MNI US MARKETS ANALYSIS - Peripheral EGB Spreads Hit Multiyear Highs

US TSYS SUMMARY: Twist Steepening On Limited Drivers

• Cash Tsys have twist steepened this morning as they move on from Friday’s huge post-payrolls moves.
• 2Y yields are -0.7bps at 1.302%, 5Y +0.7bps at 1.773%, 10Y +1.3bps at 1.921% and 30Y +1.3bps at 2.223%, but all remain a little below Fri highs.
• TYH2 is at the low end of today’s narrow range at 126-27 with volumes modestly above average. Resistance is 128-08+ (20-day EMA) whilst support is 126-23 (Jul 17, 2019 low).
• Data limited to consumer credit for Dec (1500ET) but attention instead on the key CPI release for Jan on Thu.
• Bill issuance: US Tsy $60B 13W, $51B 26W bill auctions (1130ET).

EGB/GILT SUMMARY: Sharp BTP Sell-Off Amid Broad EGB Weakness

European sovereign bonds have traded lower at the start of the week with core-periphery spreads widening. Last week's hawkish central bank meetings (BoE hike & hawkish ECB presser) has underpinned the re-rating of rate expectations.

• Gilts initially opened higher, but sold off through the morning with cash yields now 2-3bp above the Friday close.
• The bund curve has bear steepened with the 2s30s spread 4bp wider.
• OAT yields are 3-5bp higher on the day with the long end of the curve similarly underperforming.
• BTPs sold off sharply, led by the short-end/belly. Cash yields are 9-17bp higher.
• Germany industrial production data came in weaker than expected in December (-4.1% Y/Y vs -3.6% consensus).
• Supply this morning came from Germany (Bubills, EUR4.144bn allotted) and the Netherlands (DTCs, EUR2.99bn).

EUROPE OPTION FLOW SUMMARY: Markets opt for Hawkish ECB plays

Some focus paid to hawkish ECB meeting plays this morning, with March Euribor expiry on the 11th March and ECB meeting on the 10th:

2RH2 99.375p, sold at 20.5 in 10k2RH2 99.12/98.87ps, bought for 6 in 8.2k

RXH2 164.5/167.5 combo, bought the call for 5 in 2.5k
RXJ2 164.00/165.50/167.00c fly, bought for 21 in 5.1k
RXJ2 158/156ps, bought for 16.5 in 3.5k

OEJ2 130.75/129.75ps 1x1.5, bought for 20.5 in 6k total

FOREX: Subdued, With All Focus on CPI

• Markets have started the week in subdued fashion, with most major pairs trading inside their recent ranges, although a modest risk-off tone continues to hang over price action.
• JPY is the best performing currency in G10, with USD/JPY briefly edging below the Y115.00 handle, albeit still trades clear of the Friday low of 114.77.
• One standout currency is the NOK, falling against all others in G10 as USD/NOK bounces further off the 200-dma at 8.681. Next upside target rests at the 50-dma of 8.8989, which remains within range should crude oil prices roll further off their recent highs.
• ECB's Lagarde is due to speak later today (1545GMT/1045ET) and markets will be on watch for any reinterpretation of last week's hawkish ECB meeting. Markets continue to price in around 50bps of tightening by year-end, a marked shift that continues to widen Italian/Spanish spreads against Germany - a correlation that has historically been negative for the EUR.
• Focus remains on US CPI data later in the week, with markets expecting Y/Y CPI to rise to 7.3% - a new multi-decade high. Sentiment leading into the release will likely drive sentiment over the coming days, particularly through the lens of US monetary policy.

FX OPTIONS: Expiries for Feb07 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1500(E633mln)
• USD/JPY: Y115.00($568mln)
• GBP/USD: $1.3400(Gbp591mln)
• AUD/NZD: N$1.0600(A$1.4bln)
• USD/CAD: C$1.2730-50($560mln)

Price Signal Summary - Oil Continues To Defy Gravity

• In the equity space, S&P E-minis are still trading below recent highs. Attention is on the 50-day EMA that intersects at 4569.21 today. This average remains a key pivot resistance - a clear break is required to suggest scope for a stronger rally that would open 4671.75, the Jan 18 high. A resumption of bearish activity would refocus attention on 4212.75, the Jan 24 low . EUROSTOXX 50 futures remain vulnerable. The recent failure at 4250.00, Feb 2 high means the 50-day EMA - at 4203.60 continues to act as a firm resistance. The reversal lower also suggests that recent gains between Jan 24 - Feb 2 have been a correction and that it is over. If correct this opens 3990.50, the Jan 24 low and the bear trigger.
• In FX, EURUSD is trading closer to its recent highs. Last week’s climb resulted in a break of the 20- and 50-day EMAs plus a breach of bear channel resistance drawn from the Jun 1, 2020 high. The break of this channel top highlights a more significant reversal. The focus is on 1.1483/84 next, the Jan 14 and Feb 4 high. GBPUSD has pulled back from its recent highs. A short-term bullish condition remains intact following last week’s gains. The focus is on 1.3662 next, Jan 20 high. Support lies at 1.3502/3435, the 50-day EMA and Feb 1 low. USDJPY remains above its key short-term support at 113.47, Jan 24 low. The outlook remains bullish and the focus is on 116.35, Jan 4 high and a key resistance. Initial firm resistance is at 115.68, Jan 28 high.
• On the commodity front, Gold continues to trade above the recent low of $1780.4, Jan 28 low. Attention remains on the recent break of the bull channel base drawn off the Aug 9 low. A resumption of weakness would open $1753.6, the Dec 15 low. Resistance to watch is at $1822.2, Jan 27 high. WTI futures continue to defy gravity. The focus is on $94.13, 2.618 projection of the Dec 2 - 9 - 20 price swing.
• In the FI space, Bund futures traded sharply lower last week and remain under pressure. Futures have cleared the 168.00 handle. The focus is on 165.24, the May 7, 2019 low (cont). Gilts remain in a clear downtrend. The focus is on 120.43, 1.764 projection of the Jan 13 - 19 - 24 price swing.

EQUITIES: Shanghai Stocks Catch Up Post Holiday

• Japanese markets closed weaker, while China markets rose on the post-holiday re-open: Japan's NIKKEI closed down 191.12 pts or -0.7% at 27248.87 and the TOPIX ended 4.57 pts lower or -0.24% at 1925.99. China's SHANGHAI closed up 68.141 pts or +2.03% at 3429.581 and the HANG SENG ended 6.26 pts higher or +0.03% at 24579.55.
• European equities are fairly flat, with the German Dax up 2.21 pts or +0.01% at 15111.04, FTSE 100 up 17.56 pts or +0.23% at 7534.16, CAC 40 up 4.81 pts or +0.07% at 6957.54 and Euro Stoxx 50 down 4.73 pts or -0.12% at 4084.02.
• U.S. futures are weaker, with the Dow Jones mini down 127 pts or -0.36% at 34851, S&P 500 mini down 14.25 pts or -0.32% at 4478.25, NASDAQ mini down 45 pts or -0.31% at 14640.5.

COMMODITIES: Industrials Lower; Precious Gains

• WTI Crude down $1.5 or -1.63% at $90.8
• Natural Gas down $0.16 or -3.41% at $4.419
• Gold spot up $3.46 or +0.19% at $1811.79
• Copper down $4.3 or -0.96% at $444.8
• Silver up $0.22 or +0.98% at $22.7435
• Platinum down $13.08 or -1.27% at $1015.27