MNI US MARKETS ANALYSIS - Markets Showing Signs of Illiquidity in Pre-Holiday Trade

US TSYS: Scaling Back Friday's Support

• Futures reversing much of Fri's late support despite hawkish comments from SF Fed Daly and Cleveland Fed Mester. Daly:
  • "We see a slowdown coming in a way that would be predicted by raising interest rates, and we still have a long way to go," she told the American Enterprise Institute. Daly said she boosted her inflation projection in the Fed's dot plots largely because of the tight labor market, and also said that while goods inflation is slowing, core services prices will be more stubborn.
• Bonds near late overnight lows on light volume across the board (TUH3 leads w/ under 145k), Yield curves steeper w/ 2s10s +3.683 at -66.551 (-65.032 high).
• No scheduled Fed speakers today, limited data with NAHB Housing Market Index (34 est) at 1000ET; US Tsy auctions: $54B 13W and $45B 26W bills at 1130ET.
• Fed funds implied hike for Feb'23 steady at 32.9bp, Mar'23 cumulative 46.5bp to 4.798%, May'23 51.5bp to 4.847%, terminal slips to 4.84% in Jun'23.

EUROPE ISSUANCE: EU funding plan for H1-23

• The EU plans to issue E80bln of NGEU and MFA+ bonds in H1-23 (conventional and green). Around E70bln of the proceeds are expected for NGEU and E10bln for MFA+ funds for Ukraine.
• To date E170bln of NGEU funding has been raised since June 2021 (out of a E800bln programme running until end-2026). And E7.2bln of MFA funds were raised for Ukraine in 2022 with a total of E18bln expected to be raised for Ukraine across the whole of 2023.
• The EU will start to brand these issues all as EU-bonds rather than branding them for the individual programmes they relate to (but will keep green bond issuance separate as it is segregated spending).
• "Potential new financing needs related to REPowerEU, financed partially by unused loans under the RRF, will not affect the funding needs for H1 2023."
• "Bond auctions can be single- or multi-bond auctions and will be used to tap existing bonds or to issue new bonds."
• There are 7 planned syndication weeks in H1-23 and eight planned auction dates.
• EU-bill auctions will continue twice per month in the same format as previously (3/6-month bills available at each auction with new 6-month EU-bill in the first auction of each month).
• The full funding plan is available here.
• Furthermore, the EU has announced it will provide a framework for quoting on the secondary market with a view to increasing liquidity from summer 2023 with a new repo facility to be implemented in early 2024.

Price Signal Summary - EURUSD Pullback Considered Corrective

• In FX, EURUSD traded higher last Thursday, extending recent gains, before pulling back. The break higher last week confirmed a resumption of the uptrend and maintains the price sequence of higher highs and higher lows. The focus is on 1.0736 next, the 2.382 projection of the Sep 28 - Oct 4 - 13 price swing. Initial support lies at 1.0528, the Dec 13 low.
• GBPUSD trend conditions remain bullish, however, last Thursday’s strong sell-off signals a possible short-term top. Attention is on the first key support at 1.2107, the Dec 7 low. Clearance of this level would pave the way for a move towards 1.1901, the Nov 30 low. On the upside, key short-term resistance is at 1.2446, Dec 14 high.
• USDJPY traded higher last Thursday and pierced resistance at 137.97, the Dec 13 high. The pair has also tested resistance at 137.88, the 20-day EMA. A clear break of this average, would signal scope for stronger recovery. This would open 140.00 and 140.19, the 50-day EMA. The bear trigger lies at 133.63, the Dec 2 low.

FOREX: EUR/USD Slippage Flags Illiquidity of Markets Pre-Holidays

• The greenback is hitting reverse in early Monday trade, slipping against all others in G10. Despite the USD's pullback, Friday's highs in EUR/USD remain intact and provide the first resistance at 1.0663 and the post-ECB highs of 1.0735.
• The beginning of the NY crossover prompted a a small pick up in price action for EUR/USD, which slipped off the session highs of 1.0658 to trim the day's gains to ~40 pips or so. The small pick-up in volumes in currency futures shows how illiquid markets are here: with $512mln cash equivalent changing hands on the slippage, but scant support seen ahead of overnight lows of 1.0582.
• German IFO data came in ahead of expectations, with minor positive revisions to the previous making for a positive release. Expectations for December were 83.2 vs. Exp. 82.0, but the release had little far reaching impact on asset prices.
• GBP trades well alongside SEK, with AUD also posting minor gains. AUD/USD found support at the 0.6667 100-dma last week, and a further bounce targets gains toward 0.6736 initially ahead of the $0.68 handle.
• Focus during US hours turns to NAHB Housing Market figures, as well as the Canadian materials price indices for November. EU leaders also meet, with reports suggesting lawmakers will lower their gas price cap plans, in a further attempt to squeeze revenues for Russia headed into 2023.

BONDS: Gilts Remain the Underperformers

• Treasuries and Bunds remain comfortably above Friday's lows with this morning's German IFO a bit stronger than expected, but gilts are the big movers of the day this morning with yields up 11-13bp.
• We noted earlier that we think that these moves are driven by a combination of an FT story about the government agreeing a cap to unit energy prices for businesses through to March 2024 as well as the BOE announcing that long gilts will be sold from its APF starting from late January (the amount is not a surprise, but some had been expecting long gilts to not be sold until Q2).
• This week we will also receive funding plans from Italy (likely today, tomorrow or potentially Wednesday), the EU (there is an investor call scheduled tomorrow) and Greece (who published on 23 December last year) and Finland (who published on 22 December last year). This morning we received the 2023 plans for the EFSF / ESM.
• There will also be continued focus on energy markets with the EU set to discuss the price cap for natgas - although there are signs of warming weather in parts of Europe which are providing a bit of relief to markets this morning.
• TY1 futures are down -0-8+ today at 114-17+ with 10y UST yields up 3.7bp at 3.525% and 2y yields down -0.4bp at 4.177%.
• Bund futures are down -0.17 today at 137.26 with 10y Bund yields up 3.5bp at 2.183% and Schatz yields down -0.3bp at 2.369%.
• Gilt futures are down -0.83 today at 102.75 with 10y yields up 11.5bp at 3.439% and 2y yields up 11.7bp at 3.565%.

EQUITIES: E-Mini S&P Pullback Highlights Vulnerability

EUROSTOXX 50 futures traded sharply lower late last week to extend the pullback from 4043.00, the Dec 13 high. The move down suggests potential for a deeper retracement with sights on the 50-day EMA, at 3798.90. On the upside, key resistance has been defined at 4043.00 where a break is required to resume the recent uptrend. The S&P E-Minis appears vulnerable following last week’s sharp move lower. Thursday’s sell-off reinforced a bearish threat and note that this also highlights the importance of a shooting star candle formation on Dec 13 - a reversal signal. A continuation lower would open 3855.13, a Fibonacci retracement. Key resistance is unchanged at 4180.00, the Dec 13 high, where a break is required to resume the recent uptrend.

• Japan's NIKKEI closed lower by 289.48 pts or -1.05% at 27237.64 and the TOPIX ended 14.8 pts lower or -0.76% at 1935.41.
• Elsewhere, in China the SHANGHAI closed lower by 60.743 pts or -1.92% at 3107.115 and the HANG SENG ended 97.86 pts lower or -0.5% at 19352.81.
• Across Europe, Germany's DAX trades higher by 69.32 pts or +0.5% at 13969.75, FTSE 100 higher by 32.45 pts or +0.44% at 7364.65, CAC 40 up 42.29 pts or +0.66% at 6497.74 and Euro Stoxx 50 up 20.59 pts or +0.54% at 3826.99.
• Dow Jones mini up 109 pts or +0.33% at 33226, S&P 500 mini up 14.75 pts or +0.38% at 3892.75, NASDAQ mini up 47.25 pts or +0.42% at 11390.75.

COMMODITIES: Gold Outlook Bullish Despite Turbulent Price Action Last Week

Trend conditions in WTI futures remain bearish. Recent gains however, have highlighted a bullish corrective cycle and last week this resulted in a test of the 20-day EMA, at $77.07. A clear break of this hurdle would signal scope for an extension and open $80.57, the 50-day EMA. On the downside, a stronger reversal lower would refocus attention on the bear trigger which lies at $70.08, the Dec 9 low. Trend conditions in Gold remain bullish despite Thursday’s sell-off. Pullbacks are considered corrective and key short-term support to watch is $1765.9, Dec 5 low. The yellow metal breached $1810.0 last week, the Dec 5 high, to resume the uptrend. This maintains the positive price sequence of higher highs and higher lows and opens $1842.7, a Fibonacci retracement. On the downside, a break of $1765.9 would signal scope for a deeper pullback.

• WTI Crude up $0.62 or +0.83% at $74.46
• Natural Gas down $0.42 or -6.32% at $6.196
• Gold spot up $4.36 or +0.24% at $1796.55
• Copper up $4.6 or +1.22% at $379.8
• Silver up $0.13 or +0.55% at $23.3407
• Platinum up $13.66 or +1.37% at $1008.19