MNI US MARKETS ANALYSIS - GBP Vols Show Continued Deal Uncertainty

US TSYS SUMMARY: Flat-To-Weaker With Political Stalemates Eyed

Treasuries are trading flat-to-weaker having retraced a mild safe-haven bid early Tuesday, with a fairly light schedule ahead and few macro drivers so far.

• The 2-Yr yield is unchanged at 0.1408%, 5-Yr is up 0.5bps at 0.3909%, 10-Yr is up 0.8bps at 0.9311%, and 30-Yr is up 1.2bps at 1.6917%.
• Mar 10-Yr futures (TY) down 0.5/32 at 137-22.5 (L: 137-20 / H: 137-25.5) Light volumes, ~180k.
• Brexit uncertainty remained at the forefront in Europe trade, with COVID lockdown / vaccine rollout concerns also weighing. Stock futures dipped to new session lows a little after 0600ET on Tesla's share sale announcement. Dollar trading within ranges.
• Attention today will again be on Capitol Hill, with bipartisan stimulus/funding negotiations ongoing (Dec 11 deadline due to be pushed back one week, a vote on which Wednesday).
• Another thin data set ahead: nonfarm productivity/unit labor costs at 0830ET. Earlier, NFIB small biz optimism missed expectations very slightly, but not a market mover. And no Fed speakers (FOMC blackout).
• More bill sales today: $60B of 42-/119-day bills at 1130ET. NY Fed buys ~$2.425B of 1-7.5Y TIPS.

EGB/GILT SUMMARY: EGBs Holding Firm

Core EGBs have held firm this morning while periphery curves have slightly bear steepened alongside broad equity losses.

• Gilts have rallied and outperform core EGBs with a continuation of yesterday's bull flattening. The 2s30s spread is 2bp narrower on the day.
• Bunds have inched higher with yields within 1bp of yesterday's closing levels.
• It is a similar story for OATs. Last yields: 2-year -0.7218%, 5-year -0.6838%, 10-year -0.3439%, 30-year 0.3603%.
• BTPs have traded weaker with the longer end underperforming. Yields are broadly 1-2bp higher on the day.
• UK PM Boris Johnson today stated that get a trade deal over the line is "looking very, very difficult", adding to the slew of warnings from both the UK and EU in recent days.
• Supply this morning came from the UK (Gilts, GBP5.25bn) and Belgium (TCs, EUR1.875bn).
• The final estimate for Eurozone Q3 GDP was revised slightly lower (12.5% Q/Q vs 12.6% previously). The German ZEW print for December surprised hgiher with the expectations component reading 55.0 vs 46.0 survey.
• The UK today begins the rollout of a national Covid vaccination programme.

UK AUCTION RESULTS: 

DMO sells GBP2.00bln nominal of 0.625% Oct-50 Gilt

• Avg yld 0.842% (0.920%), bid-to-cover 2.64x (2.27x), tail 0.4bps (0.1bps), price 94.283 (92.307).
• Pre-auction mid-price: 94.114
• An additional GBP500mln will be available through the PAOF to successful bidders until 14:30GMT.

DMO sells GBP3.25bln nominal of 0.125% Jan-24 gilt

• Avg yld -0.001% (0.025%), bid-to-cover 2.28x (2.41x), tail 0.3bp (0.2bp),price 100.396 (100.321)
  
• Pre-auction mid-price 100.389
• An additional GBP812.5mln will be available through the PAOF to successful bidders until 13:00GMT.

The Belgian Debt Agency has released its funding plan for 2021

• Gross borrowing requirement E43.61bln (2020: E51.46bln).
• Net financing requirement is E22.77bln. Redemptions E15.51bln plus E4.50bln of buybacks of 2022 debt.
• E36.41bln of OLOs to be issued (E44.50bln in 2020).
• Up to 3 new benchmark OLOs to be launched. The first will be a new 10-year benchmark. The second a very long OLO (no longer than 2071) via syndication.
• 2 syndications in total.
• 8 OLO auctions
• 5 ORI operations up to E500mln each.
• E3.00bln of EMTN/Schuldscheine funding.
• E4.20bln of EU SURE funding expected to be received.
• TC stock expected to remain steady at E30.50bln.

EUROPEAN FI OPTIONS SUMMARY

EUROZONE:
RXF1 177/176.50ps, bought for 9 in 1k
DUF1 112.30/112.20ps, bought for 1 and 1.5 in 4.6k

US:
TYF1 135.5p, bought for 02 in 15k
FVG1 126.25c, sold at 7 in 30k. (20k blocked, 10k on screen)

FOREX: Market Caution Evident in Choppy GBP Implied Vols

Sterling is sinking for a second session, with GBP on the back foot as markets remain cautious over the prospects of a Brexit deal - despite PM Johnson heading to Brussels "in the coming days" for a face to face meeting with his counterpart von der Leyen. It remains clear that significant gaps remain between both sides. GBP is weaker, but trades comfortably above the Monday lows of 1.3226, with the overnight lows sitting at 1.3323.

Options markets continue to capture the cautious mood, with one-week GBP/USD implied vols hitting new multi-month highs of 17.3 points in early trade.

The only notable data release of the morning came with the better-than-expected ZEW survey (55.0 vs. Exp. 46.0). While this had little impact on markets, EUR is trading solidly so far. Commodity-tied currencies are firmer ahead of NY hours, with CAD, AUD outperforming.

The data and speaker schedule is clear for the rest of the session, keeping focus on ongoing Brexit risks and the looming ECB, Fed decisions due this Thursday and next week respectively.

FX OPTIONS: Expiries for Dec8 NY cut 1000ET (Source DTCC)

EUR/USD: $1.2000(E1.5bln), $1.2070-75(E1.2bln), $1.2100(E1.7bln), $1.2150(E521mln), $1.2200(E792mln)
USD/JPY: Y102.85-00($538mln), Y103.30-50($553mln), Y104.00-05($1.0bln), Y104.85-00($1.2bln)
AUD/USD: $0.7400-05(A$1.75bln mostly AUD calls)
AUD/NZD: N$1.0660(A$500mln)

EQUITIES: Continental Indices Uniformly Lower

Markets across Europe are lower, with losses of between 0.2-0.6% after the mixed finish on Wall Street Monday. French and Italian stocks are underperforming, with the CAC-40 and FTSE-MIB at the bottom of the table. Germany's DAX is lower, but losses are limited to just 0.2%.

Healthcare and energy names are weakest, with real estate and industrials trading inching higher.

Notable individual performers include HSBC, which trade lower by over 3%, after reports overnight suggested the bank had frozen accounts belonging to pro-democracy protestors in Hong Kong.

In the US, futures are lower, with the e-mini S&P off by just over 10 points, extending the pullback from yesterday's alltime highs to over 25 points. 3591.72 undercuts as first support (23.6% retracement of the November rally) ahead of the 50-dma at 3493.25.

COMMODITIES: Oil Inching Lower Alongside Equities

WTI and Brent crude futures are both lower ahead of NY hours, with oil markets inching into the red alongside global equity markets as the US futures market extend the gap with yesterday's all-time high. For WTI crude futures, this has translated to a further pullback from the multi-month highs printed Friday at $46.68.

In metals space, both gold and silver are in very minor negative territory as modest greenback strength weighs, although some underlying support clearly stemming from the slightly lower equity market early Tuesday.

Focus turns to API oil inventory numbers due after market ahead of tomorrow's DoE crude data.