MNI US MARKETS ANALYSIS - Sell-Off in European Banks Sets Up Lower US Open

US TSYS: Treasuries Surge On European Banking Fears

• Cash Tsys surge, led by the front end for a sizeable bull steepening, on spillover from European banks coming under increasing pressure since the open. It sees this week’s decision to hike 25bp to 4.75-5% increasingly viewed as the peak for the cycle with cut expectations mounting. Upcoming data likely take a second seat with market reaction skewed more keenly to downside surprises.
• Off extremes but still see 2YY -22.1bp at 3.612%, 5YY -17.1bp at 3.268%, 10YY -13.0bp at 3.295% and 30YY -9.1bp at 3.607%. 2s10s sit at -30bps having briefly marked their steepest levels since Oct’22 with -28.5bps.
• TYM3 trades 27+ ticks higher at 116-27 off a high of 117-01+. It opens 117-14+ (high Aug 29/30, 2022) having cleared key resistance at 116-28+ (Jan 19 high) and briefly 117-00 (61.8% retrace of Aug-Oct 22 bear leg (cont)). Cumulative volumes have accelerated to 515k for the day in a sizeable uptick since the European open after a subdued Asian session.
• Fedspeak: Bullard (non-voter) set to give the first post-FOMC remarks at 0930ET
• Data: Focus on Durable goods Feb prelim (0830ET) and S&P Mfg & Service PMI Mar prelim (0945ET), but also see wholesale inventories revisions plus the KC Fed service activity index.

STIR FUTURES: Fed Rate Path Slides With Circa 50bp Cuts By July, 100bp By Year-End

• Fed Funds implied rates have slumped in recent trading in an intensification of a move that started with the European opens as banks slide.
• There is now just a 7bp hike priced for the May FOMC (-3bp) with two cuts priced for July from current levels (-49bps for -20bp on the day) and 106bp of cuts from current levels to 3.73% by year-end (-27bps).

Source: Bloomberg

25bp hikes no longer fully priced for BOE and ECB

• SONIA futures up to 32 ticks higher (Dec23 and Mar24), with the Mar24 contract marking a 60 tick move higher since Wednesday's close.
• In terms of BOE pricing there is now less than 7bp priced for May (down from 17bp at yesterday's close) and a terminal 17bp priced by August (down from 29bp at yesterday's close). A cut from the peak is now fully priced this year for the BOE (-22bp cumulative from current levels).
• Euribor futures up to 28 ticks higher on the day with Dec23 through Sep24 futures all up more than 40 ticks since the Wednesday close.
• Markets now pricing 17bp for the ECB May meeting with a peak of just below 25bp by July. that rate cut is almost fully reversed by the February 2024 meeting.

BANKS: European Bank Weakness Spills into US Pre-Market Trade

• European banking weakness spilling well over into US pre-market trade, putting the likes of JPM (-1%), Wells Fargo (-1.4%), Citi (-1.3%) and Morgan Stanley (-1.1%) all lower pre-market.
• Moves stemming from persistent weakness across European banks, with German names among the sharpest decliners (Deutsche Bank down 12%, Commerzbank down 9%) and at fresh daily lows at typing.
• CDS spreads remain a particular focus, with Deutsche Bank 5y CDS topping the highest levels of 2022 earlier today as another indicator of underlying banking stresses.
• While not the core driver, a DoJ announcement that Credit Suisse & UBS were being investigated for any evidence of helping clients skirt Russian sanctions added further weight given the fragility of the sector at present.

GILT ISSUANCE UPDATE:

GILTS: FQ1: Short / medium auctions
6 short auctions

• 3.50% Oct-25 gilt: 2 auctions on 3 May and 7 June (MNI had pencilled in one).
• 4.125% Jan-27 gilt: 2 auctions on 19 April and 17 May (MNI had pencilled in one).
• New 7 June 2028 gilt: MNI had previously expected a launch in May but the DMO has confirmed a 20 June launch date.
• 0.50% Jan-29 gilt: The DMO had announced that this will be on offer on 5 April. This is the only auction in the quarter.

5 medium auctions

• 3.25% Jan-33 gilt: 3 auctions as expected by MNI: 13 April, 10 May, 13 June
• 0.875% Jul-33 Green gilt: One auction on 24 May (as expected)
• 3.75% Jan-38 gilt: One auction on 28 June (as expected)

Long / linker operations
3 long-dated auctions, 1 syndication

• 1.125% Jan-39 gilt: To be reopened on 4 April (as already confirmed).
• New Oct-63 gilt: An October 2063 gilt to be launched via syndication (as expected by MNI) in the W/C 15 May. To have an ISIN GB00BMF9LF76.
• 3.75% Oct-53 gilt: 2 auctions on 18 April and 6 June (we had looked for 1-2). 3 linker auctions, 1 syndication:
• New Nov-33 linker: To be launched via auction on 27 June (as expected). To have ISIN GB00BMF9LJ15.
• New 15-25 year linker: To be launched in the W/C 24 April as we expected. ISIN: GB00BMF9LH90
• 0125% Mar-39 linker: One auction on 12 April
• 0.125% Mar-51 linker: One auction on 23 May

RATINGS: Friday’s Rating Slate

Sovereign rating reviews of note slated for after hours on Friday include:

• Fitch on Malta (current rating: A+; Outlook Stable)
• Moody’s on Estonia (current rating: A1; Outlook Stable) & Poland (current rating: A2; Outlook Stable)
• S&P on Germany (current rating: AAA; Outlook Stable)
• DBRS Morningstar on Finland (current rating: AA (high), Stable Trend) & France (current rating: AA (high), Stable Trend)

FOREX: Data Plays Second Fiddle to Ebb and Flow of Risk Sentiment

• Data releases and speakers have played second fiddle the ebb and flow of risk sentiment early Friday, with a sour open for European equities helping dictate proceedings. A gap lower at the cash equity open was triggered by weakness across the European banking sector, with the likes of Credit Suisse and UBS hit particularly hard after a report that the US Dept of Justice could be investigating the banks for evidence that they aided Russian oligarchs in skirting Western sanctions.
• As a result, concerns about the stability of one of Europe's largest banking sectors have worsened, leading to underperformance across risk proxies and high Beta FX.
• Souring risk sentiment has led to outperformance of the USD and JPY, helping put the USD index higher for a second session and within range of the 50-dma pivot of 103.4421.
• PMI data from across the Eurozone saw mixed results, with composite indices beating expectations thanks to a healthier services sector, although manufacturing continues to weigh on overall sentiment.
• Focus for Friday trade turns to prelim February durable goods data and the prelim March PMIs for the US. Markets also see the first post-FOMC decision Fed speakers, with Bullard due to speak from St. Louis. ECB's Centeno, Nagel and BoE's Mann also make appearances.

FX OPTIONS: Expiries for Mar24 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0600-05(E1.7bln), $1.0675-80(E627mln), $1.0700-10(E1.4bln), $1.0800(E1.6bln), $1.0850(E539mln), $1.0875(E509mln), $1.0890-10(E656mln)
• USD/JPY: Y130.00($830mln), Y131.00($592mln), Y132.95-00($1.3bln), Y133.75($749mln)
• EUR/GBP: Gbp0.8900(E635mln)
• AUD/USD: $0.6700(A$669mln)
• USD/CAD: C$1.3600-05($606mln), C$1.3620-30($1.1bln)
• USD/CNY: Cny7.3635($1.4bln)

EQUITIES: European Banks Drive Dip in Equities at Cash Open

• Eurostoxx 50 futures are holding on to recent highs. The recovery from Monday’s 4057.00 low has resulted in a breach of both the 20- and 50-day EMAs. A continuation higher would signal scope for 4184.50, a Fibonacci retracement. Key resistance and the bull trigger is at 4268.00, the Mar 6 high. On the downside, a reversal lower and a breach of 3914.00 would resume the recent downtrend. Initial support lies at 4069.00, the Mar 21 low.
• S&P E-Minis reversed sharply lower Wednesday. It is too early to tell whether the pullback marks the start of a bearish cycle. However, the move lower means that price has - so far - failed to hold above pivot resistance around the 50-day EMA. The average intersects at 4021.50 and a clear break is required to strengthen bullish conditions. Watch support at 3966.25, Wednesday’s low - a break would be bearish. Key S/T resistance is 4073.75.

COMMODITIES: Recent Pullback in Gold Considered Corrective, Trend Conditions Still Bullish

• WTI futures remain in a downtrend and this week’s recovery appears to be a correction. Note that the latest move higher is allowing a recent oversold condition to unwind. Firm resistance is seen at $72.85 the 20-day EMA. Recent weakness confirmed a resumption of the broader downtrend and has paved the way for a move towards $62.43, the Dec 2 2021 low. The bear trigger is $64.36, the Mar 20 low.
• Trend conditions in Gold remain bullish and the recent short-term pullback is considered corrective. The breach on Mar 17 of former resistance at $1959.7, Feb 2 high, confirmed a resumption of the bull trend that started late September 2022. The test above $2000.0 opens $2034.0 next, a Fibonacci projection. $1918.3 is seen as a firm support. It is the Mar 17 low and a break would signal scope for a deeper pullback.