MNI US MARKETS ANALYSIS - Short End US Yields Climb to Post-Pandemic High

US TSYS SUMMARY: Sizeable Bear Flattening Prior To The US Coming Back

• Cash Tsys have seen a sizeable bear flattening this morning after being closed for MLK Jr Day, with short end moving to new pandemic era highs and the 2Y above 1%.
• 2Y yields +6.5bps at 1.032%, 5Y +5.5bps at 1.613%, 10Y +3.0bps at 1.814% and 30Y +1.0bps at 2.132%.
• TYH2 is down 14+ ticks at 127-23+ on solid volumes, having earlier cleared support levels at 127-20+ (Jan 17 low) and 127-18+ (2.00 proj of Dec 20-29-31 price swing) before retracing. Further support could be at 127-07 (2.236 proj of the same swing).
• Data: Empire Mfg and NAHB housing surveys for Jan plus net TIC flows for Nov.
• NY Fed buy-op: Tsy 4.5Y-7Y, appr $6.025B vs. $4.525B prior (1030ET)
• Bill Issuance: $60B 13W and $51B 26W bill auctions (1130ET)

EGB/GILT SUMMARY: Recovering Earlier Losses

European sovereign bonds traded weaker this morning before recouping losses.

• Gilts opened lower, but have gradually recovered losses through the morning to now trade marginally below yesterday's close.
• It is a similar story for bunds, which have now traded a touch above yesterday's closing levels.
• OATs are close to unchanged on the day with the curve flat overall.
• BTP yields are <=1bp higher on the day.
• While UK wage growth was in line with expectations for November, the recorded unemployment rate came in a touch better than expected (4.1% vs 4.2% consensus) and payrolled employees grew 54k more than expected in December alongside a downward revision of 95k to the November reading.
• Supply this morning came from the UK (Gilts, GBP2.5bn), Germany (Bobl, EUR3.22bn allotted), Italy (BTP, EUR1.75bn), Spain (Letras, EUR2.08bn), Finland (RFGB, EUR995mn) and the ESM (Bills, EUR1.5bn). In addition, Belgium launched a EUR5bn Jun-32 bond with book size in excess of EUR21bn.
• The ECB's Francois Villeroy de Galhau speaks at a conference at Paris Dauphine University later today.

EUROPE ISSUANCE UPDATE:

Germany allots E3.22bln new 0% Apr-27 Bobl, Avg yield -0.29% (Prev. -0.58%), Bid-to-cover 1.09x (Prev. 1.30x), Buba cover 1.35x (Prev. 1.59x)

UK sells GBP2.50bln 0.50% Jan-29 Gilt, Avg yield 1.105% (Prev. 0.887%), Bid-to-cover 2.39x (Prev. 2.40x), Tail 0.4bp (Prev. 0.5bp)

Finland sells E995mln 0% Sep-26 RFGB, Avg yield -0.252% (Prev. -0.626%), Bid-to-cover 1.85x

Italy taps 10/15-year BTPs:
E965mln 0.95% Dec-31 BTP, Avg yield 1.311% (Prev. 0.86%)
E2.5bln 2.25% Sep-36 BTP, Avg yield 1.618% (Prev. 1.19%)

Belgium syndication: 10-year: Launched
Size: E5.0bln (MNI had expected E6.0bln)
Books closed in excess of above E21bln inc E1.9bln of JLM interest
Spread set earlier at MS-6bp (initial guidance was MS - 5bps area)

EUROPE OPTION FLOW SUMMARY

Eurozone:
OEH2 131.75/131.25/131.00 broken put fly, bought for 6 in 1.5k

ERU3 vs ERH3 100.37c calendar, sold the Sep at half in 50k
3RM2 99.62/99.75/99.87c ladder, bought for 0.75 in 2k

US:
FVG2 119.25p, traded at 18 in 10k

FOREX: Greenback Extending Recovery, But Faces Stiff Resistance

• The dollar is among the strongest currencies in G10 early Tuesday, with the USD Index extending the recent recovery off last week's lows and rising for a third consecutive session. USD gains come alongside similar strength in the JPY, as haven FX follows the US yield curve higher.
• Equities trade lower across the board, with a negative close across Hong Kong and Japan feeding directly into weakness across Europe. Stocks traded lower on the resumption of trade for US assets following Monday's MLK public holiday, which saw the US 10y yield gap higher to touch 1.85% - the highest rate since early 2020 and therefore the highest rate since the COVID pandemic.
• Elsewhere, USD/CNH rallied sharply just ahead of the European open as the PBoC warned that while currencies may deviate from their equilibrium level in the short-term, the PBoC will not allow for a one-way move in the Yuan. As a result USD/CNH rallied to show above the 6.36 level before moderating slightly.
• Looking ahead, US housing starts and the NAHB housing market index take focus, with ECB's Villeroy due to speak in the afternoon.

FX OPTIONS: Expiries for Jan18 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1250(E1.7bln), $1.1370-75(E566mln)
• USD/JPY: Y114.00($1.5bln), Y115.00($566mln), Y116.00-25($1.4bln), Y117.00($1.6bln)
• AUD/USD: $0.7200(A$882mln)
• USD/CNY: Cny6.3500($775mln), Cny6.4100($505mln), Cny6.65($1.0bln)

EQUITIES: Tech Stocks Hit Hard As US Yields Gain

• Asian markets closed mixed: Japan's NIKKEI closed down 76.27 pts or -0.27% at 28257.25 and the TOPIX ended 8.33 pts lower or -0.42% at 1978.38. China's SHANGHAI closed up 28.248 pts or +0.8% at 3569.914 and the HANG SENG ended 105.25 pts lower or -0.43% at 24112.78.
• European equities are lower, with the German Dax down 207.94 pts or -1.31% at 15693.02, FTSE 100 down 74.8 pts or -0.98% at 7541.52, CAC 40 down 97.93 pts or -1.36% at 7106.93 and Euro Stoxx 50 down 54.93 pts or -1.28% at 4239.58.
• U.S. futures are likewise lower, led by tech stocks, with the Dow Jones mini down 266 pts or -0.74% at 35530, S&P 500 mini down 53.25 pts or -1.14% at 4601.5, NASDAQ mini down 279 pts or -1.79% at 15316.75.

OPEC: Saudi Arabia No Plans To Increase Crude Supply

Saudi Arabia’s Energy Minster Prince Abdulaziz bin Salman has said the kingdom does not plan to increase crude production to cover the production shortfall of other OPEC+ members.

• OPEC+ has a stated ambition to restore production to pre-pandemic levels by late 2022 through a series of monthly 400,000 b/d production hikes, but the group of oil producing nations has consistently failed to meet this target.
• Brent has risen to a seven year high of USD$87 a barrel, with some predicting that Brent could exceed USD$100 a barrel in 2022.
• The US has urged OPEC to increase supply to ease spiraling energy prices but Saudi Arabia has said they are not concerned with current levels of production. The price of oil is also under a geopolitical squeeze from the threat of sanctions on Russia and a lack of progress in Vienna on Nuclear talks with Iran.
• OPEC+ leaders will meet next on February 2 to discuss production targets.

COMMODITIES: Energy Easily Outperforming

• WTI Crude up $1.29 or +1.54% at $85.14
• Natural Gas up $0.04 or +0.89% at $4.292
• Gold spot down $9.19 or -0.51% at $1811.96
• Copper down $3.2 or -0.72% at $438.95
• Silver down $0.18 or -0.79% at $22.8783
• Platinum down $8.73 or -0.89% at $969.17