there is little optimism that much supply relief will be forth coming as spare capacity in the country and OPEC+ more broadly is reportedly fairly limited.
• Domestic gas prices in the US have been trending the right way for the administration, although it remains to be seen how much further downside materialises. Domestic supply remains tight in the US.
• Last week spec positions in both the gasoline and crude oil market were cut. For ICE Brent we are now back to a 20 month low at +143k. The US rig count also edged up by 2 last week.
• In the EU, Canada will return a repaired Russian turbine to Germany needed for the Nord Stream 1 gas pipeline according to a Reuters report.

MNI US EARNINGS SCHEDULE - Banks Kick Off Quarterly Cycle

EXECUTIVE SUMMARY

• Financials and banks are the early focus
• Just over 5% of the S&P 500 by market cap are due to report
• Friday marks the busiest session for the index

Full schedule with timings, EPS & revenue expectations here: MNIUSEARNINGS080722.pdf