MNI US MARKETS ANALYSIS - UK Budget in Focus

US TSYS SUMMARY: Bear Steeper Curve

US Treasuries have traded in tandem with EGBs, trading lower on the early risk on tone.

• 5/30s continues to claw back some of the flattening bias we saw going into Feb Month end.
• Curve sits bear steeper inline with EGBs and the UK curves.
• Some short reductions positioning has been noted in the longer end.
• Looking ahead, notable data are US ADP and ISM services. US PMIs are final readings so unlikely to move the needle.
• Fed speakers include Harker, Bostic and Evans, as well as the Beige book release.
• 2y yields up 0.4bp today at 0.127%
• 5y yields up 3.8bp today at 0.699%
• 10y yields up 5.0bp today at 1.443%
• 30y yields up 4.4bp today at 2.238%
• 2s10s up 4.6bp today at 131.6bp
• 10s30s down -0.6bp today at 79.5bp

EGB/GILT SUMMARY - UK Budget Day, Bond Selling Continues

EGBs have sold off this morning and curves have bear steepened alongside gains for equities and energy.

• Today is budget day in the UK. Chancellor of the Exchequer Rishi Sunak is expected to talk tough on the need to restore fiscal sustainability. Given that the economic recovery is still in the nascent stages, and with Tory backbenchers pushing back against tax rises, big ticket changes are unlikely. Focus will be on possible extension of Covid support schemes and potential adjustments to corporation tax.
• Gilts have weakened heading into the budget with yields 2-3 higher on the day and the curve 1-2bp steeper.
• Bloomberg earlier reported that ECB policymakers saw no need to react to the recent surge in bond yields.
• Bund yields are up 1-3bp with the curve 3bp steeper. Last yields: 2-year -0.7001%, 5-year -0.6377%, 10-year -0.3342%, 30-year 0.1711%.
• BTPs have traded broadly in line with core EGBs with the curve similarly bear steepening and 2bp steeper
• Supply this morning came from Germany (Bund, EUR2.595bn).

EUROZONE ISSUANCE: Italian Green Syndication

Inaugural Syndication of Italian Green BTP:

• Final spread set at 1.80% Mar-41 BTP + 12bp (IPT +15bp then revised guidance+13bp (+/-1bp)
• Orderbooks in excess of E76bln (inc E5.75bln JLM interest)
• Maturity 30 April, 2045
• Note that MNI continues to expect a E7-10bln size for this transaction.

Germany Allots E2.5395bln of the new 0% May-36 Bund - Technically Uncovered
Average yield -0.06% (-0.46%), Buba cover 1.17x (1.43x), Bid-to-cover 0.99x (1.18x)

EUROPE OPTIONS FLOW SUMMARY

Eurozone:
RXJ1 170/169ps, bought for 13.5/14 in 4k
RXJ1 170/169ps, bought for 12.5 in 1.5k

0RZ1 100/100.75 RR, sold the put at flat in 6k

UK:
0LU1 100.12c, bought for 1.25 in 10k
3LU1 99.12/98.87ps, sold at 7.5 in 9k

US:
TYJ1 133.50/133ps, sold at 13 in 30k

FOREX: EUR Bought as ECB Reportedly See No Need to Take Action on Yields

• A spell of EUR/USD buying followed a Bloomberg sources report on the ECB, stating that the ECB see no need to take drastic action to curb bond yields at this stage. EUR/USD rose in response, rising to 1.2113 before fading.
• JPY is again the weakest in G10, but USD/JPY is yet to top yesterday's high - a requirement to keep the current bullish sequence of higher highs in tact.
• Equities are rangebound, with the e-mini S&P still below Tuesday's best levels, although a sizeable rally in US bond yields ahead of the open today will be eyed headed into the NY crossover. The US 10y yield is just shy of the Tuesday's highs of 1.451%.
• Focus turns to the UK Budget, due to be presented to the Commons at around 1230GMT/0730ET, as well as US ADP Employment Change and the ISM services index for February.
• Central bank speak should once again take focus, with de Cos, Panetta, de Guindos and Schnabel of the ECB, Harker, Bostic and Evans of the Fed and BoE's Tenreyro all scheduled to speak.

Expiries for Mar 03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1900(E1.0bln), $1.2000(E1.4bln-EUR puts), $1.2040-60(E921mln-EUR puts), $1.2150-60(E1.0bln), $1.2300(E1.0bln)
• USD/JPY: Y105.40-60($2.1bln), Y105.95-106.05($649mln)
• EUR/GBP: Gbp0.8600(E1.9bln-EUR puts), Gbp0.8650(E767mln-EUR puts)
• USD/CHF: Chf0.9300($515mln)
• EUR/SEK: Sek10.17(E505mln-EUR puts)
• AUD/USD: $0.7750-55(A$520mln)
• NZD/USD: $0.7300(N$1.4bln-NZD puts)
• USD/CAD: C$1.2630-50($646mln-USD puts)
• USD/CNY: Cny6.44($499mln), Cny6.46($506mln)

Price Signal Summary - FI Bearish Risk Still Present

• Equity indices outlook is unchanged and the broader bull trend remains intact. The EUROSTOXX50 index has traded just short of key resistance at 3742.53, Feb 15 high and the bull trigger. A break would resume the uptrend and open 3798.19, 0.764 projection of the Mar - Jul - Oct 2020 swing. E-mini S&P futures have managed thus far to find support at the 50-day EMA. Levels to watch today are:
  • Support at 3785.00, Friday's low. A break would trigger a deeper sell-off.
  • Initial resistance at 3934.50, Feb 25 high
• In the FX space, EURUSD remains vulnerable despite yesterday's gains. The breach of support yesterday at 1.2023, Feb 17 opens 1.1952, Feb 5 low. USDJPY uptrend remains intact and the pair is holding onto recent gains. The focus is on 107.05 next, Aug 13, 2020 high. On the USD Index, key resistance is 91.60, Feb 5 high.
• On the commodity front, Gold remains in a clear downtrend. Resistance is at $1775.9, Feb 26 high. The focus is on $1700.0. Oil contracts are firmer today but remain in a bearish corrective cycle. Brent (K1) targets the $70.00 psychological handle but watch support at $61.39 Feb 19 low. WTI (J1) targets the round number resistance at $65.00. However keep an eye on support at $58.60, Feb 19 low.
• In the FI space, gains in Bunds (H1) are still considered corrective. Firm resistance is seen at 175.03, the 20-day EMA. The average remains intact and the contract is lower today. Gilts (M1) remains bearish. Scope is for a move towards the 127.00 handle. Resistance seen at 129.27, yesterday's high. Treasuries are still trading within the body of price action from Feb 25. In candle terms the pattern on this day is a bearish standard line - a continuation pattern. Attention is on 131-31, Feb 25 low. Key S/T resistance is at 134-06+, the Feb 25 high.

EQUITIES: European Stocks Hit Weekly Highs, But US More Cautious

• Continental stock markets are uniformly higher Wednesday, with UK names outperforming to pull the FTSE-100 higher by 1.1%. Peripheral European indices slightly underperform, with Spain's IBEX-35 higher by just 0.4%. The Stoxx 600 topped out at a new weekly high this morning, touching 416.69 - the best level since Feb 18.
• The consumer discretionary sector is outperforming in Europe, with financials and energy not far behind. Defensive utilities and healthcare sectors are the laggards.
• The e-mini S&P trades inside the Tuesday range so far, exhibiting more cautious trade so far relative to the European markets. This leaves resistance for the index at 3903.75 ahead of last Friday's 3934.50.

COMMODITIES: WTI, Brent Bounce, But Gold Still Close to Cycle Lows

WTI and Brent crude futures are higher Wednesday, with both benchmarks bouncing further off the Tuesday low. For WTI, the Tuesday high at $61.21 appears to be containing prices so far, but a move north of here would open $61.53 - intraday resistance. This level marks the 50% retracement of the pullback from cycle highs.

• Both gold and silver are in minor negative territory, erasing much of yesterday's late gains. Gold weakness would accelerate on a move through $1707.22, opening the $1700 handle and June 2020 lows at $1670.98.
• Active copper futures are broadly flat, trading within range of the Tuesday highs at $422.71. This week's price action has relieved overbought conditions, which topped out with an RSI reading of over 88 last week.