MNI US MARKETS ANALYSIS - Risk-Off Pervades, Tsy Curve Flattens Further

US TSYS SUMMARY: Impressive Bull Flattening Continues

The impressive bull flattening of the Tsy curve continued overnight Thursday, with a sea of red in risk assets (incl commodities and stocks) accompanying a global safe haven bid.

• 10Y and 30Y at fresh post-Feb lows. Short-end/belly stronger too, but can't keep up.
• The 2-Yr yield is down 1.4bps at 0.2003%, 5-Yr is down 4.3bps at 0.7356%, 10-Yr is down 6.3bps at 1.2529%, and 30-Yr is down 6.9bps at 1.8692%. Sep 10-Yr futures (TY) up 16/32 at 134-1.5 (L: 133-16.5 / H: 134-02)
• Once again, no single factor to point to for risk aversion: the increasing prevalence of the Delta COVID variant continues to make headlines, while Wednesday's hint from China about monetary easing pointed to potential downside economic risks emerging there.
• Conversely, Wednesday's release of FOMC minutes didn't really change the narrative. No Fed speakers scheduled Thursday.
• Jobless claims data at 0830ET is the data focus.
• 1130ET sees $80B of 4-/8-week bill auction. NY Fed buys ~$8.425B of 2.25-4.5Y Tsys.

Summary of Sell-Side Views on ECB Strategy Review

Ahead of today's release of the ECB strategy review (results today at 1200BST, presser at 1330BST), a few sell-side comments of note – with the range of expectations relatively broad for the outcomes of today's release:

• Berenberg: "A shift to a straight 2% target and the move to a symmetrical approach, which explicitly allows for temporary overshoots, would raise the inflation target and thus signal an even softer policy stance. In practice, it will make no major difference in our view as the majority of council members has probably been aiming for that anyway. The new strategy is more in line with that of other major central banks."
• BNP Paribas: "Strategy review may result in a non-event."
• BofA: Worries the strategy review could disappoint - "What worries us, and this has been our worry on the outcome of the review for some time, is that disagreements seem large on that overshoot: its size, its length, and how to implement it. Again, we fear that those disagreements may end up delivering an inflation overshoot promise vague enough to make everyone happy, a perfect recipe for too high real rates and a further deanchoring of inflation expectations.
• Citi: Expects the outcome of the ECB strategy review to confirm what we consider to be already policy, in particular that it pursued a 2% symmetric inflation objective, with more aversion for continued undershooting than moderate overshooting. We expect however the ECB to fall short of explicitly committing to inflation overshoot but rather to convey a willingness to tolerate some overshooting. That would legitimise a reinforced forward guidance, with more emphasis on realised inflation, but would not suggest a return to a more forceful policy of yield curve control or capping. So whichever approach prevails in the outcome of the strategy review, it seems likely to us that it comes with what may appear as "dovish" announcements. But we stress that if we are right that the ECB falls short of an explicit commitment to run the economy hot, that dovishness is more form than substance, and may confirm a policy direction that was already implicit, as opposed to altering it in a meaningful way.
• Goldman Sachs: "We think the direction of yields will be determined by risks around the ECB strategy review and the macro outlook, both of which we expect will push yields higher to year-end."
• Nomura: "AIT would be the most dovish of scenarios and would mean even more monetary policy support than we currently expect, particularly with the ECB forecasting HICP inflation to undershoot 2% inflation for some years to come from 2022 onwards."
• RBC: "we expect something that can be interpreted as being akin to an average inflation target without specifically saying so (see here) and stress that how strongly this wriggle room for overshoots is will be the crucial piece of the puzzle when the actual announcement comes."

EUROPE ISSUANCE UPDATE: Irish Bond Auction

Ireland sells:
E450mln 1.00% May-26 IGB, Avg yield -0.494%, Bid-to-cover 2.55x
E500mln 0% Oct-31 IGB, Avg yield 0.040%, (Prev 0.300%), Bid-to-cover 2.29x (Prev 1.48x)
E550mln 0.40% May-35 IGB, Avg yield 0.267%, (Prev 0.056%), Bid-to-cover 1.59x (Prev 1.53x)

EUROPE OPTIONS FLOW SUMMARY

Eurozone:
RXU1 172/170.5/169p fly, bought for 10.5 in 4k

DUQ1 112.30c bought for 1 in 3k
DUU1 112.20/112.10^^, sold at 6.5 in 2

2RH2 100.25/100.37cs 1x1.25, vs 100.125p, bought cs for 2.75 up to 3.5 in 15k
3RU1 100.37c, bought for 1.75 in circa 7.2k (ref 100.29)
3RU1 100.12/00/87/75p condor, bought for 2 in 3.5k

UK:
0LZ1 99.50/99.62/99.75c fly, bought for 3.5 in 5k

FOREX: Risk-Off Pervades Further, ECB Strat Review in Focus

• Volumes across JPY, AUD and NZD have been healthy so far Thursday, with the pervasive risk-off helping fuel trade in currency markets, sending havens higher and growth proxies lower from the off.
• JPY is comfortably the best performer in G10, pressing USD/JPY through the 50-day EMA at 109.89 to expose losses toward the mid-June lows of 109.72.
• The themes and catalysts behind today's return of risk-off are unchanged, with concerns over the more transmissible Delta COVID variant, waning global GDP growth rates and the prospect of tighter monetary conditions still a weight on market sentiment.
• Haven CHF, JPY currencies are strongest so far, with NOK, CAD weaker alongside oil prices. AUD and NZD follow equity markets, with the e-mini S&P showing through the week's lows well ahead of the NY open.
• There's little data on the slate to digest beyond the weekly jobless claims numbers from the US. This will keep focus on the release of the ECB's strategy review, due at 1200BST/0700ET, at which the bank are expected to agree upon an upgraded inflation goal of 2%, allowing for price level overshoots in the near-term.

FX OPTIONS: Expiries for Jul08 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1685-00(E1.3bln), $1.1800(E514mln), $1.1930-50(E1.9bln)
• USD/JPY: Y110.75-85($849mln), Y111.25($570mln), Y112.00-10($774mln)
• AUD/USD: $0.7515-30(A$1.3bln), $0.7600-05(A$901mln)
• USD/CNY: Cny6.5100($635mln)

Price Signal Summary - Equities on the Backfoot

• In the equity space, S&P E-minis are running against the previously strong bullish tone, slipping below the Tuesday low in early trade. Bulls need the dominant buy-the-dip strategy to return to keep focus on round number resistance at 4400.00. Watch support at 4270.00, the 20-day EMA. EUROSTOXX 50 (U1) futures have sold off this morning. 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.
• In FX, the USD outlook remains bullish. EURUSD traded lower yesterday and cleared the recent lows of 1.1807/8. This confirms an extension of the downtrend and opens 1.1704, Mar 31 low. This morning's gains are considered corrective. The GBPUSD focus is on 1.3733, Jul 2 low that would open 1.3717, Apr 16 low. Resistance is at 1.3898, the weekly high. This week's bout of risk-off has worked against USDJPY. Today's move lower has resulted in a test of the 50-day EMA at 109.88. A clear break would expose the Jun 21 low at 109.72 and 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 $1814.6. 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) continues to trade lower with the focus on $71.24, the Jun 17 low. WTI (Q1) has cleared its 20-day EMA and attention turns to $69.54, Jun 17 low.
• Within FI, Bund futures are stronger having cleared resistance at 173.16, Jun 11 high. Scope is for a climb to 174.97 next, Mar 3 high (cont). Gilt futures have topped key resistance at 128.39, Jun 11 high, strengthening the bullish case. This has opened 129.99, the Feb 24 high (cont).

EQUITIES: Stocks Sinking, Taking Lead From Surging Treasuries

• Equities are soft ahead of the NY crossover, with European cash markets and US futures solidly in negative territory so far Thursday.
• The themes largely remain the same, with concerns over the Delta Variant, the prospect of tighter global monetary policy and a possible peak in near-term GDP growth unsettling sentiment.
• This time, the tremors began in Asian hours, with the Hang Seng selling off sharply and dropping near 3% at the close. This bled into the European session, with broad-based losses posted across the Energy, Financials and Consumer Discretionary sectors.
• S&P E-minis are running against the previously strong bullish tone, slipping below the Tuesday low in early trade. Bulls need the dominant buy-the-dip strategy to return to keep focus on round number resistance at 4400.00. Watch support at 4270.00, the 20-day EMA.

COMMODITIES: Sell-Off Slows, But Oil Still Weak

• WTI and Brent crude futures both trade in negative territory, although the pace of the decline has slowed Thursday, although both benchmarks continue to look weak. Brent (U1) continues to trade lower with the focus on $71.24, the Jun 17 low. WTI (Q1) has cleared its 20-day EMA and attention turns to $69.54, Jun 17 low.
• Focus turns to the one-day delayed weekly crude oil inventories update, with markets expecting a draw of around 4.5mln bbls for the headline, while refinery utilization is seen slowing to 0.39%.
• Gold maintains a firmer tone. Attention is on the 50-day EMA that intersects at $1814.6. 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.