MNI US MARKETS ANALYSIS - GBP Perky with Brexit on the Menu

US TSYS SUMMARY: Slow And Steady Weakness With 10-Yr Supply Eyed

Tsys are near session lows having weakened in slow and steady fashion overnight, with macro / headline drivers few and far between, and with 10-year supply eyed later Wednesday.

• Bit of bear steepening, the 2-Yr yield is up 0.4bps at 0.1548%, 5-Yr is up 1.1bps at 0.4036%, 10-Yr is up 2.2bps at 0.9394%, and 30-Yr is up 2.4bps at 1.6863%.
• Mar 10-Yr futures (TY) down 6.5/32 at 137-19.5 (L: 137-18 / H: 137-23.5), weak volumes (~180k).
• First point of business in Washington is for Congress to vote on a stopgap funding bill ahead of the Dec 11 funding deadline, House set to vote today.
• The White House's return to stimulus negotiations yesterday suggested progress but major stumbling blocks still there (Democratic leadership said cutting supplementary unemp benefits "unacceptable").
• $55bn of 105-/154-day bills auctioned at 1130ET, then $38bn 10-Yr Note Re-open at 1300ET.
• Another thin data calendar today: Oct final Wholesale Inventories and JOLTS at 1000ET.
• NY Fed buys ~$1.750bn of 20-30Yr Tsys.

EGB/GILT SUMMARY: Risk-on Prompts Weaker EGBs

Markets have shifted to a risk-on posture with core European sovereign bonds trading weaker, G10 FX gaining against the dollar and equities pushing higher.

• The recent bull flattening of the gilt curve has reversed somewhat with cash yields up 2bp on the day.
• The bund curve has slightly bear steepened with the 2s30s spread 1bp higher.
• It is a similar story for OATs where the curve is 3bp steeper.
• BTPs have firmed following a weak start to the session and now trade close to unch on the day.
• After Boris Johnson this week warned that securing a post-Brexit trade deal could prove very difficult, German Chancellor Angela Merkel stressed that a failure to resolve the 'level playing field' issue could result in the EU accepting a no-deal outcome.
• Supply this morning came from the UK (Gilts, GBP2.25bn and linkers GBP0.25bn), Germany (Schatz, E2.411bn allotted), Italy (BOTs, EUR7bn) and Greece (Bills, EUR812.5mn).
• German trade and current account surplus data for October came in slightly higher than expected, while Spanish industrial production was slightly better than expected for the same month (-1.6% Y/Y vs -2.7% survey).

FRANCE: 2021 Issuance Plans

• M/T and L/T OAT borrowing E260bln net of buybacks (same as 2020). Linkers make up approximately 10% of issuance.
• New conventional bonds: 3-year benchmark, 5-year benchmark, 10-year benchmark, 30-year benchmark (in H2 via syndication), 50-year benchmark.
• New Green OAT: 20-year via syndication
• New linkers: 10-year OATEi, also possible 10-year OATi
• Schedule Jan-Nov: OATs of 8.5+ years first Thursday of each month. OATs of 2-8.5 years third Thursday of each month and inflation-linked third Thursday of each month
• Schedule: Dec 2021: Optional auction of nominal and/or inflation-linked OATs.
• Also looking at setting up new repo facility managed by Caisse de la dette publique (CDP). This would be announced through a dedicated communique.

IRELAND: 2021 Issuance Plan

• Long-term bond issuance for 2021 between E16-20bln (down from E24bln in 2020).
• There are no 2021 redemptions and the forecast Exchequer Borrowing Requirement is E18bln.
• Bond and bill auction plans will be outlined in the usual quarterly announcements.

UK AUCTION RESULTS: DMO sells GBP2.50bln nominal of the 0.625% Jul-35 gilt

• Avg yield 0.612% (0.676%), bid-to-cover 2.95x (2.44x), tail 0.0bp (0.1bp), price 100.183 (99.283)
• Pre-auction mid-price 100.110
• An additional GBP625mln nominal will be available through the PAOF to successful bidders until 13:00GMT.
• SUPER TIGHT TAIL OF LESS THAN 0.1BPS (LAP 100.178, ave price 100.183).

GERMAN AUCTION RESULTS: Germany Allots E2.411bn of the 0% Dec-22 Schatz

• Average yield -0.78% (-0.74%), Buba cover 2.3x (1.35x), bid-to-cover 1.84x (1.12x), pre-auction 101.57

EUROPEAN OPTION FLOW SUMMARY

EUROZONE:
UBF1 223/218ps, bought for 84/80/78 in 1.7k
RXH1 178.00/173.50ps 1x3, bought for 70 and 70.5 in 1.5k
DUG1 112.30/112.20/112.10, bought for 1.5 in 6k

SX7E Jan 80/90cs, bought for 2.00 in 5k

UK:
LZ1 100^, bought for 19 in 4kLU1 100.00/100.12/100.25c fly, bought for 1.5 in 2k

FOREX: GBP Optimistic With Brexit on the Dinner Menu

GBP volatility extends into Wednesday morning, with GBP marginally stronger against most others ahead of NY hours. Markets are taking an optimistic view ahead of this evening's key dinner meeting between UK PM Johnson and EC President von der Leyen. While negotiators have failed to reach a compromise in recent meetings, it's unlikely we see an immediate breakthrough this evening, but the leaders' meeting could inject some political impetus into progress toward any deal. GBP/USD is testing the 1.3450 mark at pixel time.

The greenback is broadly lower, with firmer equities in Europe and in US futures space helping contribute to a general risk-on theme. As a result, JPY and CHF weakness has also been noted throughout the European morning.

The data calendar is light Wednesday, with just US wholesale inventories/trade sales on the docket. The Canadian and Brazilian central bank rate decisions are due, with both seen keeping policy rates unchanged.

Expiries for Dec9 NY cut 1000ET (Source DTCC)

TECHS: Price Signal Summary

• In FX, Sterling Set To Remain Volatile.
  • Initial directional parameters in Cable have been identified at 1.3539, Dec 7 and 1.3225, the Dec 7 low.
  • EURGBP technical readings remain bullish despite this morning's bounce in Sterling. The key support to monitor is 0.8958, the former trendline resistance drawn off the Sep 11 high.
• EU FI technical conditions improve further for bulls.
  • Bund (H1) cleared resistance at 178.10, Nov 30 high. This opens 178.38 next, 76.4% retracement of the Nov 4 - 11 sell-off. Gilts (H1) traded through 134.70, Nov 20 high and bulls have sights set on 135.00 next.
  • Treasuries (H1) however maintain a softer stance and support and downside trigger at 137-07+, Dec 4 low remains exposed.
• On the commodity front, gold and oil outlook remains bullish.
  • Gold key support lies at $1822.5 - Low Dec 7. Scope is seen for a climb towards the $1888.9 level, 61.8% retracement of the Nov 9 - 30 sell-off. Brent (G1) dips are considered corrective. Bullish objectives are set at $50.00 and $50.45, 61.8% of Jan - Apr sell-off (cont). WTI (F1) bulls, eye $48.07, 0.764 projection of the Apr - Aug rally from the Nov 2 low.

EQUITIES: Favourable Start for European Markets

European cash equity markets are trading well, with German stocks outperforming (DAX up 0.9%) while Spanish, Italian indices slightly lag. This is feeding through into higher US equity futures, with the e-mini S&P hitting a new alltime high in overnight hours of 3714.75.

Across Europe, consumer discretionary and materials sectors are trading well, while the tech and consumer staples sectors trade a little heavier.

Notable individual movers today include airline owner IAG (up over 5%) on recovery hopes and UK home builders, with Taylor Wimpey higher by 4%.

COMMODITIES: Oil Markets Modestly Higher With Equities

New alltime highs in US equity futures are helping prop oil markets headed into US hours Wednesday. Further support is stemming from reports of possible production disruption in Iraq, after a series of attacks on the Khabbaz field in Kirkuk. Despite the more solid prices this morning, WTI still holds below the multi-month highs printed Friday at $46.68.

Precious metals prices are lower in response to the firmer equity picture Wednesday. Silver is off by the largest margin, with prices lower by over 2%. Spot gold appears to be having trouble topping resistance at the $1878.29 50-dma.