MNI US MARKETS ANALYSIS - Sterling Skewered

US TSYS SUMMARY: Higher On Brexit Headlines; Midnight Gov't Shutdown Eyed

After flatlining in Asia-Pac trade (a 2-tick range for TYs), Tsys jumped just after 0300ET on headlines that EU leadership now sees 'no deal' Brexit as more likely than not (Sunday now seen as a deadline for a deal).

• The 2-Yr yield is down 0.4bps at 0.133%, 5-Yr is down 1.8bps at 0.3686%, 10-Yr is down 2bps at 0.8865%, and 30-Yr is down 1.3bps at 1.6138%. Mar 10-Yr futures (TY) up 5/32 at 138-01.5 (L: 137-26.5 / H: 138-04).
• Apart from that Brexit development, it's been quiet overnight, with few macro drivers. The day's focus will be on Capitol Hill, with the Senate yet to approve a stopgap funding measure to ensure the federal gov't doesn't shut down at midnight ET.
• Alongside this are discussions over COVID relief, with Senate taking up a key Defense bill.
• Nov PPI (0830ET) and Dec Prelim UMich Sentiment (1000ET) are Friday's data points.
• Fed's Quarles due to speak on banking supervision (1240ET), but don't expect anything on current monetary policy as per pre-FOMC blackout rules.
• No supply, but NY Fed buys ~$12.825B of 0-2.25Y Tsys.

EGB/GILT SUMMARY: Shifting to Risk-Off

Markets have shifted to a risk-off position following escalating no-deal Brexit warnings and news that European drugmakers will delay the rollout of a Covid vaccine.

• Gilts are leading the charge among European majors. Yields are 2-6bp lower on the day with the longer end of the curve outperforming.
• The bund curve has similarly bull flattened with the 2s30s spread 4bp narrower.
• OATs slightly underperform bunds at the longer end. Last yields: 2-year -0.7332%, 5-year -0.7166%, 10-year -0.387%, 30-year 0.3029%.
• BTPs have given up much of the early gains and now trade close to unch on the day.
• Sanofi and GSK have delayed their rollout of a Covid vaccine after stating that it failed to deliver a strong immune response in the elderly.
• European Commission President Ursula Von der Leyen has warned that the probability of a no-deal Brexit is now higher than securing a deal. While both sides continue to talk up their commitment to reach an agreement, both have also ratcheted up warnings of a no-deal risk.
• Belgium sold E350mn of the 0.80% Jun-25 OLO and GBP150mn of the Jun-26 OLO via the Optional Reserve Inquiry (ORI) facility.
• The final German CPI print for November matched the initial estimate (-0.7% Y/Y). Spanish inflation was a touch better than expected (-0.8% vs -0.9% survey).

EUROPEAN OPTION FLOW SUMMARY

EUROZONE:
RXF1 177.50/176.50ps, bought for 9 in 1k
RXG1 175.50 put, bought for 13 in 2k

DUF1/DUG1 112.30/20ps spread, bought the Feb for 1.25 in 10k

UK:
0LM1 99.875/99.75ps, sold at 2 in 8k
L Z1 100.99.99.875ps vs 100.375c, bought the ps for 0.75 in 3k
L Z1 99.875/99.625ps, bought for 2 in 5k

FOREX: Brexit Provides a Busy Session

GBP plummets on Brexit headline

• EU VDL told the EU Summit "no deal" was the likely option, set the tone for the Pound and across multi assets.
• USD saw further upside continuation following the latest Brexit headline on safe haven, as Equities dipped lower.
• Gold test low of the session on the Dollar move. With next support in the precious metal noted at $1822.5 - Low Dec 7
• Cable fell 130 pips and through multiple supports to print a 1.3185 low.
• Cable has since pared some of the weakness after VDL, added during the EU summit presser, that they will decide Sunday if they are conditions for a deal.
• USD outperforms against most G10s, beside the JPY, given the risk off tone in early trading.
• Some large moves was also seen in EM and particularly the Turkish Lira down 0.86% against the Greenback, on EU and US Sanctions.
• Looking ahead, US PPI and Michigan are the data of note Speakers sees ECB de Cos and Fed George and Quarles, but given blackouts, there will be no mention of monetary policy ahead of the FOMC next week

FX OPTIONS: Expiries for Dec11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1720-30(E675mln), $1.1875-95(E552mln),
  $1.2100-10(E1.3bln)
• USD/JPY: Y102.00($865mln), Y102.90-00($512mln), Y104.50($601mln), Y105.95-00($514mln)
• GBP/USD: $1.3600(Gbp767mln)
• EUR/GBP: Gbp0.8800(E510mln)
• AUD/USD: $0.7420-25(A$609mln)
• USD/CAD: C$1.3060-65($582mln), C$1.3190($542mln)

TECHS: Price Signal Summary. Sterling Under Pressure Again

• EU FI bull rally extends.
  • Bund (H1) has cleared yesterday's high with the focus shifting to 178.89 next, 1.00 projection of the Nov 11 - 30 rally from Dec 2 low.
  • Gilts (H1) surge higher again this morning as the contract continues to defy gravity. 135.96, 76.4% of the Nov 5 - 11 sell-off (cont) and 136.13, 1.50 projection of the Nov 11 - 30 rally from the Dec 2 low mark the next objectives.
  • Treasuries (H1) are pushing higher too, approaching key resistance and the bull trigger at 138-08, Nov 20 / 30 high.
• In FX, Sterling remains volatile and is significantly softer this morning.
  • Cable has breached support at 1.3225. A clear break through the 50-day EMA would open 1.3106, Nov 12 low.
  • EURGBP has charged higher clearing 0.9142, Dec 7 high. The focus is on 0.9220 next, Sep 22 high.
• On the commodity front, Gold key support lies at $1822.5, Dec 7 low. A break would signal scope for a deeper pullback. Potential remains for gains to the $1888.9 level, 61.8% retracement of the Nov 9 - 30 sell-off. Brent (G1) bullish objectives are set at $51.66, 0.764 projection of the Nov 16 - 25 rally from the Dec 2 low. WTI (F1) bulls eye $48.07 next, 0.764 projection of the Apr - Aug rally from the the Nov 2 low.

EQUITIES: Stocks Trade at Session Lows Pre-NY

European equity markets are uniformly lower ahead of the NY open, with most continental indices down around 1-1.5%, although Spanish and German names are notable underperformers, falling 2% or more. Energy and communication services names are leading losses in Europe, with defensive healthcare and consumer staples shielded from the sharper move lower.

It's a similar scene in US futures space, with the e-mini S&P off just over 30 points and opening a gap of just over 75 points with the alltime highs printed earlier in the week.

Focus remains on the lack of dealmaking worldwide, with no resolution in sight seen in Brexit talks and US stimulus, government funding still seen a way off.

COMMODITIES: Oil Moderates, Precious Metals See Little Support

After this week's sharp rally, WTI and Brent crude futures have moderated slightly but continue to hold close to the top-end of the recent range. Soft equity markets this morning are largely responsible for the pullback in commodity prices, with Brent futures dipping back below the $50/bbl mark.

Precious metals are seeing little support from soft risk sentiment early Friday, with spot gold still pinned between the 50- and 200-dma directional triggers. These levels lie at $1875.29 and $1809.67 respectively.