MNI US MARKETS ANALYSIS - Risk Spirals as Variant of Concern Found in Europe

US TSYS SUMMARY: Large, Belly-Led Rally On Covid Risk-Off

• Cash Tsys have seen a large, belly-led rally today in the wake of the discovery of a new, aggressive Covid variant in Africa. Data on real-world transmissibility or vaccine efficacy could take "several weeks" according to the WHO.
• The 2Y yield is -13bps at 0.508%, 5Y is -15.5bps at 1.187%, 10Y is -12bps at 1.516% and 30Y is -9bps at 1.870%. This has completely unwound the sell-off earlier this week on the accelerated taper and earlier Fed hike theme.
• TYZ1 futures are up sharply on the day, currently +1-07 at 131-01 on high volumes despite coming post-Thanksgiving.
• Separately, S&P500 futures are down -1.8% and oil is down 6-7% today.
• No US data/auctions today. Cash Tsys will close early at 1400ET/1900GMT per SIFMA recommendation and Tsy futures at 1300ET/1800GMT (although some prices will print until 1315ET).
• The macro focus next week is Powell testifying on Tue and Wed before non-farm payrolls for Nov on Fri.
• These are particularly pertinent as money markets have pushed back the second 25bp hike to 2023 and questions arise whether the Fed will slow rather than accelerate the pace of tapering at the Dec 15 meeting.

EGB/GILT SUMMARY: Covid Fears Trigger Risk Off Move

Sovereign FI has rallied sharply this morning alongside a sell off in stocks and oil as concerns over the latest Covid variant has hit risk sentiment.

• Gilts have lead the charge with yields 12-13bp lower and the belly of the curve marginally outperforming.
• The bund curve has bull flattened with yields 2-7bp lower and the 2s30s spread 5bp narrower.
• The OAT curve has also flattened sharply with the 2s30s spread trading down 7bp.
• BTPs have slightly outperformed core EGBs with yields down 5-9bp.
• Supply this morning came from Italy (BOTs, EURbn) and the UK (Bills, GBP2bn).
• The ECB's Visco earlier reiterated President Lagarde's often aired sentiments about the risk of premature tightening, warning that the exit from pandemic measures needs to be gradual.
• The ECBs Lane and de Cos will speak later today as will the BoEs Huw Pill.

EUROPE OPTION FLOW SUMMARY

Eurozone:
DUG2 112.20/112.00 ps vs 112.40 calls, bought the ps for -0.5 and 1 in 12k

2RF2 100.00/99.75ps, bought for 4.75 in 4k (ref 100.075)

UK:
0NH2 99.10/99.30/99.40/99.60c condor, sold at 3.25 in 3.75k

FOREX: Nu Variant Adds to COVID Pressures, Puts EUR/CHF at New Lows

• Concerns surrounding a new variant uncovered in South Africa have unsettled markets in style this morning, with commodities, equities and government bond yields all slipping sharply. The discovery of the new variant has already prompted new travel restrictions to be laid on countries across southern Africa, and has raised concerns that nations already on the cusp of a broad lockdown - namely Germany - could be tipped into tighter COVID counter-measures.
• The German health minister Spahn has already spoken, warning that social contacts will need to be reduced and that the healthcare system could be overwhelmed.
• Haven currencies are faring well, with CHF and JPY rallying and pressuring EUR/CHF to fresh multi-year lows.
• Oil- and commodity-tied currencies have been hardest hit, with the likes of NOK, AUD and CAD falling against most others in G10 as WTI and Brent crude prices follow equities lower. WTI trades at levels last seen in mid-September, with key support at the 100-dma giving way at $74.44/bbl.
• With the early US close, data and speakers are few and far between Friday, keeping focus on further developments on the continent.

FX OPTIONS: Demand for JPY Vol Hedges Buoys Options Markets

Given the risk-off moves seen across equities, commodities and rates this morning, no surprise to see currency hedging volumes well ahead of average for this time of day, led by JPY, EUR and CAD options activity. No surprise to see implied vol for calls across haven currencies has surged:

• USD/JPY 3m risk reversals have slipped to their lowest levels since November last year (when lockdown concerns were again spiralling across Europe)
• Solid demand for JPY vol hedges has been seen across European hours, with sizeable trade in 111.70/115.50 strangles a focus, with an end-January expiry eyed.
• Mirroring the strength in EUR spot, the front-end of the EUR risk reversals curve has corrected higher, allowing the 3m contract to recover off mid-November lows of -0.7 points. Move coincides with the sharp pullback in the front-end of the US yield curve this morning, with the 2y off 13bps at typing.

OPTIONS: Expiries for Nov26 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1150-60(E503mln), $1.1275-80(E612mln), $1.1380-1405(E598mln), $1.1500-14(E1.1bln)
• USD/JPY: Y113.65-80($1.3bln), Y115.50($582mln)
• GBP/USD: $1.3400(Gbp963mln)
• AUD/USD: $0.7200(A$524mln), $0.7240-50(A$597mln)
• USD/CAD: C$1.2520-25($1.8bln), C$1.2545-55($2.9bln)
• USD/CNY: Cny6.3750-60($500mln), Cny6.4000($650mln), Cny6.4550-55($1.2bln)

Price Signal Summary - Risk Aversion Forces Short-Term Trend Reversals

• In the equity space, S&P E-minis have sold off sharply today. The move lower highlights the S/T importance of Tuesday's price action - a bearish shooting star formation that warned of a short-term top. Support at 4625.25 level, Nov 10 low has been breached to strengthen the case for bears and opens the 50-day EMA at 4562.53. EUROSTOXX 50 futures have also sold off sharply today and cleared the 50-day EMA. This signals scope for a deeper decline and attention is on 4058.10, 76.4% retracement of the Oct - Nov rally.
• In FX, trend conditions are unchanged in the USD and the uptrend remains firmly intact. EURUSD objectives remain; 1.1185 Jul 1, 2020 low and 1.1128, 1.764 projection of the Jan 6 - Mar 31 - May 25 price swing. Short-term gains are considered corrective. GBPUSD has traded to a fresh short-term trend low today. The next objective is 1.3216, 1.236 projection of the Sep 14 - 29 - Oct 20 price swing. USDJPY has traded sharply lower today. Attention is on the first key short-term support at 113.59, Nov 19 low. A break would open 112.73, the Nov 9 low.
• On the commodity front, Gold remains vulnerable despite today's bounce. This follows the recent sharp sell-off. The short-term focus is on the bull channel base at $1757.1 today. The channel is drawn off the Aug 9 low. WTI futures have reversed course today and sold off sharply. The break of support at $74.76, Nov 22 low opens $72.30 next, 50.0% of the Aug 23 - Oct 25 rally.
• In the FI space, Bund futures are recovering from recent lows and importantly, support at 170.06, the Nov 5 low has remained intact. This suggests the recent move lower has been a correction and that a short-term uptrend remains intact. The focus is on resistance at 172.57, Nov 22 high. Gilts have rallied today and the contract gapped higher at the open. This negates recent bearish concerns and with resistance at 125.96, Nov 22 high breached, the key short -term hurdle at 126.23 has been exposed, Nov 9 high. This level has been probed and a clear break would strengthen the near-term outlook for bulls and open the 127.00 handle.

EQUITIES: Stocks Spiral, With Energy Firms Hit on Lockdown Fears

• Equity markets trade uniformly lower worldwide, as a new COVID variant uncovered in South Africa has been dubbed a 'concern' with fears it's increased mutation could evade vaccine-built immunity. Spain's IBEX-35 leads the way lower, dropping 3.7% with Europe's energy names hardest hit.
• WTI and Brent crude futures trade lower by over 5% apiece, with explorers and producers including BP, Repsol and Royal Dutch Shell off by a similar margin.
• Not all stocks are lower, however, with lockdown plays including Peloton and Zoom both trading sharply higher ahead of the open.
• The e-mini S&P trades at levels last seen on Nov 2nd, with 4593.25 undercutting as first support. A fall through here opens the 50-dma at 4521.1.

COMMODITIES: Oil Shies From New COVID Variant, Taking Out Key Support

• WTI and Brent crude futures trade sharply lower, with concerns for a fresh wave of lockdowns sweeping across Europe weighing on commodities globally. WTI has slipped to levels not seen since September, with key support at the 100-dma giving way at $74.43/bbl.
• Gold and silver are benefiting from the risk-off move, with spot gold back above the $1,800/oz and narrowing the gap with the Monday high at $1,84914/oz.
• With the downside in the front-end of the futures curve, volumes around $70/bbl, $71/bbl WTI put strikes have surged, underpinning the risk-off moves and strengthening downside ahead of the NY crossover.