MNI US MARKETS ANALYSIS - USD Touches New August High Before Fading

US TSYS SUMMARY: A Modest Twist Flattening With US Activity Data, 2Y Supply Eyed

• Cash Tsys sees a modest twist flattening, led by a 2bp cheapening in the front end and with a pivot only after 10s in a stagflationary collection of headlines through London hours. Global gas prices popped higher still (US no exception briefly clearing $10/MMBtu having been $5.5 in early July) and the Eurozone PMI printed sub-50 for the second month running although at least fared slightly better than expected.
• JPM see the 2-year supply being digested with relative ease as investors might use the auction to cover shorts “given the large short base at the front end, very low dealer inventory levels in front-end coupon Treasuries, the moves since the July auction, and limited room for short-term Fed expectations to move materially higher before the release of the September data”.
• 2YY +1.9bps at 3.329%, 5YY +0.9bps at 3.167%, 10YY +0.4bps at 3.018% and 30YY -0.3bps at 3.222%.
• TYU2 trades just 2+ ticks higher at 117-25, close to yesterday’s low of 117-21+ and with key near-term support eyed at 117-14+ (Jul 21 low) as the bear cycle is still in play.
• Data: S&P Global PMI Aug prelim (0945ET) before Richmond Fed mfg index Aug and new home sales Jul (1000ET)
• Fedspeak: Kashkari (’23 voter) with audience Q&A at 1900ET
• Bond issuance: US Tsy $44B 2Y Note auction (91282CFG1) – 1300ET
• Bill issuance: US Tsy $60B 21D bill auction – 1130ET

STIR FUTURES: Fed Hike Path Maintaining Drift Higher

• Fed Funds implied hikes are unperturbed by European PMIs, with the Eurozone composite sub-50 for the second month running but a small beat (49.2 vs 49.0 cons) and a mixed UK PMI (50.9 vs 51.0 cons) for the preliminary August surveys.
• It leaves 66.5bps priced for the Sept FOMC (slowly grinding nearer to the 70bps pre US CPI) whilst the 127bps to 3.61% in Dec and 145bps to a peak 3.78% in Mar’23 are at recent highs before a trimmed 35bps of cuts to end-2023.
• US PMIs come into focus next whilst a Q&A with Kashkari (’23 voter) late at 1900ET is the last scheduled Fedspeak prior to Jackson Hole. He last called for rates of 3.9% by end'22 and 4.4% by end'23 as he maintains the more recent shift towards the hawkish end of the FOMC spectrum.

FOMC-dated Fed Funds futures implied rate at specific meetingsSource: Bloomberg

EGB/GILT SUMMARY: Continuing To Slide

European government bonds have continued to trade lower having posted losses at the beginning of the week, while equities are similarly down again.

• Most notably, the euro has pushed below parity against the dollar, marking the weakest level for the single currency in 20 yeras.
• Gilts have sold off with the curve bear flattening. Cash yields are up 5-10bp.
• Bunds opened higher but quickly gave back the gains with yields now 1bp higher across much of the curve.
• OATs similarly had a strong start before trading lower through the morning.
• The BTP curve has marginally steepened with the 2s30s spread widening 1bp.
• Preliminary eurozone PMI data for August continued to indicate contractionary or near contractionary conditions across most of the bloc.
• Supply this morning came from the UK (Linker, GBP750mn), Austria (ATBs, EUR1.923bn)

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU2 147/151/155c fly sold at 227 in 5k

OEV2 126/125.5ps, sold at 34 in 4k

ERU2 99.00/12/25/37c condor, sold at 6 in 4k
ERZ2 99.12/99.00/98.78p fly, sold at 0.75 in 18k
ERU3 98.875/99.125/99.75c ladder, sold at 0.75 in 14k

SX7E 16th Dec 80/90cs 1x2 bought for 1.85 in 12k

SOUTH KOREA: Terms of Trade Plummet as Authorities Warn of FX Risk

• The South Korean finance ministry strengthened their language concerning currencies earlier today, with the finance minister Kyung-ho warning that 'market sentiment may be one-sided' and that the authorities would step up monitoring on possible speculative trading.
• Judging by their actions earlier this year, this morning's comments strongly suggest the Korean finance ministry could intervene further in the KRW, and will keep focus on their FX reserves pile (last reported at $439bln, down from $469bln in late 2021).
• This morning, the USD/KRW rate hit a new cycle high and the best level since the Global Financial Crisis, with Citi's terms of trade dropping to a new series low (on records going back to the mid-1990s) and suggests the recent trend of surging import costs (July's Y/Y import price index rose 27.9%) is far from over.
• The comments come ahead of this Thursday's BoK rate decision, at which the bank are expected to raise rates by 25bps to 2.50% - but could come under pressure to take sharper action.

FOREX: USD Hits August High, But Fades Into NY Hours

• The USD Index briefly printed a new August high in early European hours, putting the gauge at 109.27 before fading. The mid-July highs of 109.294 remain the cycle high for now, and a break above would put the USD at it's strongest since 2002.
• The EUR continues to trade heavy, with EUR/USD briefly printing 0.9901 before slightly firmer than expected German manufacturing PMI shored up the rate ahead of the NY crossover.
• Equity futures are distinctly mixed, with no firm market direction so far Tuesday. US stock indices sit slightly higher, indicating a positive open on Wall Street after the sharp pullback noted through Monday's session.
• Over-arching USD strength continues to work against the CHF, putting the pair higher today for the seventh consecutive session. USD/CHF is now above the 100-dma at 0.9653 and sits at the highest levels since late July. 0.9689 marks the next key upside level, the 61.8% retracement for the July - August downleg.
• US prelim August PMI data takes focus going forward, expected to slow to 51.8 from 52.2 in July. Richmond Fed manufacturing also crosses as well as new home sales for July. Nonetheless, focus remains elsewhere, with the beginning of the Jackson Hole policy symposium later this week - and Fed's Powell speaking on Friday.

Price Signal Summary - EURUSD Resumes Its Primary Downtrend

• In the equity space, the trend condition in S&P E-Minis remains bearish for now - a corrective cycle is still in play. The 20-day EMA has been cleared and this opens the 50-4080.86. EUROSTOXX 50 futures remain in a short-term downtrend. The 20-day EMA has been cleared and the 50-day EMA at 3650.80, has been pierced. A clear break of this 50-day average would strengthen the bearish theme and open 3582.50, 50.0% of the Jul 5 - Aug 17 rally.
• In FX, EURUSD started the week on a bearish note and the pair has cleared key support at 0.9952, the Jul 14 low. This confirms a resumption of the primary downtrend. The focus is on 0.9883 next, 1.764 projection of the Jun 9 - 15 - 27 price swing. GBPUSD has breached support at 1.1760, the Jul 14 low and bear trigger. This confirms a resumption of the downtrend and paves the way for weakness towards 1.1673, the 1.00 projection of the May 27 - Jun 14 - 16 price swing. USDJPY continues to appreciate and last week traded above resistance at 135.58 , the Aug 8 high. The pair has also breached 137.27, 76.4% of the Jul 14 - Aug 2 downleg. Sights are on 137.96 next, the Jul 22 high.
• On the commodity front, Gold remains soft. The yellow metal recently failed to confirm a clear break of the 5-month downtrend. The break of support at $1754.4 Aug 3 low, signals scope for a deeper pullback towards $1711.7 next, the Jul 27 low. In the Oil space, WTI futures are trading higher as recent short-term gains extend. Key resistance is seen at $94.17, the Aug 11 high. A resumption of weakness would refocus attention on $85.37, the Aug 16 low.
• In the FI space, Bund futures remain in a bear cycle and the contract has traded lower today. The focus is on the 150.00 handle next. Gilts remain vulnerable. The next objective is 111.72, the Jun 29 low.

EQUITIES: Bouncing Off Session Lows, Energy Leading

• Asian markets closed weaker: Japan's NIKKEI closed down 341.75 pts or -1.19% at 28452.75 and the TOPIX ended 21.15 pts lower or -1.06% at 1971.44. China's SHANGHAI closed down 1.571 pts or -0.05% at 3276.223 and the HANG SENG ended 153.73 pts lower or -0.78% at 19503.25.
• European equities are a little higher for the most part, with Eurostoxx up about 1% from the session lows, and energy stocks leading: German Dax up 14.49 pts or +0.11% at 13847.56, FTSE 100 down 32.47 pts or -0.43% at 7521.73, CAC 40 up 11.98 pts or +0.19% at 6573.53 and Euro Stoxx 50 up 2.77 pts or +0.08% at 3795.33.
• U.S. futures are a little higher: Dow Jones mini up 43 pts or +0.13% at 33100, S&P 500 mini up 5.25 pts or +0.13% at 4146.5, NASDAQ mini up 16.25 pts or +0.13% at 12925.25.

COMMODITIES: NatGas Prices Surge Amid Continued Supply Disruptions

• WTI Crude up $1.6 or +1.77% at $89.92
• Natural Gas up $0.23 or +2.4% at $9.673
• Gold spot up $3.26 or +0.19% at $1774.56
• Copper up $0.9 or +0.25% at $364
• Silver up $0.02 or +0.09% at $19.0457
• Platinum down $0.06 or -0.01% at $877.31