MNI US MARKETS ANALYSIS - Debate Over Future of PEPP Heating Up

US TSYS SUMMARY: ISM And ADP Eyed For Further Clues On August Performance

Treasuries have weakened in overnight trade, but it's been a story of two halves, with weakness in Asia-Pac largely reversing in the European morning.

• Tsy futures dipped as equity futures gained in an overall risk-on global atmosphere, but after hitting lows between 2300ET and 0200ET, we saw a rebound, partially on dovish comments by ECB's Stournaras boosting EGBs.
• Fairly tight ranges though: Dec 10-Yr futures (TY) down 2.5/32 at 133-12 (L: 133-07 / H: 133-13.5); curve flat too. 2-Yr yield is up 0bps at 0.2094%, 5-Yr is up 0.7bps at 0.7836%, 10-Yr is up 0.3bps at 1.3121%, and 30-Yr is up 0.1bps at 1.9338%.
• Data is the session's focus, in the context of several surveys in the past month showing weakening economic activity/sentiment in August. Aug ADP employment at 0815ET, with final Manufacturing PMI at 0945ET. Then at 1000ET is Aug ISM Manufacturing and Jul construction spending.
• Atlanta Fed's Bostic speaks at 1200ET.
• No supply; NY Fed buys $3.225B of 7-10Y Tsys.

EGB/GILT SUMMARY: PEPP Debate Heating Up

EGBs have continued to broadly weaken this morning following yesterday's strong inflation reading for the euro area.

• The ECB's Stournaras suggested that the inflation surge will be temporary and that the GC should be cautious. This contrasts with yesterday's relatively hawkish comments from Klaas Knot.
• German retail sales for July missed by a wide margin (-0.3% Y/Y vs 3.6% survey), while UK property prices continued to soar in August (11.0% Y/Y vs 8.6% survey). Elsewhere, Italian and Spanish manufacturing PMI data for August came in a touch higher than expected.
• Supply this morning came from the UK (Gilt, GBP2.5bn) and Germany (Bobl, EUR3.296bn). In addition the regular auctions, Germany has received EUR18bn in bids for a new Aug-52 bund via syndication, while Greece has opened booked on a dual tranche of 5Y and 30Y bonds (combined book size last seen around EUR14bn).
• The bund curve is marginally steeper this morning with the 2s30s spread 2bp wider.
• It is a similar story for OATs with the curve 2bp steeper.
• BTPs have lacked direction and now trade near yesterday's close.

EUROPE ISSUANCE UPDATE: German, Greek and ESM Issuance

EGB SYNDICATION: Germany's August 2052 set at 3 bps above August 2050 Bond
* Germany receives EU18bn bids for their EU5.5bn issue

EGB SYNDICATION: Greece 5y/30y Dual Tranche EUR Tap Update
* 5y Books >E6.6bln (incl. 175m JLM), spread set at MS+38
* 30y Books>E7.3bln (incl. 125m JLM), spread set at MS+135
* Books close 1130BST / 1230 CET

ESM ISSUANCE: 2Y USD Books Open
* Maturity 8 September 2023
* IOIs > $5.75bln (ex JLM)
* Spread set at MS-1
* US Books to close at 0830ET , today's business

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXV1 172.5/170.5ps 1x2, sold at 41 in 1.5k
RXV1 174/175cs, bought for 10.5 in 2.5k
RXX1 172/170ps 1x2, bought for 23 and 24 in 5k
RXX1 172/171/170p ladder, bought for 2.5 in 1.5k

FOREX: JPY Dips as Equities Reverse Tuesday Weakness

• Following yesterday's mixed finish for equities (both Europe and US indices closed lower), risk sentiment has been far more positive early Wednesday, with mainland Europe bouncing nicely. Markets across Asia also traded positively, helping start the session with a risk-on tone, and leading the JPY to underperform all others.
• Australian GDP data came in ahead of expectations, with Q2's quarterly reading at 0.7% vs. Exp. 0.4%. Prior readings were also revised higher, giving AUD a boost to the top of the G10 table so far Wednesday.
• The USD has traded more rangebound, with the USD Index either side of the 92.592 50-dma.
• US ISM Manufacturing data takes focus going forward, with markets looking to gauge clues ahead of Friday's Nonfarm Payrolls release. ECB's Weidmann and Fed's Bostic are both scheduled to speak.

FX OPTIONS: Expiries for Sep01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1700(E795mln), $1.1825(E648mln)
• USD/JPY: Y109.00($500mln), Y109.40($1.2bln), Y110.00-05($625mln)
• USD/CAD: C$1.2635-45($818mln)
• USD/CNY: Cny6.4750($520mln)

Price Signal Summary - Bunds Approach Trendline Support, EUROSTOXX 50 Rally

• On the equity front, S&P E-minis outlook is unchanged and remains bullish. The contract traded to a fresh all-time high of 4542.25 yesterday and this confirms a resumption of the uptrend once again. The focus is on 4580.21, 1.382 projection of the Jun 21 - Jul 14 - 19 price swing. EUROSTOXX 50 has rallied today and traded above 4238.50, Aug 13 high. This confirms a resumption of the uptrend and opens 4294.20, 1.236 projection of the May 13 - Jun 17 - Jul 19 price swing.
• In the space, EURUSD failed to hold above its 50-day EMA yesterday. The average intersects at 1.1827 today and a clear break is required to open 1.1909, the Jul 30 high and a key short-term resistance. In terms of patterns, yesterday's activity is a shooting star candle - a potential bearish reversal signal. Watch support at 1.1735, Aug 20 low. GBPUSD key near-term resistance is unchanged at the 50-day EMA, at 1.3826. A break is required to signal potential for a stronger recovery. Recent gains are still considered corrective.
• On the commodity front, Gold is consolidating but remains bullish. Attention is on $1834.1, Jul 15 high and a bull trigger. WTI remains bullish with the focus on $70.74, 76.4% retracement of the Jul 30 - Aug 23 sell-off. Support is seen at $66.92, Aug 25 low.
• In FI, Bunds traded sharply lower yesterday and breached 175.66, Aug 27 low. Price action has also moved below the 50-day EMA reinforcing current bearish conditions. The focus is on trendline support at 175.11, drawn off the May 19 low. Gilt futures have cleared support at 128.33, Aug 12 low and 128.24, Aug 12 low. The break lower strengthens a bearish case and signals scope for 128.03, the Jul 6 low (cont).

EQUITIES: Asia Sets the Tone, Indices Rebound

• After the negative close on Wall Street, Asia markets were far more positive, with the Nikkei 225 and CSI 300 both finishing with gains of 1.3% apiece.
• A similar story across Europe, with Spain's IBEX-35 outperforming alongside France's CAC-40. Germany's DAX lags slightly thanks to a pullback in German carmakers, with Daimler, Volkswagen and BMW all lower.
• The e-mini S&P sits just below yesterday's alltime high print of 4542.25, with the uptrend remaining intact. A recovery through here opens 4542.58 and 4580.21, both projections off the Jun 21 - Jul 14 - 19 price swing.
• VIX futures remain under pressure, with prices touching a new lower low today of 18.25 points. This marks the weakest level for the Sep contract.

COMMODITIES: Base Metals Sell-Off Continues, With China Freeing Up Supply

• Industrial metals have extended recent weakness, with iron ore falling further and adding an extra 6% to the sell-off. Dalian-listed iron ore futures are now near 40% off the year's best levels, and coming closer to the cycle lows printed mid-August.
• Heavy selling pressure was present in markets from the off, with reports that China had released a third batch of metals supply from state reserves quickly doing the rounds. China confirmed that 150,000 tons of copper, aluminium and zinc had been released from their strategic supply, with the government vowing to continue to monitor price trends going forward.
• Oil and precious metals markets trade more or less unchanged, with focus turning to the weekly DoE oil inventories later today. Markets expect headline stockpiles to record a draw of near 3mln barrels in the latest week.