MNI US MARKETS ANALYSIS - Markets Reverse Risk-Off Poise

US TSYS SUMMARY: Treasuries Bear Steepen Ahead Of Data, Fed Nominations

• Cash Tsys have seen a sizeable bear steepening today as the long end sells off on Russia de-escalation moves.
• 2YY +1.9bps at 1.594%, 5YY +3.7bps at 1.949%, 10YY +5.6bps at 2.043% and 30YY +5.6bps at 2.341%.
• This sees the 2s10s firm 3.5bps to 45bps, rising off yesterday’s low of 38bps, the lowest since Aug 2020.
• TYH2 is down 10+ ticks on the day at 125-21+ having moved sharply lower on headlines of Russian units moving back to their bases. This leaves it just above first support of 125-17+ (Feb 10 low) after which it would open 125-06+ (low May 30, 2019, cont).
• Fed: Senate Banking Committee nomination hearings for Raskin, Cook & Jefferson (1415ET).
• Data: PPI inflation is the highlight at 0830ET but Empire Manufacturing is also of note, being the first of the main surveys for Feb (also 0830ET).
• NY Fed buy-op: Tsy 4.5Y-7Y, appr $3.225B vs. $6.025B prior (1030ET)

US 2s10s USTsSource: Bloomberg

EGB/GILT SUMMARY: Russia-Ukraine De-Escalation Provides S/T Reprieve

Tentative signs of a modest de-escalation in the Russia-Ukraine crisis has underpinned the relief rally in stocks and weaker trading in EGBs.

• Although the situation remains fluid, Moscow's decision to pull back some troops from the Ukrainian border markets a positive step in the short term.
• Bunds initially opened higher, but have sold off through the morning with the curve bear steepening. Cash yields are 1-3bp higher on the day with the 2s30s soread widening 2bp.
• OATs have traced out a similar path with the curve steepening 2bp.
• The BTP curve has twist steepened with the 2s30s spread edging up 3bp.
• The preliminary Q4 GDP print for the eurozone was a touch weaker than expected (0.3% Q/Q vs 0.4% expected).
• European supply this morning came from the UK (Gilts, GBP2.25bn), Germany (Bobl, EUR3.247bn allotted), Spain (Letras, EUR1.9bn). The ESM also plans to sell EUR1.1bn of 6m bills.
• In addition, syndicated auctions have been held by Belgium (1.70% Jun-50 OLO, EUR5bn with book size last seen above EUR24bn), the Netherlands (0.50% Jul-32 DSL with books size last seen above EUR20bn).

There has been some divergence between gilts and other core fixed income this morning.

• Gilt initially opened lower, following some decent labour market data and inline with moves seen in Bunds and Treasuries saw downward pressure as risk sentiment improved, driven by events in Russia. There was also strong downward pressure on the SONIA strip.
• However, with so much priced into the curve and ahead of the crucial inflation print tomorrow morning, it appears that some short sellers have been taking profits, leading to gilt outperformance (and particularly the front-end of the SONIA strip).
• Despite the moves back, we still see 43bp priced for the March meeting, 81bp for May, 110bp for June and 130bp by August (i.e. one 50bp and three 25bp hikes more than fully priced) with a further 25bp hike fully priced by November. 2-year gilt yields also remain 1.1bp higher on the day, and above the psychological 1.50% level.
• The biggest moves have been in terms of a flattening of the curve. On the back of a decent auction, the 10-year gilt has performed well with yields down 1.8bp while 30-year gilts have seen even bigger moves with yields down 2.7bp on the day.

EUROPE ISSUANCE UPDATE

UK DMO sells GBP2.25bln 1.00% Jan-32 Gilt, Avg yield 1.598% (Prev. 0.918%), Bid-to-cover 2.51x (Prev. 2.23x), Tail 0.7bp (Prev. 1.9bp)

Germany sells E3.247bln 0% Apr-27 Bobl, Avg yield 0.04% (Prev. -0.29%), Bid-to-cover 1.03x (Prev. 1.09x), Buba cover 1.27x (Prev. 1.35x)

Netherlands Syndication: DDA update, 0.50% Jul-32 DSL

• Books closed over E20bln
• Final spread guidance 0% Feb-32 Bund +26-27bps
• Amount: E4-6bln (MNI expects top of the range)
• Pricing due later today

Belgium Syndication: Belgium 30-year, Final terms

• Size: E5bln (in line with MNI expectations)
• Spread set earlier at 1.70% Jun-50 OLO + 12bp (original guidance +14bp)
• Books over E36bln

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXJ2 160.50/159.50ps, bought for 29 in 20k (rolling down strike)

OEJ2 129.75/129.25ps, bought for 12 and 13 in 13k (was bought yesterday for 10/11 in 10k)

SX7E 18th March, 115/120cs 1x2 bought for 0.60 in 6k

UK:
SFIK2 98.70/98.80/98.90/99.00c condor for 1.75 in 10k, with SFIM2 98.80/99.00/99.10c fly, bought for 2.5 in 10k

FOREX: Markets Reverse Risk-Off Poise as Russian Troops Demobilize

• Markets are reversing the risk-off posture seen since the beginning of the week, with signs that Russia are pulling back troops from both the eastern and southern Ukrainian borders the latest catalyst for a risk-on rally. As a result, the currencies that were hardest hit yesterday (namely SEK, AUD and EUR) are among the strongest performers so far.
• Equities have rallied sharply, with US futures pointing to a solidly positive open of 1.5-2.0% later today. Markets clearly have some way to go before retracing the Russia-inspired sell-off, with EUR/JPY still much closer to recent lows relative to recent highs. 131.39 marks first resistance for the cross ahead of 131.60 and the 132 handle.
• UK jobs data came in largely inline with expectations, leaving little reason for the MPC to change tack on their current tightening path. Sell side consensus continues to shift toward a protracted tightening cycle in the UK, with both HSBC and Goldman Sachs steepening their BoE rate path assumptions in the past few days.
• Focus turns to the US PPI release for January, with markets expecting headline final demand PPI to moderate to 9.1% from 9.7% on a Y/Y basis. There are few central speakers of note, with just ECB's Villeroy on the docket.

FX OPTIONS: Expiries for Feb15 NY Cut 1000ET (Source DTCC)

• EUR/USD: $1.1295-00(E691mln), $1.1340-50(E981mln), $1.1395-00(E617mln)
• USD/JPY: Y114.85-00($900mln), Y115.45-50($650mln), Y115.70-75($800mln), Y115.90-00($1.3bln)
• USD/CAD: C$1.2695-00($2.3bln)

Price Signal Summary - Gold Remains Bullish Inside It Channel

• In the equity space, S&P E-minis remain vulnerable despite today’s bounce. A bearish theme follows last week’s failure to hold above the 50-day EMA - at 4550.89 today. The Feb 10 candle pattern was a bearish engulfing reversal, signalling a potential top and remains in play. A deeper pullback would expose 4212.75. EUROSTOXX 50 futures traded lower yesterday, extending the reversal from last Thursday’s high. The contract has also recently failed to remain above the 50-day EMA. This reinforces a broader bearish threat and exposes support at 3990.50, Jan 24 low. A break of this level would open 3980.00, the Nov 30 2021 low.
• In FX, EURUSD traded lower Monday, resulting in a breach of support at the 1.1315 bear channel top. A continuation lower together with a breach of the next support at 1.1267, Feb 2 low, would signal scope for a deeper retracement of recent gains. On the upside, key short-term resistance is unchanged at last Thursday’s high of 1.1495. GBPUSD continues to consolidate in a range. A resumption of gains would open 1.3662 next, Jan 20 high. Support to watch lies at 1.3491, Feb 7 low. USDJPY attention is on key resistance at 116.35, the Jan 4 high and bull trigger. A clear break of this hurdle would confirm a resumption of the uptrend. Support to watch is at 114.65, the 50-day EMA.
• On the commodity front, Gold has continued to appreciate and add to last week’s gains. The yellow metal has cleared resistance at $1853.9, Jan 25 high and today has traded above $1877.2, the Nov 16 high. This reinforces current bullish conditions and suggests scope for a stronger climb within the bull channel drawn off the Aug 9 low. The focus is on $1903.8, the Jun 8 2021 high. WTI futures remain in an uptrend. The continuation higher also maintains the bullish price sequence of higher highs and higher lows. The focus is on $98.24 next, 3.00 projection of the Dec 2 - 9 - 20 price swing.



• In the FI space, Bund futures appear vulnerable and the downtrend remains firmly intact. The focus is on the 164.00 handle. The Gilts trend needle still points south and the contract has delivered another fresh cycle low today of 119.39. Price is approaching the 119.36 level, Oct 10, 2018 low (cont). A break would open 119.06, the 2.500 projection of the Jan 13 - 19 - 24 price swing.

EQUITIES: Stocks Bounce, But Last Week's Highs Still Intact

• Continental equity markets trade uniformly higher, with stocks following a bounce in sentiment after the demobilization of Russian troop units at both the eastern and southern Ukrainian borders. Markets are reversing the risk-off poise adopted early Monday, helping consumer discretionary, tech and financials outperform across the European morning.
• While the bounce in stocks looks promising, prices are yet to make any material challenge on last week's highs, suggesting the risk of a Russian incursion remains partly priced into assets at this point. As such, the e-mini S&P targets 4520.50 initially ahead of the 100-dma at 4567.4.
• S&P E-minis traded sharply lower Friday and remains vulnerable. The contract recently failed to hold above the 50-day EMA - at 4549.15 today. This average represents a firm resistance and a clear break would suggest scope for a stronger rally towards 4671.75 initially, Jan 18 high. The Jan 10 candle pattern is a bearish engulfing reversal, signalling a potential top and the recent move lower reinforces the pattern.

COMMODITIES: Crude Hits Reverse as Russian Troops Demobilize

• The crude futures curve has flattened aggressively this morning, with front-month contracts shedding well over $2/bbl apiece as reports continue to point toward a demobilization of troops at both the eastern and southern Ukrainian borders.
• The reports are being seen as a sign of a de-escalation of tensions between Russia and The West, prompting markets to price out the risk of an armed conflict in the coming sessions.
• Gold is edging lower alongside oil, with the risk premium reducing as equities stage a parallel recovery.
• Nonetheless, Gold remains bullish inside the uptrend channel posted over the past few weeks. Gold has cleared resistance at $1853.9, Jan 25 high and today has traded above $1877.2, the Nov 16 high. This reinforces current bullish conditions and suggests scope for a stronger climb within the bull channel drawn off the Aug 9 low. The focus is on $1903.8, the Jun 8 2021 high. Short-term pullbacks are considered corrective, support is at $1821.1, Feb 11 low.