Highlights:
- Front-end rates bid in Europe as markets re-consider odds of a 50bps ECB cut in December
- USD/JPY crests at new highs as markets narrow in on election
- Implied vols starting to show ripples in early December
US TSYS: Short End Resisting Sell-Off After Dovish ECB Comments Late Tuesday
- Treasuries continue to see-saw lower, paring losses at the moment after futures slipped to late July levels overnight. The Dec'24 10Y Treasury futures contract trades 111-07.5 last (-3.5) vs. 111-03.5 low, round number technical support of 111-00 is also the July 22 low.
- Trading desks continue to cite increased odds of a Trump election win (underpinning inflation concerns) for the pressure in rates. However, dovish comments from ECB governing council member Villeroy late Tuesday has stemmed a rise in short end yields.
- If inflation is "sustainably at 2%" next year, and with still a sluggish growth outlook in Europe, there won’t be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest", Villeroy said in New York.
- Short end rates bounced off lows late Tuesday, helping rekindle projected US rate cuts that are holding steady this morning: Nov'24 cumulative -23.0bp, Dec'24 -41.1bp, Jan'25 -58.6bp.
- Incoming data includes MBA Mortgage Applications at 0700ET, followed by Existing Home Sales at 1000ET and the Federal Reserve Beige Book release at 1400ET. Treasury supply sees $13B 20Y Bond auction re-open at 1300ET.
- Scheduled Fed speakers: Philly Fed Bowman making opening remarks at a fintech conference 0900ET, Richmond Fed Barkin community college conference at 1200ET.
US TSY FUTURES: OI Points To Mix Of Short Setting & Long Cover
OI points to a mix of net short setting and long cover that roughly offset in DV01 equivalent terms during Tuesday’s sell off, as the recent run of weakness in Tsys extended a little further.
- Increased odds of a second Presidential term for Trump have weighed on Tsys in recent sessions.
| 22-Oct-24 | 21-Oct-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,545,665 | 4,582,018 | -36,353 | -1,351,554 |
FV | 6,238,689 | 6,207,442 | +31,247 | +1,326,453 |
TY | 4,653,882 | 4,650,842 | +3,040 | +194,965 |
UXY | 2,163,032 | 2,148,962 | +14,070 | +1,246,940 |
US | 1,761,256 | 1,768,911 | -7,655 | -989,263 |
WN | 1,732,401 | 1,738,091 | -5,690 | -1,132,493 |
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| Total | -1,341 | -704,953 |
STIR: OI Points To Mix Of Positioning Swings During SOFR Twist Steepening Tues
OI points to a mix of net short cover, long cover and short setting as SOFR futures twist steepened on Tuesday.
- Spill over from dovish ECB headlines helped the very front end outperform into the close.
- Fed pricing little changed to incrementally more dovish on Tuesday as a result.
- Drift lower in Tsys since yesterday’s close has generated modest hawkish moves, leaving 23bp of cuts priced for November, 41bp of cuts through December, 78bp of cuts through March and 109bp of cuts through June.
| 22-Oct-24 | 21-Oct-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,239,018 | 1,239,857 | -839 | Whites | -9,155 |
SFRZ4 | 1,054,317 | 1,065,578 | -11,261 | Reds | -15,329 |
SFRH5 | 994,426 | 996,781 | -2,355 | Greens | -3,978 |
SFRM5 | 884,743 | 879,443 | +5,300 | Blues | +1,298 |
SFRU5 | 720,750 | 725,910 | -5,160 |
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SFRZ5 | 901,661 | 924,715 | -23,054 |
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SFRH6 | 617,034 | 614,713 | +2,321 |
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SFRM6 | 621,108 | 610,544 | +10,564 |
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SFRU6 | 534,613 | 539,413 | -4,800 |
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SFRZ6 | 636,600 | 631,355 | +5,245 |
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SFRH7 | 360,576 | 362,668 | -2,092 |
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SFRM7 | 298,948 | 301,279 | -2,331 |
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SFRU7 | 256,121 | 253,952 | +2,169 |
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SFRZ7 | 242,016 | 240,336 | +1,680 |
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SFRH8 | 180,247 | 182,460 | -2,213 |
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SFRM8 | 148,308 | 148,646 | -338 |
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BUNDS: /SWAPS: Swap Spreads Remain Under Pressure, Fresh Cycle Lows
Receiver-side flow in swaps, linked to the latest round of dovish ECB repricing, helps drive ASWs tighter once again, with the 4 major invoice spreads all on track to register fresh cycle closing lows.
- The long end has taken the lead in recent sessions, flattening various ASW box structures.
- Commerzbank previously noted that “the latest tightening leg seems to be driven by pressure on futures/cash, which is causing the collateral risk premium to evaporate so that ASW-spreads are now trading on par with specialness spreads vs €STR. At the same time, this raises the bar for further tightening below the zero line (in Schatz vs. €STR) in the absence of another collateral re-pricing.”
- That ‘limitation’ in Schatz spreads will be helping the flattening seen in various ASW box structures, even as the DU/€STR invoice spread moves a couple of bp below 0.
Fig. 1: DU, OE, RX & UB Futures Invoice Spreads vs. €STR
Source: MNI - Market News/Bloomberg
EUROPE ISSUANCE UPDATE:
UK auction results
- Acceptable 3-year gilt auction with a decent bid-to-cover of 3.29x (marginally lower than last in August) but on a slightly larger auction size of GBP4.0bln (versus GBP3.75bln).
- The lowest accepted price of 99.240 is in line with the pre-auction mid-price.
- There has been no notable moves in either the 3.75% Mar-27 gilt or gilt futures on the back of the auction result.
- GBP4bln of the 3.75% Mar-27 Gilt. Avg yield 4.082% (bid-to-cover 3.29x, tail 0.6bp).
Germany auction results
- E4bln (E3.303bln allotted) of the 2.60% Aug-34 Bund. Avg yield 2.31% (bid-to-offer 1.93x; bid-to-cover 2.34x).
FOREX: USD Gains Further as Markets Narrow In On Election
- Markets continue to narrow in on the still too-close-to-call US election, with the near-term upside in the dollar showing little signs of abating. Greenback strength and the yawning US-JN 2yr yield spread are working further in favour of USD/JPY, which touched a new recovery high at 152.56 in European hours, extending the clearance of the 50% retracement of the downleg off the July high. 153.40 marks the next notable level.
- Pervasive USD strength extends across G10 this morning, with the USD Index touching 104.353 today for the highest print since early August. A close at current or higher levels for the USD Index confirms a clean break of 104.087 (61.8% retracement for the downleg off the April high) and provides another strong signal of near-term momentum in the greenback.
- GBP trades well, prompting a second consecutive session of losses for EUR/GBP, which remains tilted toward recent lows and the bear trigger at 0.8295. Moves come alongside the continued pricing and speculation that the ECB could up the pace of their rate cutting cycle as soon as the December meeting, with markets still pricing a ~50% chance of a 50bps step before year-end.
- The Bank of Canada today are expected to increase the pace of rate cuts with a 50bps move, more aggressively shifting Canadian monetary policy out of restrictive territory and closer toward neutral. A not insignificant minority, however, look for a smaller move of 25bps. The decision and statement are set for release at 1445BST/0945ET. US existing home sales and speeches from ECB's Lagarde, Lane, Cipollone, Escriva, Knot & Centeno, BoE's Bailey and Fed's Barkin make up the rest of the schedule.
FOREX: Election Ripples Clearly Showing in Front-End Vols
Pervasive USD strength extends across G10 this morning, with the USD Index touching 104.353 today for the highest print since early August. With the proximity to the US election nearing, two-week implied vol contracts now capture the first post-results options expiry (Nov06), and impact is clear. EUR/USD 2w vols have been marked higher to 8.9 points from 6.2 points at yesterday's close - while the same USD/JPY contract has added 3 points to trade 13.7 vol points today.
- These vol risk premiums have cleared those seen ahead of the 2020 and 2016 votes (for which we'll go into more detail later today), but it's how these contract prices develop in the coming weeks that could help define the market reaction on November 6th.
- A close at current or higher levels for the USD Index confirms a clean break of 104.087 (61.8% retracement for the downleg off the April high) and provides another strong signal of near-term momentum in the greenback. We wrote overnight on the strong correlation between improving Trump election odds and financial markets and also point to growing US exceptionalism in equity markets as lending background support - we see the Q3 earnings season so far as ~6% ahead of expectations on EPS metrics. 50% of the S&P 500 will have reported by the end of next week.
EQUITIES: E-Mini S&P Trend Conditions Unchanged, Signals Remain Bullish
- Eurostoxx 50 futures are unchanged. For now, a bear threat remains present. The contract traded sharply lower on Oct 15 and has recently pierced the 50-day EMA, at 4947.94. A clear break of this average would undermine a recent bullish theme and highlight a stronger reversal. This would open 4884.06, a Fibonacci retracement. Key resistance and the bull trigger is 5106.00, the Sep 30 high. Clearance of this level resumes the uptrend.
- S&P E-Minis trend conditions are unchanged and signals remain bullish. The latest move lower is considered corrective. Recent fresh cycle highs confirm a resumption of the primary uptrend and maintain the bullish price sequence of higher highs and higher lows. Note that moving average studies are in a bull-mode setup, highlighting a dominant uptrend. Sights are on 5961.00, a Fibonacci projection. Initial support to watch is 5830.91, the 20-day EMA.
COMMODITIES: WTI Futures Holding Onto Bulk of This Week's Gains
- WTI futures have recovered from their recent lows. However, a bearish theme remains intact following last week’s sell-off. A resumption of weakness would threaten the recent bullish theme and expose $65.99, the Oct 1 low, and $64.16, the Sep 10 low and a key support. For bulls, a stronger reversal would instead refocus attention on the key short-term resistance at $77.70, the Oct 8 high. Clearance of this level would resume to the recent uptrend.
- Gold bulls remain in the driver’s seat. Last week’s climb resulted in a break of $2685.6, the Sep 26 high, confirming a resumption of the primary uptrend. This week’s extension reinforces the bullish theme. Sights are on $2767.1 next, a Fibonacci projection point, ahead of the $2800.0 handle. Firm support is $2661.4, the 20-day EMA. A clear break of this EMA would signal scope for a deeper retracement.
| Date | GMT/Local | Impact | Country | Event |
| 23/10/2024 | 1100/0700 | ** |  US | MBA Weekly Applications Index |
| 23/10/2024 | - |  EU | ECB's Lagarde and Cipollone in G20 FMs and CB Governors meeting | |
| 23/10/2024 | 1300/1400 |  GB | BOE's Breeden panellist at IIF meeting | |
| 23/10/2024 | 1300/0900 | US | Fed Governor Michelle Bowman | |
| 23/10/2024 | 1345/0945 |  CA | BOC Monetary Policy Report | |
| 23/10/2024 | 1345/0945 | *** | CA | Bank of Canada Policy Decision |
| 23/10/2024 | 1400/1600 | ** | EU | Consumer Confidence Indicator (p) |
| 23/10/2024 | 1400/1000 | *** | US | NAR existing home sales |
| 23/10/2024 | 1400/1600 | EU | ECB's Lane participates in growth talk at IIF Meeting | |
| 23/10/2024 | 1400/1600 | EU | ECB's Lagarde Speech at Atlantic Council event | |
| 23/10/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 23/10/2024 | 1430/1030 | CA | BOC Governor Press Conference | |
| 23/10/2024 | 1430/1630 | EU | ECB's Cipollone in panel by Bretton Woods Committee | |
| 23/10/2024 | 1600/1200 | US | Richmond Fed's Tom Barkin | |
| 23/10/2024 | 1700/1300 | ** | US | US Treasury Auction Result for 20 Year Bond |
| 23/10/2024 | 2030/2130 | GB | ECB's Bailey at IIF meeting | |
| 24/10/2024 | 2200/0900 | *** |  AU | Judo Bank Flash Australia PMI |
| 24/10/2024 | 0030/0930 | ** |  JP | Jibun Bank Flash Japan PMI |
| 24/10/2024 | 0645/0845 | ** |  FR | Manufacturing Sentiment |
| 24/10/2024 | 0715/0915 | ** | FR | S&P Global Services PMI (p) |
| 24/10/2024 | 0715/0915 | ** | FR | S&P Global Manufacturing PMI (p) |
| 24/10/2024 | 0730/0930 | ** |  DE | S&P Global Services PMI (p) |
| 24/10/2024 | 0730/0930 | ** | DE | S&P Global Manufacturing PMI (p) |
| 24/10/2024 | 0800/1000 | ** | EU | S&P Global Services PMI (p) |
| 24/10/2024 | 0800/1000 | ** | EU | S&P Global Manufacturing PMI (p) |
| 24/10/2024 | 0800/1000 | ** | EU | S&P Global Composite PMI (p) |
| 24/10/2024 | 0830/0930 | *** | GB | S&P Global Manufacturing PMI flash |
| 24/10/2024 | 0830/0930 | *** | GB | S&P Global Services PMI flash |
| 24/10/2024 | 0830/0930 | *** | GB | S&P Global Composite PMI flash |
| 24/10/2024 | 1000/1100 | ** | GB | CBI Industrial Trends |
| 24/10/2024 | - | EU | ECB's Lagarde and Cipollone in G20 FMs and CB governors meeting | |
| 24/10/2024 | 1230/0830 | *** | US | Jobless Claims |
| 24/10/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
| 24/10/2024 | 1245/0845 | US | Cleveland Fed's Beth Hammack | |
| 24/10/2024 | 1300/1400 | GB | BOE's Mann panellist at Reinventing Bretton Woods session | |
| 24/10/2024 | 1345/0945 | *** | US | S&P Global Manufacturing Index (Flash) |
| 24/10/2024 | 1345/0945 | *** | US | S&P Global Services Index (flash) |
| 24/10/2024 | 1400/1000 | *** | US | New Home Sales |
| 24/10/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
| 24/10/2024 | 1500/1100 | ** | US | Kansas City Fed Manufacturing Index |
| 24/10/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 24/10/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 24/10/2024 | 1700/1900 | EU | ECB's Lane remarks at 'Inflation: Drivers and Dynamics' event | |
| 24/10/2024 | 1700/1300 | ** | US | US Treasury Auction Result for TIPS 5 Year Note |