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MNI US MARKETS ANALYSIS - Core Fixed Income Markets Trade Heavy

HIGHLIGHTS:

  • Core fixed income markets softer on heavy supply schedule
  • Equities backtrack off recent highs
  • Light data, speaker schedule keeps focus on Thursday's ECB decision

US TSYS SUMMARY: Heavy Supply Schedule Dominates In Return From Long Weekend

Treasuries continue to weaken from Friday's brief nonfarm payroll-driven spike, with 10Y yields now 10bp higher than last week's low as cash trade resumes post-Monday holiday. Supply is in focus.

  • Curve is bear steepening, with 10Y underperforming: 2-Yr yield is steady at 0.2062%, 5-Yr is up 2.4bps at 0.8078%, 10-Yr is up 3.9bps at 1.3613%, and 30-Yr is up 3.3bps at 1.975%.
  • Dec 10-Yr futures (TY) down 10/32 at 133-2.5 (L: 133-01 / H: 133-12), on strong volumes (~500k).
  • We get a very busy supply schedule today in a catch-up from Labor , including 4 bill auctions and 3Y Notes. 1000ET is $99B 13-/26-week bill auction, followed by another $79B in 21-day and 52-week bills at 1130ET, and then $58B 3Y Note at 1300ET.
  • Conversely, a fairly light data schedule today, with weekly MBA mortgage applications at 0700ET, July JOLTS at 1000ET, and July consumer credit at 1500ET.
  • No FOMC speakers scheduled today, but the Fed releases the latest Beige Book at 1400ET.

EGB/GILT SUMMARY: Sell-Off Momentum Builds

European sovereign bonds have sold off this morning with the EGB periphery underperforming. European equities are broadly lower following a mixed session in Asia, while the dollar is on the front foot across major crosses.

  • The gilt curve has bear steepened with the 2s30s spread 2bp wider.
  • Bunds have underperformed gilts with cash yields 1-4bp higher on the day.
  • The OAT curve is similarly 2-3bp steeper.
  • BTPs have underperformed core EGBs with yields now 3-5bp higher across the curve.
  • Supply this morning came from the UK (Gilts, GBP4.5bn), Germany (ILBs, EUR0.556bn allotted), Austria (RAGBs, EUR1.4bn), Belgium (TCs, EUR2.950bn) and the ESM (Bills, EUR1.5bn).
  • UK PM Boris Johnson is facing increasing pressure among senior Tories over his proposed increase in National Insurance Contributions to fund social care.
  • MNI earlier published its ECB Preview For September, which is available online and by email.

FOREX: AUD Lower as RBA Opt for Slower, But Longer Asset Purchases

  • After a spell of USD weakness coinciding with the European open, markets are reversing course slightly into the NY crossover, with a steeper US curve and more buoyant 10y year yields underpinning the greenback.
  • AUD has certainly been the most volatile among G10 overnight, with the RBA's decision to stick to a cautious taper initially boosting AUD, only for progress to be countered by an extension of the QE programme into mid-February next year. AUD/USD hi/lo sits at 0.7468/0.7404. This keeps resistance intact at 0.7478 and progress through here would open the 100-dma at 0.7541. Option interest at 0.7410-15 could keep prices anchored alongside a larger expiry for tomorrow's cut at 0.7425.
  • EUR benefited from an upward revision in final Q2 Eurozone GDP, which saw the figure revised up to 2.2% (from 2.0%) for the quarter, and up to 14.3% from 13.6%.
  • Datapoints are few and far between Tuesday, with no central bank speakers of note for the rest of the session.

FX OPTIONS: Expiries for Sep07 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.1840-50(E706mln)
  • USD/JPY: Y110.00($639mln), Y110.30-50($708mln), Y111.60($525mln)
  • AUD/USD: $0.7410-15(A$663mln)
  • USD/CAD: C$1.2540($840mln), C$1.2635-40($984mln)
  • USD/CNY: Cny6.40($500mln)

Price Signal Summary - Bund Weakness Extends

  • On the equity front, S&P E-minis are consolidating ahead of recent highs. The outlook is unchanged and remains bullish - recent gains confirmed a resumption of the underlying uptrend. The focus is on 4580.21, 1.382 projection of the Jun 21 - Jul 14 - 19 price swing. EUROSTOXX 50 remains firm and delivered a fresh high trend print yesterday of 4252.00. This again confirms a resumption of the uptrend and has opened 4294.20, 1.236 projection of the May 13 - Jun 17 - Jul 19 price swing.
  • In the FX space, EURUSD remains below Friday's high of 1.1909 that also marks the Jul 30 high and is a key short-term resistance and hurdle for bulls. A break would strengthen the recent uptrend. GBPUSD maintains a short-term bullish tone and last week's gains marked an extension of the recovery that started Aug 20. The pair has also traded above its 50-day EMA. This opens 1.3958 next, Aug 4 high. DXY remains below its 50-day EMA at 92.42. The index has entered a key support zone ahead of 91.78, Jul 30 low. A reversal signal ahead of this support, would highlight a potential base. A break though would instead strengthen the case for bears.
  • On the commodity front, Gold is pulling back from recent highs. The near-term outlook though remains bullish with the focus on $1834.1, Jul 15 high and the next bull trigger. A break of this level would strengthen bullish conditions. Support to watch is $1801.8, the Aug 31 low. WTI futures remain in a bull mode. The focus is on $70.74, 76.4.% retracement of the Jul 30 - Aug 23 sell-off.
  • In FI, Bund futures have traded through the 172.00 handle confirming a resumption of the downleg that started Aug 5. The sell-off opens 171.149, 2.236 projection of the Aug 5 - 11 - 17 price swing. Gilt futures are weaker this morning. The recent break of 128.33, Aug 12 low and 128.24, Aug 12 low highlights a bearish theme and signals scope for 128.03, the Jul 6 low (cont).

EQUITIES: European Indices Softer Off Monday Highs

  • Japan's NIKKEI up 256.25 pts or +0.86% at 29916.14 and the TOPIX up 22.16 pts or +1.09% at 2063.38
    China's SHANGHAI closed up 54.728 pts or +1.51% at 3676.587 and the HANG SENG ended 190 pts higher or +0.73% at 26353.63.
  • China's SHANGHAI closed up 54.728 pts or +1.51% at 3676.587 and the HANG SENG ended 190 pts higher or +0.73% at 26353.63.
  • The German DAX down 46.5 pts or -0.29% at 15883.43, FTSE 100 down 25.22 pts or -0.35% at 7161.43, CAC 40 down 7.8 pts or -0.12% at 6738.57 and Euro Stoxx 50 down 10.73 pts or -0.25% at 4236.73.
  • Dow Jones mini up 13 pts or +0.04% at 35362, S&P 500 mini down 1.25 pts or -0.03% at 4539.5, NASDAQ mini down 19.25 pts or -0.12% at 15632.25.

COMMODITIES: WTI Shows Below Monday Lows in Light Trade

  • WTI Crude down $0.79 or -1.14% at $68.53
  • Natural Gas down $0.11 or -2.27% at $4.608
  • Gold spot down $12.58 or -0.69% at $1811.06
  • Copper down $5.7 or -1.32% at $427.65
  • Silver down $0.42 or -1.71% at $24.2756
  • Platinum down $11.39 or -1.11% at $1012.49

MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com

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