MNI US MARKETS ANALYSIS - Relief Rally  in EGBs

US TSYS SUMMARY: Back Closer To Immediate Post Payrolls Levels

• Cash Tsys have seen a reasonable rally after yesterday’s sell-off with only the short-end underperforming, as yields pull back from new pandemic era highs when the 10Y got close to 2% at 1.969%.
• 2YY are -1.6bps at 1.326%, 5YY -3.1bps at 1.785%, 10YY -3.4bps at 1.929% and 30YY -3.2bps at 2.224%.
• TYH2 is up 7 ticks at 126-25+ and very nearly through yesterday’s range on above average volumes. Resistance is seen at 127-24 (Feb 4 high) whilst initial support is yesterday’s low of 126-15+.
• Fedspeak likely dominates second tier data, with Fed Gov Bowman at 1030ET (no text, moderated Q&A) followed by Cleveland Fed Mester at 1200ET (hawk, voter with text/q&a)
• Issuance: US Tsy $37B 10Y Note auction (1300ET)

STIR UPDATE: Small Shift In Fed Funds Futures, Fedspeak Later

• Fed Funds futures implied hikes have shifted slightly since London came in, with 1 extra bp of tightening seen in March (+33bps) but 1bp less in June (79bps) and Dec (133bps).
• Similarly, the odds of four consecutive hikes for Mar, May, Jun and Jul have dipped a little further with 93bps priced for July, down from yesterday’s late high of 96bps.
• Ahead of today’s Fedspeak: Mester (1200ET) last spoke before the Jan FOMC blackout, repeating her support for a March hike (if the economy in March looks like it did on Jan 11) and saying the Fed should shrink the balance sheet as fast as it can without disrupting financial markets. Bowman (1030ET) last spoke in Nov.

EGB/GILT SUMMARY: Relief Rally for European Sovereign FI

European government bonds have rallied this morning alongside gains for equities and G10 FX versus the dollar. Given the lack of significant catalysts following last week's hawkish BoE and ECB meetings, this morning's moves may be more reflective of a relief rally than an immediate change of trend.

• Gilts opened stronger and have held on to the majority of the early gains. Cash yields are 3-4bp lower on the day with the curve bull flattening.
• Bunds have traded in a similar fashion with yields now 2-4bp lower.
• OAT yields are down 3-5bp with marginal outperformance in the belly of the curve.
• The BTP curve has bull steepened with the 2s30s spread widening 2bp.
• The German trade surplus was smaller than expected in December (eUr7.0bn vs EUR11.0bn survey) on the back of particularly robust growth in imports.
• Supply this morning came from Germany (Bund, EUR1.266bn allotted) and Portugal (OTs, EUR1.25bn). in addition, Spain is placing a 30-year bond via syndication with an order book in excess of EUR54bn so far.

EUROPE ISSUANCE UPDATE

• Size: E7bln (larger than the E5bln MNI expected)
• Spread set earlier at Oct-50 Obli (mid) +10bps (Original guidance: was +12bps(+/- 2bps WPIR))
• Books closed in excess of E60bln (incl. E3.3bln JLM trading interest)

Germany allots E1.266bln 0% Aug-50 Bund, Avg yield 0.39% (Prev. -0.04%), Bid-to-cover 0.97x (Prev. 1.63x), Buba cover 1.15x (Prev. 1.97x)

Portugal sells 7/10-year OTs:

• E544mln 2.125% Oct-28 OT, Avg yield 0.603% (Prev. -0.19%), Bid-to-cover 2.06x
• E706mln 0.30% Oct-31 OT, Avg yield 1.008% (Prev. 0.31%), Bid-to-cover 1.27x (Prev. 1.46x)

FOREX: Favourable Equity Backdrop Tilts Greenback Lower

• Following the positive close across Wall Street yesterday, markets in Asia and Europe are seen similarly higher, reinforcing a positive backdrop for risk assets at the NY crossover. As a result, the USD trades slightly lower, reversing a small part of yesterday's gains across the DXY. the 100-dma continues to trend higher, emphasizing the more positive medium-term outlook, but for now it marks first major support at 95.264.
• The EUR saw some modest support on the back of an interview from the new Bundesbank chief Nagel with German press, in which he said that he expects German inflation to rise "significantly" above 4% this year, and if the inflation picture does not change by March, he will advocate for a normalization of monetary policy.
• The main beneficiaries of the modest risk-on backdrop are AUD and NZD, helping AUD/USD rise north of the 50-dma to narrow the gap with major resistance at 0.7250. NZD/USD eyes 0.6684 for direction.
• Data releases are few and far between Wednesday, keeping focus on speeches from BoE's Pill, ECB's Schnabel, BoC's Macklem and Fed's Bowman & Mester.

FX OPTIONS: Expiries for Feb09 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1300-20(E1.0bln)
• USD/JPY: Y113.80-00($964mln), Y114.50-55($840mln), Y115.00($725mln), Y115.50-60($822mln), Y115.70-90($1.1bln)
• AUD/USD: $0.7150-70(A$1.0bln)
• USD/CAD: C$1.2720-30($740mln)

Price Signal Summary - Bond Futures Still Vulnerable

• In the equity space, S&P E-minis have recovered from recent lows but also remain below its recent highs. Attention is on the 50-day EMA that intersects at 4563.47 today and represents a key resistance. For bulls, a clear break of the EMA is required to suggest scope for a stronger rally that would open 4671.75 initially, Jan 18 high. Initial support to watch is 4438.50, the Feb 4 low. EUROSTOXX 50 futures have recovered from recent lows and attention is on the 50-day EMA. The contract breached this EMA last week - currently at 4196.90. It marks a key resistance point and a clear break would suggest scope for a stronger recovery towards 4324.50, Jan 13 high. A shift lower again though would refocus attention on 3990.50, Jan 24 low.
• In FX, EURUSD is trading closer to its recent highs and the recent consolidation appears to be a bull flag, reinforcing bullish conditions. The focus is on 1.1483/84 next, the Jan 14 and Feb 4 high. A break would resume bullish activity. Support is seen at 1.1336, the former bear channel top. GBPUSD maintains its short-term bullish condition following last week’s gains. The focus is on 1.3662 next, Jan 20 high. Support lies at 1.3491/3435, Feb 7 and Feb 1 low. USDJPY trend conditions remain bullish. The pair has tested initial resistance at 115.67/68, 76.4% of the Jan 4 - 24 downleg and the Jan 28 high. Clearance of this hurdle would strengthen bullish conditions and signal scope for a climb towards 116.35, this year’s high on Jan 4 and the key bull trigger.
• On the commodity front, Gold has continued to strengthen this week. The recovery has resulted in a break of initial resistance at $1822.2, the Jan 27 high. A continuation higher would expose the firmer resistance at $1853.9, Jan 25 high. A reversal lower would refocus attention on $1780.4, Jan 28 low. WTI futures remain in a clear uptrend however the contract appears to have entered a corrective cycle. The focus is on a climb towards $94.13 next, 2.618 projection of the Dec 2 - 9 - 20 price swing. Support to watch is at $86.34, the Jan 31 low.
• In the FI space, Bund futures remain vulnerable and traded lower again yesterday. The focus is on 164.82, the May 3, 2019 low (cont). Gilts remain under pressure and traded to fresh trend low yesterday. Sights are on the 120.00 psychological handle.

EQUITIES: Futures Improve Further, Point to Positive Open

• Following the positive close on Wall Street Tuesday, equities have improved further, with futures pointing to strength at the opening bell. As was the case earlier in the week, growth and value names appear to be driving the recovery in sentiment, evident in the NASDAQ future's outperformance over core Dow Jones and S&P500 contracts this morning.
• Asia-Pac equities traded firmer into the Tuesday close, with the Hang Seng adding over 2% while the Nikkei 225 hit the best levels since mid-January. This fed through into European trade, with continental markets all uniformly higher.
• Europe's energy sector trades slightly higher, but underperforms all others as WTI and Brent crude futures retrace recent gains as markets continue to price a thawing of relations between Russia and the West. A possible near-term peak in energy prices has dragged Shell off the multi-year high printed earlier in the week, with the stock off close to 5% from yesterday's highs.
• Earnings season plods on, with highlights today including CME Group, CVS Health and Walt Disney. Full schedule here: https://marketnews.com/mni-us-earnings-schedule-qu...

COMMODITIES: Oil Continues to Price Thawing of Russia/West Tensions

• WTI and Brent crude futures sit in minor negative territory, holding the bulk of the losses seen Tuesday as markets priced in a possible thaw in relations between the West and Russia as well as progression for the Iranian nuclear deal.
• Today's DoE inventory data takes focus going forward, with markets expecting a build of 1.3-1.7mln bbls across both headline crude and gasoline stockpiles. Distillate stocks are expected to drag, with the median forecast for a 1.5mln bbls draw on reserves.
• The flurry of meetings between politicians and diplomats from Russia, Ukraine, the US, and NATO members continues today, with UK Foreign Secretary Liz Truss visiting Moscow for a two-day trip. She will meet with her Russian counterpart Sergey Lavrov and, like all other Western visitors to Moscow in recent weeks, encourage de-escalation around the Ukrainian border.
• WTI futures remain in a clear uptrend however the contract appears to have entered a corrective cycle. The focus is on a climb towards $94.13 next, 2.618 projection of the Dec 2 - 9 - 20 price swing. Support to watch is at $86.34, the Jan 31 low.
• Gold has continued to strengthen this week. The recovery has resulted in a break of initial resistance at $1822.2, the Jan 27 high. A continuation higher would expose the firmer resistance at $1853.9, Jan 25 high. A reversal lower would refocus attention on $1780.4, Jan 28 low.