MNI US MARKETS ANALYSIS - Equity Sell-Off Extends

US TSYS SUMMARY: PCE And ISM Manufacturing Take Focus

The Treasury curve is fairly flat, having retraced both a jump higher in Asia-Pac trade (as equities fell sharply), and a drop to session lows in the European morning.

• Stock futures now off worst levels (though still down), and dollar near session lows.
• The 2-Yr yield is up 0.4bps at 0.2796%, 5-Yr is up 0.2bps at 0.9666%, 10-Yr is up 0bps at 1.4875%, and 30-Yr is up 0.1bps at 2.0456%.
• Dec 10-Yr futures (TY) up 9.5/32 at 131-29 (L: 131-24 / H: 132-00.5), strong volume (~480k).
• Data includes personal income/spending and PCE prices at 0830ET, with ISM manufacturing alongside construction spending at 1000ET
• In between, we get finals for manufacturing PMI at 0945ET and UMichigan Sentiment at 1000ET.
• Philly Fed's Harker speaks at 1100ET, Cleveland's Mester at 1300ET.
• With gov't shutdown postponed for now, attention turns toward a potential infrastructure bill today.
• No supply. NY Fed buys ~$8.425B of 2.25-4.5Y Tsys.

EGB/GILT SUMMARY: Govies Gain Ground As Equities Struggle

European sovereign bonds have rallied this morning with EGBs outperforming gilts and equities still under pressure.

• Gilts yields have edged down 1-2bp with the curve marginally flatter.
• The UK fuel crisis continues to rumble on alongside continued warnings of goods shortages later in the year which has stoked concerns about a slowdown in growth.
• The bund curve has bull flattened with the 2s30s spread 2bp narrower.
• OAT yields are broadly 1-3bp lower on the day.
• BTPs have slightly outperformed core EGBs with cash yields 2-4bp lower and the curve 1-2bp flatter.
• Supply this morning came from the UK (UKTBs, GBP2bn).
• The ECBs Isabel Schnabel is due to speak on a panel for a Federal Reserve conference later today.

EUROPE OPTION FLOW SUMMARY

Eurozone:
OEZ1 135.25/135.50/135.75c ladder, bought for 5 in 1k

UK:
SFIZ1 99.80/99.85/99.90c fly, bought for 1 in 2.5k
SF1H2 99.75/99.80/99.85/99.90c condor, bought for 1 in 3k
SFIG2 with SFIH2 99.60/99.50/99.40/99.30p condor strip, bought for 4in 1k

2LZ1 99.25/99.37cs 1x2, bought for half in 5k3
LZ1 99.25/99.00ps, sold at 18 in 10k

Eurozone:
SX7E 18/03/22 105c, bought for 3.75 in 10k

FOREX: A More Stable Start, But Vol Remains Supported

• Following acute volatility this week across EUR, GBP and USD rates, markets are far more stable early Friday, with the USD Index remaining in a holding pattern below this week's multi-month highs. Nonetheless, front-end implied vols remain supported, with the EUR/USD 1m contract holding back above 5 points having touched new post-pandemic lows of 4.4 points last week.
• NOK and JPY are the sole outperformers early Friday, but recoveries are shallow, with markets largely consolidating following the outsized moves in the first half of the week.
• Equity markets across Europe are following the negative Wall Street close, with the EuroStoxx50 and FTSE-100 leading with losses of 0.9% or so. US futures are following suit and indicate another negative open Friday, possibly providing an underlying bidtone to the JPY.
• Market focus turns to Canadian GDP data, US personal income/spending metrics for August and the ISM Manufacturing release. Central bank speakers include Harker and Mester of the Fed and ECB's Schnabel.

FX OPTIONS: Expiries for Oct01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1700-20(E886mln)
• USD/JPY: Y110.50-70($1.6bln)
• AUD/USD: $0.7200(A$1.4bln)
• USD/CAD: C$1.2400-15($1.3bln); C$1.2600($1.8bln), C$1.2670-90($620mln), C$1.2700-20($1.3bln), C$1.2800($1.4bln), C$1.2850($2.0bln)

Price Signal Summary - S&P E-Minis Key Support Cleared

• In the equity space, S&P E-minis have weakened once again today and cleared key support at 4293.75, Sep 20 low. The break strengthens a bearish case and confirms a resumption of the bear cycle that started Sep 3. This opens 4214.50, Jul 19 low. EUROSTOXX 50 futures remain weak and registered a print below 3974.00, Sep 20 low - today's low has been 3961.00. Further downside is likely towards 3951.50, 1.00 projection of the Sep 6 - Sep 20 - Sep 24 price swing.
• In FX, EURUSD remains in a downtrend. The pair has this week cleared key support at 1.1664, Aug 20 low to confirm a resumption of its downtrend. The focus is on 1.1493 next, 50.0% retracement of the Mar '20 - Jan '21 bull phase. GBPUSD remains vulnerable following this week's sell-off. The focus is on 1.3354 next, Dec 23, 2020 low. USDJPY has traded through key resistance at 111.66, Jul 2 high and the bull trigger. The clear break strengthens a bull case and opens 112.23, Feb 20, 2020 high. Near-term however, attention is on yesterday's price pattern - a bearish engulfing candle - that highlights the risk of a deeper corrective pullback, potentially towards 110.12, the 50-day EMA.



• On the commodity front, the Gold trend needle still points south. The focus is on $1690.6, Aug 9 low and the bear trigger. Note though that yesterday's price pattern is a bullish engulfing candle and highlights the potential for a stronger short-term corrective bounce. A climb would open $1787.4 - High Sep 22. WTI futures remain below Tuesday's high of $76.67. Dips are considered corrective and firm support is seen at $73.58, Jul 6 high and a recent breakout level.



• In the FI space, short-term gains are considered corrective. Bund futures remain in a clear downtrend with the focus on 169.46, 1.50 projection of the Sep 9 - 17 - 21 price swing. Resistance is seen at 170.81, Sep 17 and a recent breakout level. Gilt futures remain heavy. The focus is on 124.64, 1.382 projection of the Aug 31 - Sep 17 - 21 price swing.

EQUITIES: Stocks Sour as Markets Halfway to Correction

• Equity markets across both side of the pond are in negative territory, pressing the likes of the e-mini S&P and DAX through yesterday's lows. The losses in the e-mini S&P put the index overhalfway to entering correction territory, marked at 4095 on the charts.
• The break lower for the e-mini S&P strengthens a bearish case and confirms a resumption of the bear cycle that started Sep 3. Furthermore, the move lower today establishes a bearish price sequence of lower lows and lower highs on the daily chart and this reinforces bearish conditions, opening 4214.50, Jul 19 low.
• The energy and financials sectors are leading the decline on the continent, with just utilities and real estate in the green. The much-watched tech sector also remains lower, with Europe's tech names off over 1% on aggregate.

COMMODITIES: Prospect of OPEC+ Output Hike Still Adding Weight

• WTI remains below Tuesday's high of $76.67. Dips are considered corrective and a bullish theme remains intact. The recent break of resistance at $73.58, the Jul 6 high and bull trigger confirmed a resumption of the uptrend. The focus is on $78.24 next, a Fibonacci projection with scope seen for a climb towards the psychological $80.00 level further out. On the downside, firm support is seen at $73.58.
• The prospect of OPEC+ supply remains a key driver for prices, with prices topping out yesterday as sources reports suggested the group could front-load supply with an 800,000bpd increase in production across November.
• Gold is more rangebound, but is holding on to the bulk of the Thursday gains. Price action formed a bullish engulfing candle. A rally would suggest scope for a stronger corrective bounce, perhaps towards $1787.4.