MNI US MARKETS ANALYSIS - Markets Moderate, Pre-Position for Fed

US TSYS SUMMARY: Pausing For Breath After Yesterday's Swings

• Cash Tsys have sold off slightly this morning after yesterday’s swings, which saw a sustained rally through the day before a sharp retracement late on.
• 2Y yields are +0.8bps at 1.013%, 5Y +0.8bps at 1.556%, 10Y +0.7bps at 1.778% and 30Y +1.0bps at 2.122%. Putting the short-end into perspective, the 2Y is just under 6bps off last week's new pandemic era high of 1.071%.
• TYH2 is towards the low end of yesterday’s range, down 10 ticks at 128-06+ off earlier lows of 128-01 amidst average volumes. Support is seen at 127-28 (Jan 21 low) and then the bear trigger of 127-02 (Jan 19 low) whilst resistance is at 128-21+ (Jan 24 high).
• Data: Nothing overly market moving with house prices from FHFA and S&P/CoreLogic plus Conference Board consumer confidence and Richmond Fed manufacturing.
• NY Fed buy-op resumes: TIPS 1Y-7.5Y, appr $2.025B vs. $1.525B prior (1030ET).
• Issuance: US Tsy $34B 52W bill auction (1130ET) followed by US Tsy $55B 5Y Note auction (1300ET).

STIR SUMMARY: Implied Rates Continue To Slowly Recover

• Yesterday’s partial unwinding of the earlier core fixed income rally has slowly continued this morning.
• Fed Funds futures are back to pricing in 25bps for the March meeting and 98bps for Dec, having touched lows of 23bps and 92bps yesterday.
• Similarly, the 5 tick drop in EDZ2 from yesterday’s settlement sees it back to largely pricing in 4 full hikes through 2022. Highest volumes so far have been in EDZ3, down 8.5 ticks and pricing in a further ~2.5 hikes in 2023.

EGB/GILT SUMMARY: Unwinding Yesterday's Risk-Off Move

Following yesterday's risk-off move, European markets have reversed course with sovereign fixed income selling off and equities pushing higher. However, given the fluid state of play with the Russia-Ukraine crisis and the pressure facing tech stocks, sentiment is at risk of turning sour again in the near term.

• Gilts have underperformed EGBs with cash yields 4-6bp higher on the day and the curve steepening 1-2bp.
• The bund curve has bear steepened with the 2s30s spread widening 2bp.
• The long end of the OAT curve has similarly underperformed with the 2s30s trading up 3bp.
• The BTP curve has twist steepened by 1-2bp.
• The German IFO survey for January was a touch better than expected. The current assessment printed in line with the consensus (96.1), while the expectation component surprised higher (95.2 vs 93.0).
• Supply this morning came from the Netherlands (DSL, EUR1.985bn). France is also selling EUR3bn of a 30-year OATEi via syndication.

EUROPE ISSUANCE UPDATE

Netherlands sells E1.985bln 0% Jan-52 DSL, Avg yield 0.350% (Prev. 0.275%), Price 90.05 (Prev. 92.02)

French Syndication: 30-year OATEi
Spread set at 0.10% Jul-47 OATei + 14bps (Guidance had been + 16bps area)
Books in excess of E18bln (inc E2.65bln JLM interest)
Size set earlier at : E3bln Will Not Grow (in line with MNI's E2.5-3.5bln expectation)

EUROPE OPTION FLOW SUMMARY

Notable flow includes some closing of positions in Euribor and possible profit taking ahead of what may be a volatile session for the short end during the FOMC tomorrow

Eurozone:
RXH2 169.5/168.5ps, sold at 26 in 7.75k (closing)
RXH2 169.50/168.50/167.50p ladder, bought for 10 in 2k

OEH2 132.25 put bought for 12 in 4.25k

ERZ2 100.5/100.25/100 iron p fly, sold the body at 19.25 in 1.25k
0RH2 100.25/100.12/100p fly, sold at 3.25 in 3k
0RH2 100.125/100.00 ps bought in 7.8k vs selling 3.9k 100.25c, received 3 ticks for the package
3RG2 99.75/99.50ps, sold at 10 in circa 6.7k

US:
FVH2 119p, bought for 15+ and 16 in ~6k
FVH2 118.75/118.00 ps sold at 7.5 and 7 in 15k

FOREX: Equity Bounce Fades, Helps Tip USD Index to New High

• Equity markets remain the leading indicator for risk appetite following yesterday's late-in-the-day recovery rally. Prices have moderated slightly, with stock index futures in minor negative territory. As a result, the greenback and other haven FX including JPY are seen higher, helping the USD Index touch the best levels since Jan 10.
• Despite slight outperformance among haven currencies, CHF sits at the bottom of the G10 pile, helping EUR/CHF bounce off multi-year printed yesterday at 1.0300. The reversal of CHF strength today will raise questions about the SNB's involvement in FX levels at this point, with the bank still committed to intervening across currency markets to avoid disorderly price formations in CHF.
• Mimicking the price action across EUR/CHF, AUD and CAD are also bouncing, but both currencies remain well off the best levels of the week against the USD. This keeps a lid on AUD/USD at 0.7188 and USD/CAD at 1.2555.
• US conference board consumer confidence data takes focus Tuesday, with the Richmond Fed index also on the docket. There are no central bank speakers of note.

FX OPTIONS: Expiries for Jan25 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1300-10(E1.6bln), $1.1330-40(E703mln), $1.1450(E1.1bln)
• USDJPY: Y115.25-40($663mln)

Price Signal Summary - Equity Space Remains Vulnerable

• In the equity space, S&P E-minis sold off sharply yesterday but recovered strongly from the day low. Price action is likely to remain volatile near-term however bearish conditions continue to dominate. A break of yesterday’s low of 4212.75 would confirm a resumption of this month's downtrend. EUROSTOXX 50 futures remain vulnerable and yesterday’s sharp accelerated sell-off reinforces the bearish threat. Former support at 4216.50, Jan 10 low has been cleared and this has resulted in the break of a number of short-term support levels. The move lower has exposed 3980.00, Nov 30 low and 3935.00, Oct 6 low.
• In FX, EURUSD is trading lower this morning and sights are on support at 1.1272, Jan 4 low. A breach of this level would signal scope for weakness towards 1.1222, Dec 15 low. Moving average studies continue to highlight a downtrend. GBPUSD remains vulnerable. The recent sell-off has resulted in a break of both the 20- and 50-day EMAs. This allows for a deeper unwinding of the bull rally between Dec 8 - Jan 13 and the focus is on 1.3456, 50.0% retracement of the Dec 8 - Jan 13 bull phase. USDJPY yesterday probed support at 113.49, Jan 14 low. This cancels recent bullish signals and the doji candle reversal on Jan 14. A deeper pullback would open 113.14, Dec 17 low. Resistance is at 115.06, Jan 18 high.
• On the commodity front, Gold maintains a positive tone. This follows last week’s break of resistance at $1831.9, Jan 3 high and a bull trigger. Attention is on $1848.0 next, 76.4% of the Nov 16 - Dec 15 downleg. WTI futures remain in an uptrend and the most recent pullback is still considered corrective. Key support to watch is at the 20-day EMA. It intersects at $80.33 today.
• In the FI space, Bund futures traded higher yesterday and probed key short-term resistance at 171.00, the Jan 13 high. A clear break of this hurdle would signal potential for a stronger short-term recovery and open the 50-day EMA at 171.64. A resumption of weakness would refocus attention on the bear trigger is 168.95, Jan 19 low. Gilts remain in a downtrend. Key short-term resistance is at 123.79, Jan 13 high where a break is required to highlight a short-term base. The bear trigger is unchanged at 121.93, Jan 19 low.

EQUITIES: Futures Holding On To Most Of Late Monday's Recovery

• Asian stocks closed lower: Japan's NIKKEI closed down 457.03 pts or -1.66% at 27131.34 and the TOPIX ended 33.25 pts lower or -1.72% at 1896.62. China's SHANGHAI closed down 91.044 pts or -2.58% at 3433.061 and the HANG SENG ended 412.85 pts lower or -1.67% at 24243.61
• European equities are bouncing a bit, with the German Dax up 152.97 pts or +1.02% at 15163.22, FTSE 100 up 64.49 pts or +0.88% at 7362.95, CAC 40 up 80.78 pts or +1.19% at 6871.02 and Euro Stoxx 50 up 45.26 pts or +1.12% at 4098.83.
• U.S. futures have held on to most of late Monday's recovery, with the Dow Jones mini down 99 pts or -0.29% at 34154, S&P 500 mini down 31.75 pts or -0.72% at 4372, NASDAQ mini down 163.5 pts or -1.13% at 14339.

COMMODITIES: Metals Fade As Dollar Gains

• WTI Crude up $0.92 or +1.1% at $84.2
• Natural Gas down $0.11 or -2.73% at $3.921
• Gold spot down $5.63 or -0.31% at $1837.42
• Copper up $0.7 or +0.16% at $441.85
• Silver down $0.24 or -1% at $23.7529
• Platinum down $9.79 or -0.95% at $1023.47