MNI US MARKETS ANALYSIS - Markets Stabilise, Curve Steepening

US TSYS SUMMARY: Bear Steepening

Treasuries are continuing to retrace from Thursday's highs, though remain poised for strong weekly gains.

• Sep 10-Yr futures (TY) have reversed Thursday's gains, today down 11/32 at 133-17.5 (L: 133-14.5 / H: 133-26). But still well up from last week's close of 132-21+.
• Curve bear steepening: the 2-Yr yield is up 0.8bps at 0.2026%, 5-Yr is up 2.4bps at 0.7658%, 10-Yr is up 4.2bps at 1.3344%, and 30-Yr is up 4.3bps at 1.9691%. 2s30s and 5s30s are respectively ~10+/8+bps above Thursday's flattest levels.
• The big headline of the European morning session was the PBOC cutting the reserve requirement ratio for Chinese banks by 0.5pp - but this didn't have much of an impact on US markets (or most global markets) as it had been telegraphed well in advance.
• No scheduled Fed speakers today; overnight the FT published an interview with SF Pres Daly, who noted downside risks to global growth from lockdowns due to the Delta COVID variant.
• The only data is May final wholesale inventories (1000ET).
• No further supply this week. NY Fed buys ~$2.025B of 22.5-30Y Tsys.

EGB/GILT SUMMARY: Edging Lower

European bonds have sold off this morning while equities have recovered some of yesterday's losses.

• Gilts have underperformed EGBs with yields broadly 1-4bp higher on the day and the curve bear steepening.
• UK GDP data for May was slightly weaker than expected at 3.6% (3M/3M) vs 3.9% survey.
• Bunds had a choppy start with yields now edging higher while still within 1bp of yesterday's close.
• It is similar for OATs where yields are 1bp higher across much of the curve.
• Price action in BTPs has been relatively contained with trading near yesterday's closing levels.
• Supply this morning came from the UK (UKTBs, GBP3.0bn) and Italy (BOTs, EUR7.5bn).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU1 172.50p vs RXQ1 175.50c, bought the Sep for 34 in 1.5k

OEQ1 134.75c, sold at 6.75 in 2k

2RZ1 99.87/99.75/99.62p fly 1x1.5x0.5, bought for 0.25 in 4k

MNI REVIEW: ECB Strategy Update

• On the whole, sell-side analysts see the ECB's strategy review as broadly inline with a modest set of market expectations, which justifies the muted market reaction Thursday.
• Most analysts see the review as having limited impact on near-term ECB policy, but could have a more material effect on the medium-term outlook for the governing council, and could imply a change in sequencing for the roll-off of policy accommodation post-pandemic.

FOREX: Havens Softer, Growth Proxies Firmer as Markets Stabilise

• Haven currencies are unwinding slightly this morning, with the JPY reversing recent outperformance on likely profit-taking after an extended spell of strength. This puts USD/JPY back above the Y110 handle, but USD/JPY bulls need to take the pair through 110.34 Fib retracement before any recovery solidifies.
• Oil-tied and growth-beta FX are the strongest this morning, helping AUD, NZD and NOK rally off the week's worst levels. A decent bounce in US equity futures is helping, with the e-mini S&P comfortably back above 4,300.
• CNH saw a modest downtick as the Chinese central bank cut the Reserve Requirement Ratio by 50bps, boosting USD/CNH to 6.50 before quickly retracing. The move was largely telegraphed earlier in the week, as the China State Council noted they would "use timely reserve requirement ratio cuts in order to support the real economy and to use RRR cuts to lower financing costs."
• Focus turns to the Canadian jobs report, expected to show a gain of 175k in the net change in employment headline. ECB's Lagarde is due to speak, as well as the publication of the ECB minutes from their early June meeting.

FX OPTIONS: Expiries for Jul09 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1780-00(E1.5bln), $1.1830-50(E1.5bln), $1.1875(E658mln), $1.1885-00(E1.6bln)
• USD/JPY: Y111.10-25($938mln)
• AUD/USD: $0.7500(A$575mln), $0.7550(A$754mln)
• USD/CAD: C$1.2350($600mln)

Price Signal Summary - Gold Challenges The 50-Day EMA

• In the equity space, {US} S&P E-minis have recovered from yesterday's lows. Key near-term support is seen at 4271.36, the 20-day EMA. A clear breach of this average would signal scope for a deeper corrective pullback. The bull trigger is at 4353.25, the Jul 7 high. EUROSTOXX 50 (U1) futures traded lower yesterday but did find support at the session low. The contract has cleared 4015.00, Jun 21 low. The break lower strengthens a bearish case and reinforces the bearish engulfing candle reversal on Jun 21. This opens 3914.00, the May 20 low. Resistance is at 4101.50, Jul 1 high.
• In FX, the USD outlook remains bullish. EURUSD has traded lower this week, extending the downtrend with the focus on 1.1704, Mar 31 low. Gains are considered corrective. The GBPUSD focus is on 1.3733, Jul 2 low where a break would open 1.3717, Apr 16 low. Resistance is at 1.3898, the weekly high. USDJPY remains vulnerable following this week's sell-off. The move lower has resulted in a print below the 50-day EMA at 109.88 as well as the Jun 21 low at 109.72. A resumption of weakness would expose 109.19/14, the Jun 7 low and the 100-dma.
• On the commodity front, Gold maintains a firmer tone. Attention is on the 50-day EMA that intersects at $1814.1. A clear break of the EMA is required to suggest scope for a stronger rally. This would open $1833.7, 50.0% of the Jun 1 - 29 decline. Brent (U1) remains vulnerable following this week's downleg. The focus is on $71.24, the Jun 17 low. Gains are considered corrective. WTI (Q1) has also cleared its 20-day EMA this week and attention turns to $69.54, Jun 17 low.
• Within FI, Bund futures remain firm having cleared resistance at 173.16, Jun 11 high. Scope is for a climb to 174.97 next, Mar 3 high (cont). Gilt futures remain bullish despite the pullback from Thursday's high. Futures have topped key resistance at 128.39, Jun 11 high, strengthening the current bullish case. Attention is on 129.99, the Feb 24 high (cont).

EQUITIES: Cyclicals Lead Gains Early Friday

• Asian stocks closed mixed, with Japan's NIKKEI down 177.61 pts or -0.63% at 27940.42 and the TOPIX down 7.94 pts or -0.41% at 1912.38. China's SHANGHAI closed down 1.416 pts or -0.04% at 3524.088 and the HANG SENG ended 191.41 pts higher or +0.7% at 27344.54.
• European equities are higher, with with the German Dax up 156.98 pts or +1.02% at 15567.77, FTSE 100 up 57.97 pts or +0.82% at 7085.99, CAC 40 up 116.2 pts or +1.82% at 6501.19 and Euro Stoxx 50 up 61.92 pts or +1.55% at 4047.89.
• U.S. futures are gaining, with the Dow Jones mini up 189 pts or +0.55% at 34483, S&P 500 mini up 17.5 pts or +0.41% at 4330.5, NASDAQ mini up 21.5 pts or +0.15% at 14734.

COMMODITIES: Oil Continues To Regain Lost Ground

• WTI Crude up $0.72 or +0.99% at $73.71
• Natural Gas down $0.01 or -0.3% at $3.676
• Gold spot down $0.18 or -0.01% at $1802.67
• Copper up $1 or +0.23% at $427.35
• Silver down $0 or 0% at $25.942
• Platinum up $6.87 or +0.64% at $1086.16