MNI US MARKETS ANALYSIS - China Stimulus Headlines Buoy Global Equity Recovery

US TSYS: Futures Ease from Monday's Rally, Fed Commentary Remains the Focus

Treasury yields are sharply lower in the restart of cash trade following Monday's holiday, but are off session lows, with futures weakening.

• The curve has seen significant bull flattening, but all in catching up with Monday's futures gains: 2-Yr yield is down 8.9bps at 4.9927%, 5-Yr is down 12.7bps at 4.63%, 10-Yr is down 12.9bps at 4.6716%, and 30-Yr is down 11.9bps at 4.8488%.
• However futures are weaker Tuesday: TYA -8.5 ticks at 107-18+, having rallied a full point Monday in part on the Israeli conflict safe-haven bid, but also on FOMC commentary (Logan, Jefferson) that higher Tsy yields could restrain further Fed funds hikes.
• With that in mind, multiple Fed speakers are the focus today: NY Fed SOMA manager Perli, as well as FOMC members Bostic, Waller, Kashkari, and Daly all appear.
• September's NFIB small biz survey showed a modest deterioration in optimism, but was not a market mover.
• The only remaining data for the session are wholesale inventories at 1000ET, and NY Fed inflation expectations at 1100ET. Most attention is on September's CPI report on Thursday, with PPI offering a prelude Wednesday.
• October's coupon supply kicks off today with an auction for $46B in 3Y Note - our monthly Treasury Issuance Deep Dive was published this morning (PDF here).

MNI UST Issuance Deep Dive: Oct 2023

We've just published our latest UST Deep Dive (PDF link below):

• The US Treasury is set to continue raising the size of nominal coupon auction sizes for at least the next few quarters.
• Total nominal coupon issuance in October is set to reach $255B.
• Large ongoing fiscal deficits mean the November 1 Refunding announcement is likely to point to a further increase in nominal coupon sizes across the board in the final quarter of the calendar year.
• Our full Refunding preview will be published at the end of October and will include projections through calendar Q1 2024.

Full PDF Analysis Here

STIR: SOFR Short Cover Seemed to Dominate on Monday

The combination of yesterday’s ricehning on the SOFR strip and preliminary open interest data point to short cover as the dominant positioning factor on Monday, with only limited pockets of apparent net long setting observed through the blues.

• The whites saw the largest apparent round of net short cover on a pack basis, with the size of the pack positioning swings then tiered down through the blues.

FOREX: Paring Gains Going into the US Session

• The Dollar was trading closer to flat against G10s overnight and going into the EU Cash Govie open.
• Early mover was the NOK, which fell following the Norway CPI coming below consensus.
• The NOK is still worst performer, now down 0.39% but off its worst level, following some reversal in the USD, falling lower, on the back of the Risk Off tone in Europe and the US.
• The Yen was under early pressure, as US Yields ticked higher into the European session.
• USDJPY trades in a most notable range in G10, 90 pips, tested above 149.00, to print a 149.07 high, but as since fallen back below 149.00, with the dollar taking its cue from the move higher in Equities.
• Looking ahead, US Final Wholesales inventories is the only notable release, but unlikely to be a big market mover, with the main focus on the US CPI this week.
• Speakers include, Fed Perli, Bostic, Waller, Kashkari, Daly, and ECB Villeroy.

FX OPTIONS: Expiries of Note

• EURUSD: 1.0540 (642mln).
• USDJPY: 148.50 (320mln), 148.55 (425mln), 148.60 (304mln), 148.75 (345mln).
• USDCAD; 1.3655 (639mln).
• AUDUSD: 0.6350 (1.07bn), 0.6400 (289mln), 0.6420 (225mln).
• NZDUSD: 0.5950 (331mln), 0.5975 (325mln).
• USDSEK: 11.00 (660mln).

BONDS: Bund & Gilt Curves Bear Flatten

Bund and gilt futures are off Asia/early London highs, with European equities on the front foot on the back of feedthrough from Monday’s Fedspeak and hope re: fresh Chinese stimulus. Elsewhere, oil prices have recovered from session lows alongside the rally in European equities.

• Supply also provides some background pressure for EGBs, with the books on the latest EU syndication now closed.
• I/L supply out of Germany and the UK wouldn’t have been a meaningful mover for conventional paper.
• Bund futures last show -10 or so, with the German cash benchmarks sitting 1-4bp cheaper, bear flattening.
• EGB spreads to Bunds are generally a tighter after widening on Monday, with BTPs outperforming (aided by the recovery in equities), albeit consolidating the bulk of the well-documented spread widening seen in recent weeks. The exception to the trend is Portuguese & Greek 10s, which sit 0.5-1bp wider vs, Bunds.
• Gilts bear flatten, with futures +15 and cash gilts running 1-5bp cheaper. Lower tier local data won’t have moved the needle for markets, while BoE MPC member Mann stuck to the hawkish side of the spectrum late on Monday.

EQUITIES: Bear Cycle in E-Mini S&P Remains in Play Despite Recent Recovery

Eurostoxx 50 futures trend conditions remain bearish, with Friday’s rally and the follow through this morning deemed corrective in nature. The contract has traded below 4128.00, the Sep 27 low. This confirms a resumption of the downtrend that started late July and signals scope for a move towards 4055.40, a Fibonacci retracement point. Initial firm resistance is at 4207.30, the 20-day EMA. A break of this average would signal a possible short-term base. A bear cycle in S&P E-minis remains in play, despite Friday’s sharp corrective rally and the follow through this morning. The contract traded lower last Wednesday, confirming a resumption of the bear leg once again. This maintains the price sequence of lower lows and lower highs and signals scope for weakness towards 4194.75, the May 24 low. Pivot resistance is 4441.61, the 50-day EMA. Ahead of the 50-day average is resistance at 4381.68, the 20-day EMA.

COMMODITIES: WTI Futures Hold Onto Monday's Gains

WTI futures traded lower last week, but started the week on a stronger footing. The recent bearish price action resulted in a break of support at $88.19, the Sep 26 low. The contract has also cleared support at the 50-day EMA, at $84.46. This signals scope for a deeper retracement towards the $80.00 handle and $79.57, a Fibonacci retracement point. Initial firm resistance is at $87.71, the 20-day EMA. A break would signal a possible reversal. A bearish theme in Gold was put on pause Monday after a second session of gains. Monday’s bounce put prices back above $1850. Nonetheless, the recent sell-off resulted in a break of support at $1901.1 and this was followed by a breach of $1884.9, the Aug 21 low. This confirmed a resumption of the downtrend that started early May. The focus is on $1804.9, the Feb 28 low and a key support. On the upside, firm resistance is at $1878.2, the 20-day EMA.