MNI US MARKETS ANALYSIS - EUR Higher as Inflation Quickens

US TSYS SUMMARY: Near Session Lows With Chicago PMI And Consumer Conf Ahead

Treasuries are little changed to start Tuesday, and are taking a bit of a breather following gains the past two sessions ahead of Chicago PMI and consumer confidence data.

• Weaker-than-expected China PMI helped support Tsys in Asia-Pac trade, but they slipped to session lows following a higher-than-expected August inflation reading for the eurozone (to a decade-high) at 0500ET.
• This has left Sep 10-Yr futures basically flat on the session: down 0.5/32 at 134-3.5 (L: 134-03 / H: 134-09).
• 10Y underperforming on the curve: The 2-Yr yield is up 0.2bps at 0.2034%, 5-Yr is up 0.5bps at 0.7724%, 10-Yr is up 0.8bps at 1.2869%, and 30-Yr is up 0.5bps at 1.9018%.
• Today's highlights are MNI Chicago PMI at 0945ET, followed shortly afterwards by Conference Board Consumer Confidence at 1000ET.
• No scheduled Fed speakers and only supply is $45B 21-day bills at 1130ET.
• NY Fed buys ~$1.425B of 10-22.5Y Tsys.

EGB/GILT SUMMARY: Inflation Surge Will Unsettle ECB

European sovereign bonds have traded weaker this morning and curves have bear steepened, while gilts have modestly firmed. The US dollar has been on the backfoot with equities broadly higher.

• There is further evidence of intensifying inflationary pressure in the euro area. French CPI for August beat expectations (1.9% Y/Y vs 1.7%), while the eurozone aggregate estimate soared to 3.0% from 2.2% the previous month and similarly wiping out the consensus estimate (2.7% Y/Y).
• This morning's inflation prints follow yesterday's strong German inflation reading (3.4% Y/Y for August) and indications from the ECB's Villeroy that while financing conditions are now more favourable, there is no urgency to take a decision on PEPP in September.
• Bunds have traded lower with cash yields up 1-3bp on the day and the long-end of the curve underperforming.
• The BTP curve has similarly steepened with the 2s30s spread 1bp wider.
• BTPs have underperformed core EGBs, with yields 1-4bp higher.
• Gilts have bucked the EGB trend with the curve marginally bull flattening this morning.

EUROPE ISSUANCE UPDATE

Italy sells:
E2.5bln 0% Aug-26 BTP, Avg yield -0.01% (Prev. 0.02%), Bid-to-cover 1.46x (Prev. 1.29x)
E3.25bln 0.95% Dec-31 BTP, Avg yield 0.67% (Prev. 0.66%), Bid-to-cover 1.36x (Prev. 1.33x)
E2bln 0.65% Apr-29 CCTeu Avg yield 0.03% (Prev. 0.05%), Bid-to-cover 1.46x (Prev. 1.86x)

Netherlands sells:
E2bln 0.25% Jul-25 DSL, Avg yield -0.716% (Prev. -0.721%), Price 103.80 (Prev. 104.42)

• Size: USD 2bln (No-grow)
• Coupon: Fixed, semi-Annual, 30/360 (short first to 8-Mar-2022)
• IPTs MS+ 1 bp area

Greek Syndication:

• Greece 5/30-year dual syndicated tap
• Reopening of the existing GGB 0% 12 February 2026 and GGB 1.875% 24 January 2052

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXV1 174/175cs 1x3, sold at -2 in 2k
RXV1 172.5/171.5ps, bought for 19 and 20 in 2k
RXZ1 174.50/175.50/176.50/177.50c condor, bought for 20.5 in 4k

ERM2 100.50/100/99.50p fly, bought for 2.75 in 1k
3RH2 100.25/100.37/100.50c fly 1x3x2, bought for 0.75 in 1.5k
3RM2 100.25/100.37/100.50c fly 1x3x2, bought for -0.25 in 2.5k

UK:
3LZ 9925/00 ps, bought for 7.5 in 5k

FOREX: Modest USD Weakness Helps Support Equity Uptrend

• The greenback trades weaker, with the minor losses most notable against the antipodean currencies - AUD, NZD are both higher today. Markets have largely shrugged off the poor China data overnight, which showed both the manufacturing and non-manufacturing sectors slowed far faster than forecast.
• The most USD decline comes alongside further equity strength, suggesting the ongoing uptrend in risk appetite is persisting. The e-mini S&P hit a new alltime ahead of the NY crossover today.
• Canadian monthly GDP data crosses later today, with monthly GDP seen bouncing back into positive territory at +0.7%, although still insufficient to prevent a slowdown in Y/Y growth - seen edging down to +8.8% from +14.6% previously.
• The data comes as USD/CAD continues to exhibit bearish technical signals, after the Aug 20 price pattern was a bearish shooting star candle. An extension lower would expose 1.2526, the 50-day EMA.
• The MNI Chicago Business Barometer is the data highlight, with markets expecting a slowdown to 68.0 from July's 73.4.

FX OPTIONS:  Expiries for Aug31 NY cut 1000ET (Source DTCC)

• AUDUSD: 0.7300 (588mln), 0.7330 (450mln), 0.7400 (1.33bn)
• USDCAD: 1.2560 (1.22bn), 1.2575 (660mln), 1.2600 (250mln)
• USDCNY: 6.4680 (960mln)

Price Signal Summary - S&P E-Minis Continue To Defy Gravity

• On the equity front, S&P E-minis outlook remains bullish. The contract has traded to a fresh all-time high of 4542.25 today and the move higher 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 key support has been defined at 4078.00, Aug 19 low. The outlook is bullish while this level holds. Futures are firmer and approaching key resistance at 4238.50, Aug 13 high.
• In the FX space, the USD continues to face selling pressure. EURUSD is testing its 50-day EMA at 1.1828. A clear break would open 1.1909, the Jul 30 high and a key short-term resistance. GBPUSD has traded higher again today. The key near-term resistance is seen at the 50-day EMA, at 1.3829. USDCAD is softer and approaching its 50-day EMA at 1.2529.
• On the commodity front, Gold maintains a bullish tone following last week's breach of the 50-day EMA. The break signals scope for a climb towards $1834.1, Jul 15 high and a bull trigger. WTI futures are still trading closer to recent highs. Attention is 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 support at 176.21, Aug 11 low was cleared on Aug 25, highlighting a short-term bearish theme. The focus is on 175.45, the 50-day EMA. Gilt futures key short-term support has been defined at 128.24, Aug 26 low. A break would signal scope for a deeper pullback and open 128.03, Jul 6 low (cont). Resistance is at 129.35, high Aug 20.

EQUITIES: US Futures Inch to New Highs, Germany, Italy Outperform

• US futures trade in positive territory, pointing toward a positive open on Wall Street later today. The e-mini S&P crested at a new all-time high of 4542.25 in early European hours and have consolidated somewhat since then. Markets have largely shrugged off poorer-than-expected China PMI numbers, with both the manufacturing and non-manufacturing sectors slowing faster than forecast.
• Across Europe, Germany's DAX and Italy's FTSE-MIB are the top performers so far. Europe's utilities and consumer discretionary sectors are buoying markets, countering weakness in energy and real estate names.
• VIX futures are under pressure, touching new contract lows for the active Sep contract.

COMMODITIES: Oil Off Highs, Metals Pressured on Poor China Data

• Oil markets saw support into last week's close as Hurricane Ida threatened production across the Gulf of Mexico. This continues to abate modestly into the Tuesday open, with WTI and Brent futures in modest negative territory.
• Base metals trade under pressure, with the likes of iron ore and copper after disappointing China data overnight. PMIs for both the manufacturing and non-manufacturing sectors deteriorated faster than expected. This has supported the likes of gold and silver, with precious metals also receiving a boost from the weaker greenback.
• Gold remains above its 50-day EMA. The recent break above the average confirms a resumption of the upleg that started Aug 9. This signals scope for a climb towards resistance at $1834.1, Jul 15 high and a bull trigger. On the downside, initial support has been defined at $1774.5, Aug 19 low. A move below this support would be bearish and signal a short-term reversal.