MNI US MARKETS ANALYSIS - Market Continues to Bring Forward Fed Hiking Bias

US TSYS SUMMARY: Pulling Back After Testing New Yield Highs

• Cash Tsys have rallied mostly from the open yet remain a little cheaper from Friday’s close.
• 2Y yields are +0.4bps at 0.866%, 5Y +1.2bps at 1.510%, 10Y +1.1bps at 1.773% and 30Y +1.1bps at 2.127%. The 2s, 5s and 10s have all pulled back from pandemic era highs earlier in the session.
• TYH2 is one tick lower at 128-08 having rallied after touching a new low of 127-30. There are various supports around these levels including 128-08 (=1.78% yields) and 128-05 (1.618 proj of the Dec 20-29-31 price swing), but if it tests 127-30 again, it could open 127-18+ (2.00 proj of the Dec 20-29-31 price swing).
• No Fed speak today and the only data is for wholesale inventories/trade. Data focus firmly on CPI on Wed.
• NY Fed buy-op: Tsy 7Y-10Y, appr $2.425B (1030ET).
• Tsy issuance: $60B 13W and $51B 26W bill auctions (1130ET).

EGB/GILT SUMMARY: Local Curves Flatten

European government bonds started the session on a weak footing before reclaiming the early losses and firming through the morning. Equities are broadly lower across the region while FX performance has been mixed.

• Having initially traded lower, gilts have recovered ground to now trade close to flat on the day.
• It is a similar story for bunds, which have now inched above the Friday close.
• The OAT curve has flattened on the back of the longer end slightly outperforming. The 2s30s spread has narrowed 2bp.
• BTPs have outperformed core EGBs with cash yields down 3-6bp and the curve bull flattening.
• Supply this morning came from Germany (Bubills, EUR5.693bn allotted). The EFSF offered a dual tranche of 8-/31-year bonds via syndication with volume set at EUR 3.0bn and EUR2.5bn, respectively. Total book volume closed above EUR30bn.

EUROPE ISSUANCE UPDATE

EFSF ISSUANCE: Dual-tranche 8/31-year: Launched
8-year, Size: E3.0bln, Maturity: 18 March 2030
Final spread MS-14bps (guidance: MS-12bps area)

31-year, Size: E2.5bln, Maturity: 17 January 2053
Final spread MS+17bps (guidance: MS+18bps area)

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXH2 171.50/173.50cs, bought for 40 in 6k
RXH2 167.50/166ps, bought for 20.5 in ~5.9k
RXH2 174c, bought for 12.5 and 13 in 4,610

OEG2 134.00/133.25/132.50 put fly, sold at 26 in 1.5k
OEG2 133.75/133.25/133.00/132.50p condor, sold at 20 in 1.7k

UK:
SFIH2 99.35/99.50/99.65c fly, bought for 4.5 in 2k

FOREX: USD/CAD Breaks Key Support, Opens Losses Toward 1.26

• Currency markets are generally rangebound, with the greenback mid-table and the single currency slightly underperforming. EUR/USD has pulled lower from the late Friday highs of 1.1365, and now sits at the midpoint of last week's range.
• USD/CAD is the standout, breaking lower still, with the pair now through both the 100-dma support at 1.2627 as well as the Dec31 low of 1.2621. This narrows the gap with key support at 1.2608, the Dec 8 low.
• Commodity-tied currencies are generally firmer, with NOK also trading well despite a moderation in oil prices headed through the Monday open. This puts USD/NOK lower for a second session and further below the 50-dma of 8.8641.
• The data and speaker slate is typically muted for a Monday, with just US wholesale inventories/trade sales numbers due. There are no central bank speakers of note.

FX OPTIONS: Expiries for Jan10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1275-80(E1.1bln), $1.1350(E501mln), $1.1390-10(E552mln)
• USD/JPY: Y114.00($1.1bln), Y116.00($600mln), Y116.50($1.2bln)

Price Signal Summary - S&P E-Minis Hover Above The 50-Day EMA

• In the equity space, S&P E-minis are consolidating but remain vulnerable following a sharp sell-off last week from above 4800.00. Attention is on the 50-day EMA that intersects at 4647.81. A clear break of this EMA would signal scope for a deeper pullback. A bearish threat remains present in EUROSTOXX 50 futures. The focus is on 4258.30, the 20-day EMA where a break would allow for a deeper pullback and expose the 50-day EMA at 4222.40.
• In FX, EURUSD is still trading within a broad range and resistance at 1.1383/86 remains intact, the Nov 30 and Dec 31 high. The support to watch lies at 1.1222, Dec 15 low and the bear trigger at 1.1185, Jul 1, 2020. GBPUSD bullish conditions remain in place and sights are set on 1.3607 next, the Nov 9 high ahead of 1.3676, 76.4% of the Oct - Dec sell-off. Support to watch is at 1.3445, the 20-day EMA. EURGBP is weaker this morning. The trend condition remains bearish with sights on 0.8282/77 Feb’20 / Dec’19 lows and key bear triggers. Note too that 0.8300 represents the base of a broad range the cross has been trading within since 2016 and is seen as a major pivot support. The USDJPY trend outlook remains bullish following the break last week of 115.52, Nov 24 high. This confirmed a resumption of the uptrend and opens 117.08 next, 2.00 projection of Apr 23 - Jul 2 - Aug 4 price swing. 114.89, the 20-day EMA is seen as a firm support.
• On the commodity front, Gold traded lower last week. The move reinforced the potential importance of the Jan 3 engulfing candle pattern and a bearish reversal signal. Attention is on the base of a bull channel drawn from the Aug 9 low, at $1783.2. A break would strengthen a bearish case and open $1753.7, Dec 15 low. Key resistance is unchanged at 1831.9, Jan 3 high. WTI futures remain in an uptrend. Scope is seen for a climb towards $81.73, Nov 10 high.
• In the FI space, Bund futures remain bearish and the contract has traded lower this morning. The focus is on 169.34, Oct 29 low. Gilts remain in a downtrend and have trade through the 123.00 handle. This opens 122.66 next, 3.764 projection of the Dec 8 - 16 - 20 price swing.

EQUITIES: Mixed markets across the Atlantic

• China's SHANGHAI closed up 13.976 pts or +0.39% at 3593.519 and the HANG SENG ended 253.16 pts higher or +1.08% at 23746.54
• German Dax down 19.9 pts or -0.12% at 15936.11, FTSE 100 down 3.69 pts or -0.05% at 7483.71, CAC 40 down 8.27 pts or -0.11% at 7219.1 and Euro Stoxx 50 down 5.88 pts or -0.14% at 4301.73.
• Dow Jones mini up 39 pts or +0.11% at 36139, S&P 500 mini up 5.75 pts or +0.12% at 4673, NASDAQ mini up 15.75 pts or +0.1% at 15594.75.

COMMODITIES: Natgas the big divergent mover

• WTI Crude up $0.44 or +0.56% at $79.34
• Natural Gas (NYM) up $0.21 or +5.36% at $4.126
• Natural Gas (ICE Dutch TTF) down $1.67 or -1.9% at $86.5
• Gold spot up $0.69 or +0.04% at $1797.
• Copper up $0.1 or +0.02% at $441.1
• Silver up $0.05 or +0.21% at $22.4109
• Platinum down $0.47 or -0.05% at $961.7