MNI US MARKETS ANALYSIS - Risk Offered as Manchin Tanks BBB

US TSYS SUMMARY: Treasuries Rally On Manchin's No To BBB

• Cash Tsys have bull steepened this morning from a combination of Manchin saying yesterday that he cannot support BBB and renewed Omicron restriction fears.
• 2Y yields are -2.8bps at 0.609%, 5Y -3.1bps at 1.144%, 10Y -1.5bps at 1.387% and 30Y -0.3bps at 1.803%.
• TYH2 futures have sold off in recent trading but are still +0-07 on the day at 131-12 on above average seasonal volumes. The brief session high of 131-19 cleared the Dec 3 high of 131-16, whilst a further clear break would reinstate a bullish outlook opening the 132-00 handle.
• No Fedspeak today and data limited to the Conference Board leading index for Nov at 1000ET.
• NY Fed buy-op: Tsy 4.5Y-7Y, appr $4.525B vs. $5.275B prior (1030ET).
• Issuance limited to bills today: $60B 13W and $51B 26W (1130ET), $60B 78D (1300ET).

EGB/Gilt Summary: Core EGBs Rally on Equity Spiral

• Core EGBs trade solidly, in sympathy with Treasuries which have responded to Manchin's single-handed tanking of Biden's flagship Build Back Better policy proposals. Concerns remain further elevated that governments could impose stricter Covid-19 restrictions across the UK and Europe (and the announcement of the Dutch lockdown), which continue to work in favour of core fixed income.
• The UST curve has steepened, with larger moves having been seen at the short-end. Eurodollar Reds/Greens are all higher as some future Fed hikes are pushed further out in expectation of a lower level of government spending.
• A similar steepening has been seen in the gilt curve, but more due to rate hike expectations being pushed back due to concerns about a post-Christmas lockdown, with a number of newspapers talking up the options ministers are said to be discussing this morning.
• The German curve has bull flattened a little, in contrast. 10-year Bunds have moved in line with 10-year gilts but with little expected in terms of near-term hikes, Schatz yields have moved less. Peripheral spreads,particularly BTP-Bund spreads, have widened a little.

EUROPE OPTION FLOW SUMMARY

Eurozone:
OEG2 134.25/133.75 put spread vs 134.75 call (+ps, -c) in 2k, net received 1.5 (-48% delta)
RXG2 172/170 put spread bought for 18 in 1.4k (-11% delta)
RXF2 173/172 put spread bought for 2 in 5k (expiry this Thursday)
2RJ2 100.00/99.75 put spread bought for 6.75 in 10k

FOREX: Risk Proxies Slide as Manchin Tanks BBB

• Vague risk-off pervades currency markets early Monday, with the greenback making gains against losses for growth proxies and commodity-tied FX. Stock futures trade higher on both sides of the pond, with the e-mini S&P dropping over 60 points and European indices joining the slide.
• Senator Manchin's one-handed tanking of Biden's Build Back Better bill has prompted a number of sell-side outfits to lower GDP forecasts for the coming year, adding to the near-term pressures as cases from the omicron variant continue to swell across developed markets.
• GBP/USD has revisited sub-1.32 levels, narrowing the gap with key support at 1.3163. A break below here opens losses toward 1.3135 and levels not seen since late 2020.
• The single currency fares better, with EUR higher against all others in G10. EUR/USD is recouping a very minor portion of the losses suffered late last week, with EUR/USD now either side of the 1.1250 level. Nonetheless, the near-term outlook remains weak below 1.1349.
• The data calendar is understandably light headed into the holiday season, with no central bank speakers of note either.

FX OPTIONS: Expiries for Dec20 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1250(E625mln), $1.1300(E916mln), $1.1335-55(E1.1bln), $1.1400(E1.4bln)
• USD/JPY: Y113.65-75($726mln), Y114.10-25($741mln), Y115.00($1.2bln)
• AUD/USD: $0.7100(A$686mln), $0.7200-05(A$1.6bln); $0.7240-50(A$1.5bln)
• USD/CAD: C$1.2800-20($690mln)

Price Signal Summary - Market Remains In Risk Averse Mode

• In the equity space, S&P E-minis have started the week on a softer note. The sell-off late last week and today, signals potential for a deeper pullback. Futures are back below the 50-day EMA, at 4590.64. This is an important technical break as it strengthens a bearish threat and exposes key support at 4485.75, Dec 3 low. EUROSTOXX 50 futures last week failed to hold onto the high of 4234.00 on Dec 16 and the contract has started the week on a softer note. Today’s bearish pressure has exposed the key support handle at 3980.00, the Nov 30 low and the bear trigger.
• In FX, EURUSD remains below resistance at 1.1383, Nov 30 high. A break is required to signal potential for a stronger recovery. Support lies at 1.1222, the Dec 15 low and 1.1186, Nov 24 low. The latter is key support and represents the bear trigger. GBPUSD has failed to hold onto recent gains. The reversal lower Friday highlights a potential resumption of the underlying downtrend and attention is on support at 1.3163, the Dec 8 low and the bear trigger. USDJPY lacks a clear direction at this stage. The near-term directional triggers are; 114.26, the Dec 15 high and 113.14, Friday’s low
• On the commodity front, Gold last Wednesday attempted to clear the base of its bull channel from the Aug 9 low. At this stage, the move lower appears to have been a false break and the strong recovery from $1753.7, Dec 15 low suggests the yellow metal is reversing its recent downtrend. Watch resistance at $1815.6, the Nov 26 high. A breach would strengthen bullish conditions. WTI futures have traded lower today. The move lower has resulted in a breach of support at $69.21 and this paves the way for a weakness towards $66.62, the Dec 6 low and more importantly exposes the key support at $62.26, the Dec 2 low.
• In the FI space, Bund futures remain in an uptrend. Support at 173.40 is intact and this level needs to be cleared to signal a short-term reversal. The key resistance and bull trigger is unchanged at 175.02, Dec 8 high. Gilts trend outlook remains bullish too. Short-term support has been defined at 126.34, Dec 16 low. A break would sour the short-term tone. The trigger for a resumption of strength is 127.67, Dec 8 high.

EQUITIES: Stocks Slide as Manchin Snubs Biden's BBB

• Equity futures trades poorly ahead of the Monday open, with the e-mini S&P dropping over 50 points and continental European markets suffering losses of a similar magnitude. Europe's energy and healthcare names are leading the decline - but losses are broad-based with sentiment taking a hit. The risk-off theme follows Senator Manchin nixing Biden's Build Back Better plans over the weekend, withdrawing support and effectively tanking the proposals.
• The withdrawal of support for the package has prompted a number of sell-side institutions to cut their growth expectations for 2022, hurting the equity outlook into year-end.
• The sell-off late last week and today signals potential for a deeper pullback in the e-mini S&P. Note that futures are back below the 50-day EMA, at 4590.64. This is an important technical development as it strengthens a bearish threat and exposes key support at 4485.75, Dec 3 low. A break would reinforce a bearish threat.

COMMODITIES: WTI, Brent Hit Skids as Equities Tumble

• Oil benchmarks trade lower ahead of Monday's open, with WTI and Brent off as much as 4% apiece. WTI has slipped further below the $70/bbl mark, showing below support at the 200-dma of $68.31. Oil has slipped in tandem with equity markets Monday, with benchmark US indices off at least 1%.
• The risk-off sentiment follows the tanking of Biden's flagship Build Back Better legislation, which has prompted a number of sell-side outfits to crimp their growth expectations for 2022.
• Gold traded higher last week, extending the recovery from $1753.7, the Dec 15 low. The yellow metal last week attempted to clear the base of its bull channel drawn from the Aug 9 low and it appears the move lower has been a false break. Initial resistance at $1794.5, Dec 1 high has been cleared and attention is on $1815.6, the Nov 26 high.