MNI US MARKETS ANALYSIS - Fed in Focus, BoC Worth Watching Too

US TSYS SUMMARY: Modest Bear Flattening Ahead Of The FOMC

• Cash Tsys have sold off this morning ahead of the FOMC announcement, led by the short-end/belly.
• 2Y yields are +2.0bps at 1.037%, 5Y +2.6bps at 1.581%, 10Y +1.6bps at 1.785% and 30Y +1.6bps at 2.128%. 2Y yields are up 10bps from Monday’s low to get within 3.5bps of recent highs.
• TYH2 has traded in a narrow range on low volumes ahead of the Fed. At 128-02+, it’s at the low end of yesterday’s range. Support is seen at 127-28 (Jan 21 low) and then the bear trigger of 127-02 (Jan 19 low) whilst resistance is at 128-24+ (20-day EMA).
• FOMC policy announcement (1400ET/1900GMT) followed by press conference (1430ET).
• Data: Second tier Dec releases with advanced international trade and inventories (0830ET) before new home sales (1000ET).
• Issuance: US Tsy $40B 119D bill CMB auction plus US Tsy $26B 2Y FRN Note auction (1130ET).

EGB/GILT SUMMARY: Gilts Extend Losses

European sovereign bonds have traded relatively mixed this morning alongside an uneven performance in FX and a broad push higher in equities.

• Gilts continue to sell off, extending yesterday's losses. Cash yields are now up 2-4bp with the curve steepening.
• Following a period of intense scrutiny and mounting political pressure from outside and inside his party, UK PM Boris Johnson will now face the outcome of the Gray report into the Downing Street lockdown parties.
• Bunds have been relatively directionless so far with the curve steepening 1bp.
• OATs have similarly bounced around in a tight range and now trade close to flat on the day.
• BTPs have traded weaker and are now marginally below yesterday's closing levels.
• Supply this morning came from the UK (Gilts, GBP600mn), Germany (Bund, EUR3.344bn allotted), Italy (BTP/BTPei, EUR4.75bn), and Greece (Bills, EUR625mn). Finland also sold EUR3bn of a 20-year bond with book size in excess of EUR16bn.
• There was no tier one data out of European this morning. Focus now shifts to the FOMC decision later today. Though less impactful, the Bank of Canada policy decision will also be closely watched.

EUROPE ISSUANCE UPDATE

UK DMO sells GBP600mln 0.125% Mar-51 linker, Avg yield -2.191% (Prev. -2.261%), Bid-to-cover 2.04x (Prev. 2.37x)

Germany sells E3.344bln 0% Feb-32 Bund, Avg yield -0.08% (Prev. -0.09%), Bid-to-cover 1.15x (Prev. 1.14x), Buba cover 1.38x (Prev. 1.46x)

• E3.75bln 0% Nov-23 BTP Short Term, Avg yield -0.130% (Prev. -0.26%), Bid-to-cover 1.41x (Prev. 1.45x)
• E591mln 0.65% May-26 BTPei, Avg yield -1.180% (Prev. -1.20%), Bid-to-cover 2.12x (Prev. 1.55x)
• E409mln 2.55% Sep-41 BTPei, Avg yield 0.04% (Prev. 1.77%), Bid-to-cover 2.13x (Prev. 1.51x)

Finland Syndication: 20-year - Books closed

• Size set yesterday at EUR 3bn (no-grow)
• Spread set earlier at MS-5bps (Guidance was at MS-3bps area)
• Books closed in excess of E16bln (inc. E1.3bln JLM interest)

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXH2 169/168 put spread traded 21/22 in 4k

0EM2 98.00/97.75/97.50p fly, bought for 2.5 in 5k

US:
FVH2 119.50/119.00 ps bought for 13.5 in ~25k

FOREX: Oil tied FX are the best early performer

• A steady range bound session for FX and the USD, with most of the early action seen on the bounce in Equities, but very little spillovers across assets.
• Best early performers in G10 against the Greenback are the NOK and CAD.
• Oil (WTI) pushed higher, and through Monday's high at $86.09, now at $86.18.
• NOK and CAD are up 0.59% and 0.35% respectively.
• Support in USDCAD is at 1.2555, but move may be somewhat limited with market participants waiting on the BoC decision.
• Risk tied FX, Aussie has been supported this morning, on the back of the Risk On in early trade.
• The Aussie trades in the green against all G10s, beside the Oil linked NOK and CAD..
• Looking ahead, today sees no tier 1 data, and the only notable release pre Fed, will be the US Wholesale Inventories
• Earning season continues, which today include AT&T, Boeing, Abbot Labs, Intel, Tesla

FX OPTIONS: Expiries for Jan26 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1225-40(E1.4bln), $1.1280-00(E978mln), $1.1350(E619mln)
• USD/CNY: Cny6.2800($500mln), Cny6.2855($590mln), Cny6.3500($830mln), Cny6.40($642mln)

Price Signal Summary - Equity Rebound Allows Oversold Condition To Unwind

• In the equity space, S&P E-minis sold off sharply Monday but recovered strongly from the day low. The contract is firmer today and back above 4400.00. This is allowing a recent oversold condition to unwind. Resistance to watch is at 4485.75, Dec 3 low and a recent breakout level. The bear trigger is Monday’s low of 4212.75. EUROSTOXX 50 futures are firmer this morning too as the contract recovers from Monday’s low of 3990.50. Resistance is seen 4215.50, Jan 24 high. Gains are considered corrective.
• In FX, EURUSD is trading lower this morning and sights are on support at 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 Monday 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, {O4} Gold maintains a positive tone. The metal traded higher yesterday to resume its uptrend and has cleared resistance at $1848.00, 76.4% of the Nov 16 - Dec 15 downleg. The focus is on $1871.0, Nov 18 low. 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 $80.83 today.
• In the FI space, Bund futures traded higher Monday 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 171.60. 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: LEVELS UPDATE: Strong moves higher, particularly in Europe

• Japan's NIKKEI down 120.01 pts or -0.44% at 27011.33 and the TOPIX down 4.77 pts or -0.25% at 1891.85
• China's SHANGHAI closed up 22.607 pts or +0.66% at 3455.668 and the HANG SENG ended 46.29 pts higher or +0.19% at 24289.9
• German Dax up 322.97 pts or +2.14% at 15446.54, FTSE 100 up 127.06 pts or +1.72% at 7499.62, CAC 40 up 144.03 pts or +2.11% at 6981.1 and Euro Stoxx 50 up 92.12 pts or +2.26% at 4170.48.
• Dow Jones mini up 279 pts or +0.82% at 34462, S&P 500 mini up 50 pts or +1.15% at 4399.75, NASDAQ mini up 255.75 pts or +1.81% at 14400.

LEVELS UPDATE: Continental divergence in gas prices

• WTI Crude up $0.44 or +0.51% at $86.12
• Natural Gas (NYM) up $0.19 or +4.79% at $4.247
• Natural Gas (ICE Dutch TTF) down $2.09 or -2.23% at $91.2
• Gold spot down $1.58 or -0.09% at $1846.74
• Copper up $7.9 or +1.78% at $452.85
• Silver up $0.1 or +0.44% at $23.9164
• Platinum up $17.34 or +1.69% at $1046.58