MNI US MARKETS ANALYSIS - Curves Flatten Globally on Heavy Volumes

US TSYS: Curve Flatter With Eye On 5Y Supply And Fiscal Developments

The short-end/belly of the curve is underperforming early Wednesday, with a generally risk-off atmosphere prevailing. Fiscal matters and 5Y supply are in focus, with an eye also on durable goods data.

• 10Y yields below 1.60% for the first time since Oct 19: 2-Yr yield is up 2.2bps at 0.491%, 5-Yr is up 0.7bps at 1.1813%, 10-Yr is down 1.2bps at 1.5957%, and 30-Yr is down 1.8bps at 2.0231%.
• The release at 0500ET of the Democrats' proposal to tax billionaires' (unrealized) asset gains pushed stock futures to session lows and Tsys to session highs.
• That said, negotiations continue on the fiscal agenda, with little sign a deal among Democrats will materialize this week, let alone today. Politico sums up the state of play: "except for every sticking point, Dems are close to a deal".
• Supply today: $28B 2Y FRN auction at 1130ET (alongside $40B in 119-day bills), and $61B 5Y Note auction at 1300ET.
• Data today includes durable goods orders / wholesale and retail inventories / goods trade balance at 0830ET.
• NY Fed buys $1.425B of 10-22.5Y Tsys.

EGB/GILT SUMMARY - A Busy Morning Session

• A really busy morning session for EGBs and particularly Bunds.
• Big volumes have traded, as investors continue to short cover after we tested the German 10yr yield level at -0.0704% last week.
• Some of the moves have been led by the short end, back end Euribor strip, with decent buying in Greens (2023/2024), Blues (2024/2025) and Gold (2025/2026), after the strip was trading in negative territory on the open.
• Peripheral spread are mixed, Portugal and Greece are 1.3 and 1.6bp wider respectively, while Italy sits just 0.3bp tighter.
• Gilt have kept up pace and is trading inline for Bund, reflected in a flat Gilt/Bund spread.
• Looking ahead, we have nothing of real note on the data front. Data starts tomorrow with US GDP.
• Gilt futures are up 0.46 today at 124.90 with 10y yields down -4.7bp at 1.060% and 2y yields down -1.4bp at 0.605%.
• Bund futures are up 0.60 today at 169.29 with 10y Bund yields down -4.5bp at -0.164% and Schatz yields down -0.4bp at -0.670%.
• BTP futures are up 0.55 today at 151.55 with 10y yields down -5.0bp at 0.945% and 2y yields down -0.9bp at -0.228%.
• OAT futures are up 0.63 today at 165.64 with 10y yields down -4.6bp at 0.178% and 2y yields down -0.7bp at -0.672%.

EUROZONE ISSUANCE UPDATE

Germany sells E1.509bln 0% May-36 Bund, Avg yield 0.02% (Prev. -0.06%), Bid-to-cover 0.96x (Prev. 0.83x), Buba cover 1.28x (Prev. 1.11x)

EUROPE OPTION FLOW SUMMARY

Eurozone:
DUZ1 112.10/112.00/111.90p fly was sold at 1.25 in 2k

0RU2 100p, was bought for 16.5/16.75 in 4k (ref 100.05)
ERZ2 100.25^, was bought for 30.5/31 in 1.75k (ref 100.305)

FOREX: Risk Appetite and Growth Proxies Dip on Dem's Billionaire Tax

• Risk appetite is seen waning headed into the NY crossover, with equity futures rolling off the overnight (and record) highs as the USD and JPY make headway and erase a small part of the recent weakness. The softer risk outlook has worked against commodity-tied and growth-proxy currencies, putting the likes of NOK, CAD and NZD among the session's poorest performers.
• Markets were already trading modestly shakily across early Europe, but the selling pressure accelerated as the US Democrats unveiled the finer details of a Billionaire tax, which would see those with billionaire status taxed 23.8% annually based on asset price gains.
• A solid underlying inflation report from Australia (trimmed mean and weighted mean numbers came in well ahead of expectations) prompted a sharp re-pricing of the front-end of the Aussie curve, but the read through to the AUD has been more mixed as the risk-off theme pervades. AUD/USD continues to hold below key resistance at the 0.7560 200-dma,
• Focus turns to US prelim durable goods data, seen declining at a pace of 1.1% on the month, shortly followed by the Bank of Canada rate decision at which the board are seen keeping rates unchanged, but slowing the rate of asset purchases as the Bank continues to wean the economy off pandemic-stance policy.

FX OPTIONS: Expiries for Oct27 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1490-00(E834mln), $1.1600-15(E2.2bln), $1.1685-00(E1.2bln)
• USD/JPY: Y113.50-60($2.0bln), Y114.45-50($905mln)
• EUR/GBP: Gbp0.8515-25(E701mln)
• AUD/USD: $0.7400($1.3bln), $0.7500(A$697mln), $0.7530(A$606mln)
• USD/CNY: Cny6.4000($543mln)

Price Signal Summary - Bond Market Gains Considered Corrective

• In the equity space, S&P E-minis are still in a clear uptrend and traded higher yesterday just short of the next objective at 4591.25, the 1.00 projection of the Jul 19 - Aug 16 - Aug 19 price swing. Scope is also seen for a break of the 4600.00 handle. EUROSTOXX 50 futures also rallied yesterday and the focus is on key resistance at 4223.00, Sep 6 high. This also represents the bull trigger and a break would confirm a resumption of the broader uptrend and open 4290.50, 1.00 projection of the Jul 19 - Sep 6 - Oct 6 price swing.
• In FX, EURUSD continues to consolidate with a slightly weaker tone dominating for now. From a short-term perspective, scope exists for an extension higher with the focus on the 50-day EMA at 1.1687. A key resistance also resides at 1.1716, a bear channel top drawn off the Jun 1 high. Initial support lies at 1.1572, Oct 18 low. GBPUSD is off its recent highs however short-term bullish conditions remain intact and corrections so far have been shallow. The focus is on 1.3913, Sep 14 high and a key resistance. Support to watch is at 3713, the 20-day EMA. USDJPY maintains a bullish tone despite this morning's selling pressure. Scope is seen for a climb towards 114.99, 1.50 projection of the Apr 23 - Jul 2 - Aug 4 price swing. Initial support is at 113.01, the 20-day EMA. A break is required to signal scope for a deeper corrective pullback.
• On the commodity front, Gold spiked higher late last week and cleared $1800.6, Oct 14 high. Gains earlier this week highlight a short-term positive tone and attention is on $1834.0, the Sep 3 high. Key near-term support is at $1760.4, Oct 18 low. A break would alter the picture and instead suggest scope for a deeper pullback. WTI trend conditions are unchanged and remain bullish. $85.01, 1.00 projection of the Sep 21 - Oct 6 - 7 price swing has been probed. The focus is on $86.00 next. A key support to watch, following this morning's pullback is at $80.78, Oct 20 low.
• In the FI space, trend conditions remain bearish and short-term gains are considered corrective. Bund futures sights are on 167.79, 2.50 projection of the Sep 9 - 17 - 21 price swing. Key resistance is at 169.92, Oct 14 high. Gilt futures path of least resistance remains down however a corrective bull cycle continues to play out this week. The next objective is 123.16, Feb 27, 2019 low (cont). Key resistance is unchanged at 125.27, the Oct 14 high.

EQUITIES: Energy, Materials Dragging On Stocks

• Asian stocks closed lower, with Japan's NIKKEI down 7.77 pts or -0.03% at 29098.24 and the TOPIX down 4.59 pts or -0.23% at 2013.81. China's SHANGHAI closed down 35.333 pts or -0.98% at 3562.305 and the HANG SENG ended 409.53 pts lower or -1.57% at 25628.74
• European equities are weaker, with the German Dax down 55.41 pts or -0.35% at 15742.57, FTSE 100 down 13.15 pts or -0.18% at 7276.65, CAC 40 down 8.62 pts or -0.13% at 6764.7 and Euro Stoxx 50 down 6.85 pts or -0.16% at 4219.67. Materials (-0.6%) and Energy (-1.1%) leading losses in Euro Stoxx 600.
• U.S. futures are slightly higher, with the Dow Jones mini up 34 pts or +0.1% at 35678, S&P 500 mini up 4.5 pts or +0.1% at 4569.75, NASDAQ mini up 26 pts or +0.17% at 15571.

COMMODITIES: Weaker Across The Board

• WTI Crude down $1.22 or -1.44% at $84.64
• Natural Gas down $0.04 or -0.63% at $5.725
• Gold spot down $8.84 or -0.49% at $1801.61
• Copper down $5.3 or -1.18% at $449.15
• Silver down $0.29 or -1.19% at $24.0325
• Platinum down $16.78 or -1.63% at $1031.43

CALENDAR