MNI US MARKETS ANALYSIS - Risk Off Rolls On As Stocks Drive Markets

US TSYS SUMMARY: Bull Flattening On Evergrande Spillover

Treasuries have gained steadily in overnight trade to start the week, with equities weakening and the dollar on the front foot.

• Yields opened European trading lower (no cash trading in Asia-Pac with Japan on holiday) and have continued lower, with bull flattening in the curve.
• The 2-Yr yield is down 0.2bps at 0.2198%, 5-Yr is down 2bps at 0.8405%, 10-Yr is down 3.2bps at 1.3294%, and 30-Yr is down 3.9bps at 1.8598%.
• Dec 10-Yr futures (TY) up 8.5/32 at 133-1.5 (L: 132-24 / H: 133-03)
• Concerns over spillover from real estate giant China Evergrande's woes have driven the risk-off tone. And of course there's some attention on Wednesday's Fed decision, particularly with possible movement in the Dot Plot (MNI's preview will be out later today).
• And worth noting it's a big week for Congress, with government funding, the debt limit, and multi-trillion dollar fiscal packages in the balance in the coming days.
• A very quiet session in terms of scheduled data /events. 1000ET sees the session's only data: NAHB Housing Market Index. Supply today: $90B in 13-/26-week bills selling at 1130ET.
• NY Fed buys ~$3.225B of 7-10Y Tsys.

EGB/GILT SUMMARY: Bull Flattening

European sovereign bonds have rallied this morning while equities have sold off.

• Gilts have traded higher with cash yields 2-3bp lower across the curve.
• The bund curve has bull flattened with the 2s30s sread 3bp narrower on the day.
• The long-end of the OAT curve has similarly outperformed.
• BTPs have slightly underperformed core EGBs with yields edging down 1-2bp.
• Supply this morning came from Germany (Bubills, EUR5.889mn), Netherlands (DTCs, EUR2.17bn), Slovakia (SlovGBs, EUR293mn).
• The European data calendar was light this morning.
• UK Business Secretary Kwasi Kwarteng will be holding talks with energy companies today as the impact of surging gas prices intensifies.
• The diplomatic fallout from the US-UK-Australia AUKUS pact has continued over the weekend. France has recalled its ambassadors from the US and Australia and has pulled out of scheduled bilateral defence talks with the UK. Given the response from Paris, further political/diplomatic ramifications are likely.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXV1 170.5/170ps 1x2, bought for 1 in 4.5k

UK:
0LV1 99.62/99.50/99.25 broken put fly, bought for 0.25 in 2k

FOREX: China Risk and Fed Fears Work in Favour of Haven Currencies

• Extending the themes seen at the tail-end of last week, risk-off pervades across asset markets early Monday. Lingering concerns over a possible Evergrande default in China and wobbles ahead of Wednesday's FOMC meeting are sending stocks lower and providing a solid bid for haven currencies.
• While markets were highly aware of the risks surrounding real estate giant Evergrande over the past fortnight or so, these fears compounded early Monday as investors become concerned over the risk of the Chinese authorities clamping down on real estate speculation across Hong Kong. This, twinned with risks of a hawkish surprise from Wednesday's Fed projections leaves the greenback and JPY as comfortably the best performers across G10.
• Weaker equity and commodity markets are working against the growth and oil proxies, keeping NOK, SEK and AUD on the backfoot.
• ECB's Schnabel and Villeroy are due to speak as well as the release of the US NAHB Housing Market Index.

FX OPTIONS: Expiries for Sep20 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1720-30(E847mln), $1.1800(E514mln)
• USD/JPY: Y109.00($1.1bln)

Price Signal Summary - Risk-Off Mood Weighs On Equities

• In the equity space, S&P E-minis are under pressure. The contract has cleared the 50-day EMA at 4412.88 and this reinforces the current short-term bearish threat. Attention turns to the next key support at 4339.75, Aug 19 low. EUROSTOXX 50 futures have also started the week on a soft note and cleared former support at 4060.50, Aug 19 low. This signals scope for weakness towards 3962.50, 76.4% retracement of the Jul 19 - Sep 6 rally.
• In FX, EURUSD remains soft. Today's weakness has resulted in a breach of 1.1722, the 76.4 retracement of the Aug 20 - Sep 3 rally. This opens the key support at 1.1664, Aug 20 low and an important bear trigger. GBPUSD is under pressure too and has cleared support at 1.3727, Sep 8 low. This opens 1.3680, Aug 27 low. The next key support is at 1.3602 Low Aug 20. The USD Index (DXY) gains have exposed the key resistance at 93.73, Aug 20 high and the bull trigger. A break would confirm a resumption of the uptrend that started May 25.
• On the commodity front, Gold sold off sharply Sep 16 and the near-term outlook remains bearish. The focus is on $1724.5, 76.4% retracement of the Aug 9 - Sep 3 rally. WTI futures maintain a bullish outlook although the contract is facing selling pressure this morning as risk-off sentiment dominates. Initial support is seen at $69.73, the 2-day EMA. Key support has been defined at $67.56, Sep 9 low.
• In FI, Bund futures are firmer this morning, but remain in a downtrend. Recent weakness signals scope for a move towards 170.52, 3.00 projection of the Aug 5 - 11 - 17 price swing. Gilt futures remain in a bearish cycle. The focus is on 126.83 2.00 projection of the Aug 20 - 26 - 31 price swing.

EQUITIES: Stock Sell-Off Extends as China Risk, Fed Fears Swirl

• European indices all sit sharply lower ahead of the NY crossover, with the Italian FTSE-MIB, Germany's DAX and France's CAC-40 off over 2% apiece. The banking/financials sector is the worst performer, closely followed by materials and consumer discretionary names. Defensive healthcare, utilities and consumer staples names are faring better, but remain in negative territory.
• Concerns over a possible default for China's real estate giant Evergrande have filtered in to European and US trade, with the e-mini S&P off over 1% at pixel time. The pullback in the e-mini S&P puts the index below the 50-dma for the first time since July. Continued weakness would open 4339.75, the Aug 19 low. On the upside, a climb above 4478.50, Sep 16 high is required to ease current bearish pressure.
• Pre-market trade in some of the largest China-exposed companies is also resolutely negative, with the likes of Apple and Tesla both off sharply ahead of the bell.

COMMODITIES: WTI, Brent Reverse Last Week's Strength

• Oil markets globally sit sharply lower ahead of the Monday US open, with WTI and Brent crude futures off around 2% apiece. Concerns over macro spillovers from the potential default of China real estate giant Evergrande are largely responsible for the reversal, but pre-positioning ahead of Wednesday's Fed decision may also be playing a part, with the USD sharply stronger.
• Despite the pullback in WTI, futures maintain a bullish outlook following last week's gains. The climb resulted in a break of $71.30, the bear channel top drawn off the Jul 6 high. The move higher strengthens the current bullish theme and signals scope for further short-term gains.
• Gas prices globally continue to grind higher, with a number of governments now becoming concerned over supply constraints and the possible folding of a number of smaller energy providers. The UK government are said to be seeking information on the hedging arrangements for a number of suppliers, with UK day ahead gas prices again touching alltime highs. Prices are higher by close to 500% over the past 12 months.