MNI US MARKETS ANALYSIS - Markets More Steady Following Thurs Rally

US TSYS SUMMARY: Consolidating Yesterday’s Second Half Sell-Off

• Cash Tsys sit slightly softer on the day in a broad consolidation of yesterday’s second half sell-off with the rebound in equities as Western sanctions were seen as more moderate.
• 2YY +0.4bp at 1.584%, 5YY +0.7bp at 1.868%, 10YY +0.2bp at 1.965% and 30YY -0.1bp at 2.277%. The front end remains only 5bps off post pandemic highs of 1.6358 on the spike after US CPI two weeks ago.
• TYH2 sits 2 ticks lower on the day at 126-13 at the very low end of yesterday’s range. June becomes the lead quarter for TYA on Monday.
• Data: The focus is on the important January releases for core PCE deflator and incomes/spending at the same time as durable goods (0830ET), plus finalised consumer inflation expectations from the U.Mich survey.
• NY Fed buy-op: Tsy 0Y-22.5Y, appr $6.225B (1030ET – carried over from yday).
• No issuance.

STIR FUTURES: Fed Funds Dec'22 Pricing 5bps Off Pre-Invasion

• Fed Funds futures pricing sits higher today at 31.5bs for the March meeting, 87bps for June and 158bps for Dec, the latter just 5bps off pre-invasion levels.
• Waller late yesterday: a 50bp hike is on the table in March if incoming data show accelerating price pressures (Mester kept to 25bps as base case), sees the need for 100bp of tightening by mid-year (a la Bullard) and wants the Fed to signal a return to neutral at a ‘fast pace’. It is far too early to judge the impact of the Ukraine situation, although it does add to uncertainties and could result in a more modest round of tightening.

Fed Funds futures pricing for specific meetingsSource: Bloomberg

EGB/Gilt: Mixed Trading Amid Ukraine Crisis Uncertainty

EGBs have traded mixed this morning amid heightened uncertainty over the wider consequences of the Russia-Ukraine crisis.

• Russian forces are closing in on Kyiv with the Ukrainian president alleging that he is on a kill list, which follows previous warnings from a senior US defense official that President Putin plans to 'decapitate' the government In Ukraine.
• Gilts have rallied through the morning with the curve bull steepening. Cash yields are 2-7bp lower on the day with the 2s30s spread 4bp wider.
• Bunds initially sold off before recovering losses and now trade a touch below yesterday's closing levels.
• OATs similarly recovered earlier losses with the curve flattening 2bp.
• BTPs have firmed through the morning with yields 1-3bp lower across much of the curve.
• There was a slew of European data this morning which took a back seat in light of ongoing Russian invasion of Ukraine. The final Q4 GDP print for Germany came in stronger than the previous estimates (-0.3% Q/Q vs -0.7% & 1.8% Y/Y vs 1.4%). The preliminary French CIP estimate for February surprised higher (4.1% Y/Y vs 3.7% consenssus)
• Supply this morning came from the UK (UKTBs, GBP2bn), Italy (BTP/CCTeu, EUR8.25bn)

EUROPE ISSUANCE UPDATE

Italy sells 5/10-year BTPs / 5-year CCTeu

• E4bln 1.10% Apr-27 BTP, Avg yield 1.07%, , Bid-to-cover 1.37x
• E3bln 0.95% Jun-32 BTP, Avg yield 1.81% (Prev. 1.39%), Bid-to-cover 1.37x (Prev. 1.38x)
• E1.25bln 0.50% Apr-26 CCTeu, Avg yield -0.10% (Prev. -0.21%), Bid-to-cover 1.92x (Prev. 1.58x)

FOREX: Currencies on a More Stable Footing Following Late Equity Rally

• Following the rip higher on Wall Street late Thursday, currency market sentiment is more favourable early Friday, helping the likes of AUD and NZD climb to the top of the G10 table, with USD Index holding well off yesterday's highs. This leaves major pairs hovering at and around recent lows, but looking slightly more solid relative to other sessions this week.
• EUR/USD holds clear of the 1.1106 low printed yesterday, while EUR/JPY trades either side of the 129.00 handle at pixel time. Focus remains on the ongoing Ukraine crisis, with reports continuing to circulate of the Russian military presence in Kyiv, placing further pressure on the Ukrainian government to accede to demands from the Kremlin on neutrality and a removal of Western military hardware from the country.
• Outside of geopolitical risk, month-end flows will likely play a part into the London close, with most models pointing toward a USD-buying bias headed into the Friday fix.
• US personal income/spending data for January crosses later today as well as prelim durable goods numbers. ECB's Lagarde is due to be speaking at 1400GMT/0900ET following a Eurogroup meeting and is expected to address the implications of the Ukraine crisis on the Eurozone economy.
• Nonetheless, more attention will likely be paid to the sanctions and counter-sanctions traded between the West and Russia, as the Russian Parliament warn that they have prepared sanctions to hit the West's weak points. The NATO General Secretary speaks later today, holding a press conference at 1700GMT/1200ET.

FX OPTIONS: Expiries for Feb24 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1200-15(E1.8bln), $1.1225(E627mln), $1.1245-55(E1.5bln), $1.1265(E548mln), $1.1290-00(E3.4bln), $1.1315-35(E2.3bln), $1.1345-50(E752mln), $1.1385-00(E1.4bln), $1.1425-35(E1.0bln)
• USD/JPY: Y113.50($715mln), Y114.30-50($592mln), Y115.25-30($781mln), Y116.40($1.4bln)
• EUR/GBP: Gbp0.8335-55(E807mln)
• EUR/JPY: Y128.65-70(E591mln)
• AUD/USD: $0.7225-35(A$2.7bln), $0.7270(A$541mln)
• USD/CAD: C$1.2645-50($1.5bln), C$1.2695-10($827mln), C$1.2800-10($849mln)
• USD/CNY: Cny6.3700($675mln)

Price Signal Summary - Gold Remains Inside Its Bull Channel

• In the equity space, the S&P E-minis technical condition remain bearish. Short-term momentum conditions however highlight a bullish divergence between price and momentum and this does suggest scope for some unwinding of recent weakness or at the very least, a period of consolidation. Note that yesterday’s candle pattern is a hammer - a short-term reversal signal. The next resistance is at 4345.50, the Feb 23 high. Thursday’s low of 4101.75 is the bear trigger. EUROSTOXX 50 futures traded down sharply Thursday. Price did however recover from session lows. The break lower confirms a resumption of the bear cycle and futures have this week cleared a number of key support levels. This suggests scope for a deeper sell-off. Attention is on 3727.00, the Mar 25 2021 low on the continuation chart.
• In FX, EURUSD remains vulnerable and traded lower Thursday clearing support at 1.1280, the Feb 14 low and 1.1209, the 76.4% retracement of the recent Jan 28 - Feb 10 upleg. The breach of the latter support has strengthened the bearish threat and also resulted in a probe of support at 1.1121, the Jan 28 low and a bear trigger. A clear break of 1.1121 would open 1.1040, 76.4% of the Jan ‘21 - Mar ‘21 bull phase. The GBPUSD outlook remains bearish. A sharp sell-off has seen the pair trade through support at 1.3487, Feb 15 low and 1.3358, the Jan 27 low and a key support. 1.3301, 76.4% retracement of the Dec 8 - Jan 13 rally has been probed. A clear break would strengthen the bearish case and open 1.3163, Dec 8 low. USDJPY key short-term support at 114.16, the Feb 2 low, remains intact. While it holds, trend conditions is bullish. In EURJPY, the cross traded through support at 128.25, Feb 25 low. This exposes 127.52, the Dec 20 low and 127.39, the Dec 3 and 6 low.
• On the commodity front, volatile price action in Gold Thursday saw the yellow metal reverse sharply from the session high of $1974.3. The outlook is bullish however following recent impulsive gains. Gold is back inside its bull channel, drawn from the Aug 9 2021 low. The channel top intersects at $1939.2 today and represents a key short-term resistance. Watch support at $1878.4, yesterday’s low. WTI futures remain in an uptrend despite the pullback from yesterday’s high. The $100.00 level has been probed and a clear breach of this psychological barrier would strengthen current trend conditions. This would open 102.01 next, 3.382 projection of the Dec 2 - 9 - 20 price swing.
• In the FI space, Bund futures traded higher Thursday, reversing Tuesday’s pullback and have breached resistance at 167.17, Feb 22 high plus trendline resistance at 167.03. The trendline is drawn from the Dec 20 high. This signals scope for a stronger short-term correction and has opened the 50-day EMA at 168.59. The trend condition in Gilts remains bearish. Resistance to watch is at 123.53, the Feb 18 high. A break would signal potential for a stronger short-term climb. Key near-term support is at 121.10, the Feb 16 low.

EQUITIES: Stocks on More Solid Footing as Russia Avoids Worst of Sanctions Pressure For Now

• Wall Street staged a solid recovery into the Thursday close, recovering sharply as Russia appeared to avoid the worst of Western sanctions pressure and thereby minimized the broader risk to the nascent post-COVID global economic recovery. The US and Western partners stopped short of removing Russia from the SWIFT payments system and avoided hitting the Russian energy sector, leaving a protracted supply disruption less likely in the near term.
• As a result, the e-mini S&P erased a near 3% decline, adding 5% off the lows to finish higher on the session. The NASDAQ and growth names outperformed, putting the cash index higher by 3.5% at the close.
• This late rally filtered through to a largely positive Asia-Pac session, with European indices similarly green at the NY crossover. The UK's FTSE-100 outperforms, rallying over 2% to erase the Thursday drop, although the index still holds well shy of the best levels seen on Wednesday.
• Utilities are leading the bounce, with the lower risk of energy disruption fuelling gains, while real estate and consumer staples also trade well. A modestly softer Brent and WTI crude price has tampered a recovery in energy, which is the worst performing sector in Europe so far today.

COMMODITIES: Crude Prices Fade Off Highs, But Momentum Still Tilted Higher

• WTI and Brent crude futures both trade in minor negative territory ahead of the NY crossover, but both benchmarks hold close to recent highs. Brent crude - the contract in focus - has dipped back below the $100/bbl level, with gains fleeting above that handle as markets gauge inputs from both OPEC and the US, who will likely be able to justify production increases in the face of current high prices.
• Yesterday, in his televised press conference, POTUS Biden stated that while the US and partners will not impose a ban on the SWIFT banking system for now, the US will release additional oil from the Strategic Petroleum Reserve as needed - helping keep a lid on prices near current levels.
• The late Thursday rally for US equity markets also feeds well into a retreating oil price, with sanctions that avoid impacting the Russian energy industry and no removal from the SWIFT payment system reducing the risk of a material supply disruption in the near-term.
• Volatile price action in Gold Thursday saw the yellow metal reverse sharply from the session high of $1974.3. The outlook is bullish however following recent impulsive gains. Gold is back inside its bull channel, drawn from the Aug 9 2021 low. The channel top intersects at $1939.2 today and represents a key short-term resistance. Watch support at $1878.4, yesterday’s low.
• WTI futures remain in an uptrend despite the pullback from yesterday’s high. The $100.00 level has been probed and a clear breach of this psychological barrier would strengthen current trend conditions. This would open 102.01 next, 3.382 projection of the Dec 2 - 9 - 20 price swing.

Source: MNI/BBG