MNI US MARKETS ANALYSIS - Yields Creep Higher on Equity Bounce

US TSYS SUMMARY: Treasuries Dip With Risk-On Shift

• Cash Tsys have dipped this morning on an improvement in risk-on sentiment overnight, helped by a suggestion that talks between Biden and Manchin had been more constructive than first feared with further discussion due in the new year.
• 2Y yields are +0.8bps at 0.640%, 5Y +0.8bps at 1.175%, 10Y +1.5bps at 1.438% and 30Y +1.2bps at 1.863%. Following yesterday’s bull steepening, 2s10s spread is up 5.5bp at 79.5bps and back towards the upper end of the post-FOMC range.
• TYH2 futures are down -0-03+ at 131-01+ on mild volumes, a change from yesterday’s heavy start. First support is seen at 130-17+, the 20-day EMA, whilst initial resistance is 131-19, yesterday’s high.
• Biden speaks on Omicron developments at 1430ET.
• No Fedspeak today and data limited to the current account for Q3 at 0830ET.
• NY Fed buy-op: TIPS 7.5Y-30Y, appr $0.925B vs. $1.075B prior (1030ET).
• US Tsy $20B 20Y Bond auction re-open (1300ET).

EGB/GILTS: Core Yields Edging Higher as Equities Bounce

• Core EGB markets trade softer ahead of the Tuesday NY crossover, helping boost longer-end yields as the curve steepens slightly. Equities have bounced off the Monday lows, helping ease EGBs off recent highs.
• As a result, the German 10y yield has added 2.5bps, with the curve modestly steeper. Similar moves seen across Italy, as the curve bear steepens, led by a rise of as much as 6bps in the longer-end.
• A speech on the US' COVID approach takes focus going forward, with Biden expected to formally announce the delivery of 500mln free home test kits across the USA in the coming weeks.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXG2 173.00/171.00 1x2 put spread bought for 23 in 2k
DUG2 112.20/112.00 put spread bought for 6 in 6.7k
DUH1 112.10/112.00/111.90 put fly bought for 1.25 in 3.5k

FOREX: Equity Bounce Works Against USD

• Equities have recovered off the Monday lows, but the bounce has been somewhat shallow so far, with the e-mini S&P struggling to make headway above the 4600 level. Treasury yields have followed suit, with the 10y yield back above 1.42%. The greenback has subsequently softened, boosting EUR/USD and GBP/USD back to Monday NY highs.
• NZD is the strongest performing currency so far Tuesday, prompting AUD/NZD to correct off the 200-dma at 1.0594, which marks the key upside level going forward.
• Outside of developed markets, TRY remains the volatile currency, having rallied sharply Monday on the back of Erdogan's policy announcements looking to reverse the recent course of dollarisation. Markets expect further details at 1100GMT/0600ET. USD/TRY has traded as low as 11.099 having touching record high of 18.36 yesterday.
• Canadian retail sales data marks the sole tier one release Tuesday, with markets expecting October sales to rise around 1.0% on the month. There are no notable central bank speakers, but markets may watch for comments from President Biden, who speaks on the US' COVID approach at 1430ET/1930GMT.

FX OPTIONS: Expiries for Dec21 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1150(E532mln), $1.1200-20(E676mln), $1.1250-70(E889mln), $1.1275-95(E780mln), $1.1315(E527mln), $1.1350(E742mln), $1.1500(E864mln)
• USD/JPY: Y112.70($562mln)
• USD/CAD: C$1.2800-10($524mln)
• USD/CNY: Cny6.40($650mln)

Price Signal Summary - S&P E-Minis Remain Vulnerable

• In the equity space, S&P E-minis remain vulnerable. The sell-off late last week and yesterday, signals potential for a deeper pullback. Futures are back below the 50-day EMA, at 4589.37. A clear breach of this EMA would strengthen a bearish threat and expose key support at 4485.75, the Dec 3 low. EUROSTOXX 50 futures remain vulnerable too, having failed to hold onto last week’s high of 4234.00 on Dec 16. Yesterday's bearish pressure, despite a bounce, has exposed the key support handle at 3980.00, the Nov 30 low and the bear trigger.
• In FX, EURUSD is still trading sideways. The pair remains below resistance at 1.1383, Nov 30 high where a break is required to signal potential for a stronger recovery. Support to watch lies at 1.1222, Dec 15 low and 1.1186, Nov 24 low. The latter is a key support and the bear trigger. GBPUSD failed to hold onto last week’s high of 1.3374 on Dec 16. The reversal lower 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 for now. The near-term directional triggers are; 114.26, the Dec 15 high and 113.14, Friday’s low. USDCAD yesterday probed key resistance at 1.2949, the Aug 20 high. A clear break would open 1.3024, 38.2% of the Mar ‘20-Jun ‘21 downleg.
• On the commodity front, last week’s channel break in Gold appears to have been a false one and the strong recovery from last week’s low of $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 traded lower today and despite rebounding from the session low, remain vulnerable. 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 and above support at 173.40, the Dec 8 low. 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 are trading lower and attention turns to support at 126.34, Dec 16 low. A break would sour the short-term tone and expose 125.44, the Nov 26 low and gap high on the daily chart. The trigger for a resumption of strength is 127.67, Dec 8 high.

EQUITIES: Stocks Bounce, But Recovery Shallow

• Equity markets are higher early Tuesday, with markets bouncing off the Monday NY session lows. Nonetheless, the recovery so far has been somewhat shallow, with the e-mini S&P at around the 50% retracement for the Friday-Monday range.
• Across Europe, the financials and energy sectors are leading the bounce, with consumer staples and healthcare names at the foot of the table - providing further evidence of modest risk-on appetite Tuesday.

COMMODITIES: Oil Bounces Alongside Stocks

• Both WTI and Brent crude futures trade in positive territory early Tuesday, bouncing alongside global stock markets after the rout on Monday. This puts WTI just below the $70/bbl level ahead of the open - just shy of Friday's close.
• The move lower this week has resulted in a breach of support at $69.21 and this paves the way for a move towards $65.45, the Dec 3 low and more importantly towards the key support at $62.26, the Dec 2 low. Clearance of the latter level would reinforce the current bearish threat.
• 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. Resistance at $1794.5, Dec 1 high has been cleared and attention is on $1815.6, the Nov 26 high.