MNI EUROPEAN MARKETS ANALYSIS: Gilts Eyed After Sizable UK Fiscal Package Touted

US TSYS: Bear Flattening After Long Weekend, Gilts & ISM Services Eyed

TYZ2 deals at worst levels of Asia trade, -0-11+ at 116-09+, while cash Tsys run 3-7bp cheaper across the curve.

• Cash Tsys have bear flattened after the Labor Day weekend, initially taking impetus from the general direction of travel in global FI markets on Monday, before being further aided by press outlets flagging the potential for a much larger than expected fiscal support package out of the UK re: energy prices.
• A pullback in ACGBs from best levels in the wake of the latest RBA decision has allowed a fresh round of cheapening to kick in ahead of London hours, after Tsy futures initially moved away from Monday’s lows in early Asia dealing, seemingly aided by USD weakness.
• ISM services data headlines the domestic docket on Tuesday, with the Gilt market reaction to the aforementioned press reports re: potential UK fiscal support set to provide direction in pre-NY dealing.

JGBS: Off Best Levels Alongside Wider Core FI, Eyes On YCC Tolerance Band

Cash JGBs run flat to 1bp cheaper across the curve, with the belly leading the weakness as futures move away from best levels alongside wider core FI markets. JGB futures print -9 on the day.

• As we flagged on several occasions during the Tokyo morning, the proximity of 10-Year JGB yields to the upper end of the BoJ’s permitted trading band likely insulated the space from registering meaningful losses in early Tokyo dealing, with softer than expected domestic data also helping, as futures reversed overnight losses.
• The super-long end represented the firmest point on the curve all day but has moved away from best levels alongside the remainder of the curve. This comes after that zone hit firmest levels in the wake of a solid round of 30-Year JGB supply.
• Comments from Japanese Finance Minister Suzuki saw a reiteration of well-trodden rhetoric surrounding FX movements, while there was also confirmation that fund requests from Japanese ministries for FY23 totalled Y110tn, in line with press reports, as Japan works towards the compilation of its latest budget.
• Looking ahead to Wednesday, the local docket will be headlined by BoJ Rinban operations covering 1- to 10-Year JGBs.

AUSSIE BONDS: No Overt Slowing Signal From RBA Unwinds Pre-Decision Bid

Aussie bonds have pulled further away from best levels in the wake of the latest RBA decision, with no overt signal re: a pivot away from the Bank’s recent run of 50bp hikes and the RBA sounding a little more upbeat when it comes to wages.

• Still, there was enough in the statement to provide a relatively balanced outlook when it comes to the prospect of a 25/50bp hike in October (see earlier bullets), leaving OIS markets little changed when it comes to the pricing of the remainder of the current tightening cycle.
• RBA dated OIS still prices 34bp of tightening for the October decision, essentially unchanged on the week, while terminal rate pricing still sits around 3.85% (see earlier bullet for graphical and tabular depiction), with RBA Governor Lowe’s Thursday address and Q&A providing the next focal point for RBA watchers.
• ACGBs had squeezed higher pre-decision, perhaps on hawkish position covering/in anticipation of the signalling of slower rate hikes from the RBA, although this was not forthcoming (as we suggested in our preview), allowing YM & XM to print -0.5, with cash ACGBs flat to 1bp cheaper across the curve.
• A quick reminder that Wednesday’s domestic docket will bring the release of Q2 GDP data and A$800mn of ACGB Apr-33 supply.

AUSTRALIAN DATA: Trade Data Suggests A Good Q2 GDP Report

Government accounts and balance of payments for Q2 were published today. The ABS estimates that government spending should contribute 0.1 percentage point to second quarter GDP and net exports of goods and services 1pp. With all partials for Q2 GDP now released, there is a risk that GDP prints higher than expected. All components, except investment, are likely to make positive contributions. At this stage, the market consensus is +1.0% for q/q growth and +3.5% y/y (in Q1 we saw 0.8% q/q and a 3.3% y/y pace).

• The Q2 current account balance posted its 13^th consecutive surplus at $18.3bn rising $15.6bn q/q. This is the longest stretch of surpluses on record. The ABS noted that the increase was driven by the impact of higher commodity prices on the goods balance while the services balance deteriorated slightly.
• Export volumes were also strong rising 5.5%q/q due to increased demand for commodities and for travel-related services. Import volumes rose 0.7%, as Australians travelled overseas again.
• The terms of trade rose a further 4.6% in Q2 to be up 7.5% y/y. While the AUD has diverged from the terms of trade this year, it continues to drive valuation estimates higher. This coupled with the strong current account surplus is providing some support to the currency.

FOREX: USD/JPY To Fresh Highs, While GBP Outperforms

USD/JPY has pushed to fresh highs this afternoon. The pair is above 140.80, highs from late last week and closing in 141 (last 140.90/95). The move is in line with a late afternoon surge in UST yields (the 2yr at 3.46%, +7bps), while a mixed tone to regional equities hasn't impact sentiment a great deal.

• There were comments early from Japanese officials around FX, but nothing that hasn't been heard before.
• The DXY is back close 109.70, after dipping in the first half of trading (low of just under 109.40).
• GBP remains the standout, sitting around 1.1565, buoyed by the new PM's energy plans. We are down from earlier highs close to 1.1600 though. EUR/USD has mostly followed GBP gyrations, we are back sub 0.9950 now.
• AUD/USD is around 0.6800, recovering from an earlier post RBA dip. There was no dovish surprise from the RBA, but the currency is now back to following broader USD trends. AU yields have climbed post the announcement (2yr back close to 3.00%, from earlier lows at 2.93%).
• Data suggests a solid outcome for Australian GDP tomorrow, with upside risks to the 1% q/q forecast.
• NZD/USD is back sub 0.6100, losing momentum through the afternoon. The AUD/NZD cross has edged higher post RBA from around 1.1140 to 1.1160/65. This is line with recovering AU-NZ yield momentum.

FX OPTIONS: Expiries for Sep06 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9800(E521mln), $0.9900(E792mln), $0.9995-00(E1.1bln), $1.0040(E598mln), $1.0095-00(E896mln)
• USD/JPY: Y138.75($600mln), Y140.00($626mln)
• AUD/USD: $0.6800-01(A$783mln), $0.6875(A$863mln)
• AUD/NZD: N$1.1325(A$556mln)
• USD/CNY: Cny6.9500($613mln)
• USD/CAD: C$1.3015-30($1.0bln)

ASIA FX: Wedge Evident Between NEA & SEA FX ​​​​

A wedge is evident today between North East Asia (NEA) and South East Asia (SEA) FX. USD/CNH's dip sub 6.9400 wasn't sustained (last at 6.9495/00). The fixing bias was not perhaps as strong as the market anticipated post the FX reserve ratio cut. Fresh Covid headwinds also weighed, with cases in Beijing a concern. Note the pair is around 50pips away from levels that prevailed prior to yesterday's Forex reserve ratio cut.

• In South Korea and Taiwan, both equity markets remain in positive territory, but only just and we are well down from session highs. USD/KRW has traded close to 1375, a sharp turnaround from earlier lows of 1364.
• USD/TWD has continued to push higher, last at 30.77, slightly off from session highs (the CBC stated it has continued to intervene in the FX market, see this link for more details).
• In SEA, USD/SGD is around 1.4030, up from earlier lows of 1.4005, but only flat for the session. USD/THB is back sub 36.50 after yesterday's weaker than expected inflation data. Resistance remains in this pair closer to 37.00.
• USD/IDR is back to 14883, -20 figs versus yesterday's close and now back below the 50 day MA (14905).
• USD/PHP is slightly lower at 56.92, with earlier CPI figures for August coming in a touch softer at 6.3% y/y, versus 6.4% expected. Still, core inflation accelerated beyond the top-end of the 2-4% band (4.6% y/y in August).
• USD/INR has traded in a tight fashion since the open. The pair is above 79.85, only a touch firmer than yesterday's closing levels. Comments from RBI Governor post the close yesterday are likely providing some caution to fresh USD longs. Governor Das stated the central bank is involved in the FX market almost every day, with the aims of curbing volatility and anchoring rupee expectations.

EQUITIES: Mixed On Tuesday; Chinese Developers Gain On Asset Sales

Major Asia-Pac equity indices are mixed at writing, with Japanese and Hong Kong benchmarks giving up their early bids, while Chinese stocks have pushed higher amidst an uptick in optimism surrounding domestic economic stimulus in Q3.

• The Hang Seng deals 0.4% weaker, dragged lower by losses in tech and utilities. The property sub-index (+1.7%) was a notable bright spot, driven by a strong showing from China-based developers (Hang Seng Mainland Properties Index: +3.4%).
• The bid in the latter comes as several developers such as CIFI Holdings (+4.6%) and Guangzhou R&F Properties (+3.5%) have announced the disposal of assets, easing some worry re: a liquidity crunch in the sector, with the CSI300 Real Estate Index (+1.7%) firming as well.
• The broader CSI300 (+0.6%) bucked the broader trend of losses, with high-beta consumer staples equities leading the way higher following voiced support for stimulus in Q3 by NDRC officials on Monday. The ChiNext underperformed, dragged lower by heavyweight CATL (-3.5%) amidst news of a terminated JV arrangement.
• The ASX200 is little changed at writing, with little by way of a meaningful reaction observed in the index and its various sub-gauges after the RBA’s monetary policy decision.
• E-minis are off their early highs, sitting 0.4-0.6% firmer apiece at writing, operating a short distance from last week’s one-month lows.

GOLD: Higher As Dollar Softens; U.S. Market Open Eyed

Gold is ~$7/oz firmer at writing to print ~$1,717/oz, back from a brief surge of as much ~$16/oz higher earlier, notching fresh one-week highs (at $1,726.7/oz) as the USD has backed away from Monday’s cycle highs.

• From a technical perspective, gold remains in a downtrend despite a break of initial resistance at $1,726.6 (Aug 31 high), with key resistance remaining some distance away at $1,765.5 (Aug 25 high). On the other hand, initial support is seen at $1,681.0 (Jul 21 low and bear trigger).
• Gold has started the month on a firmer footing after recording five consecutive months of declines, steadying in recent sessions on a rise in recession-related worry amidst Fed/ECB hawkishness (since the Jackson Hole Symposium) and elevated energy prices.
• Looking ahead, the U.S. ISM services PMI is due later in the NY session, with participants also watching for the return of U.S. markets from the long weekend.

OIL: Holding Monday’s Gains; OPEC+ Signals More Active Stance

WTI is +$1.80 while Brent is -$0.80 (note that there was no settlement for the former owing to the U.S. holiday) at writing, with both benchmarks operating around the middle of their respective ranges established on Monday.

• To recap, crude had rallied ~$4 apiece in the run up to Monday’s OPEC+ meeting on anticipation of an adjustment to output quotas, with WTI and Brent later halving gains after a marginal cut was announced.
• To elaborate, OPEC+ cut production targets by 100K bpd for October, with the largely symbolic reduction serving as a signal of the group’s willingness to react to volatility in crude prices in the coming months.
• On that topic, while OPEC+ is scheduled to next meet on Oct 5, RTRS source reports have pointed to the group’s intention to adjust production “whenever necessary” going forward, led by the chairman, Saudi Energy Minister Prince Abdulaziz.