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MNI US MARKETS ANALYSIS - Oil Gaps to New Highs

Highlights:

  • Oil gaps higher as Western powers inch toward full Russian embargo
  • Gold shows above $2,000/oz, with equities returning lower
  • EUR/USD at multi-year lows at start of ECB week

US TSYS SUMMARY: Maintaining Recent Flats

  • Cash Tsys are relatively little changed on Friday’s close, having opened firmer before unwinding most of the move through Asian and London sessions, potentially following the rise in European inflation expectations on higher energy prices.
  • The curve remains very flat with 2s10s at its new recent lows of 25-26bps, the flattest since Mar 2020.
  • 2YY +0.4bps at 1.480%, 5YY -1.5bps at 1.622%, 10YY -0.2bps at 1.729%, 30YY -0.6bps at 2.148%.
  • TYM2 is up 1+ ticks at 128-18+ with below average volumes. Sitting towards the top of Friday’s range, it remains below resistance of 128-31+ (Mar 1) with support at 127-00 (Mar 2 low).
  • The only release today is consumer credit for Jan whilst the Fed is in media blackout ahead of the Mar 15-16 FOMC.
  • Issuance: US Tsy $60B 13W, $51B 26W Bill auctions (1130ET). No bond issuance or NY Fed buy-ops.

STIR FUTURES: Fed Funds Emerge From Weekend Largely Unscathed

  • FOMC-dated Fed Funds futures are back near late Friday levels, with implied hikes opening lower overnight before firming again as European inflation expectations increased sharply on higher energy prices.
  • There is just under one hike fully priced for March (23bp), a little over three hikes for June (80bps) but not quite four to July (95bp) and a touch over 5.5 hikes for 2022 (140bp).
  • Very light data slate today with the next major known driver US CPI on Thursday and the ECB decision shortly beforehand.

Source: Bloomberg

EGB/GILT SUMMARY: Mixed Start Amid Potential Oil Import Ban

European government bonds have traded mixed this morning alongside further downside for equities. Signs over the weekened that the US is attempting to coordinate a Russian oil import ban with its allies has further dented the outlook for growth and inflation, as well as injecting fresh uncertainty over President Putin's response.

  • Oil prices have surged again on the possibility of an import ban with Brent crude last seen at USD125/bbl, with spillovers to inflation markets. The EUR 5y5y forward inflation swap has edged up to 2.2925% from an intraday low of 2.0213%.
  • Gilts have traded weaker with the curve bear flattening. Cash yields are up 3-6bp with the curve 2-3bp flatter.
  • Bunds have firmed on the day with yields 3-5bp below the Friday close.
  • Performance across the OAT curve has been uneven. Must of the curve has firmed with yields down 2-5bp, although the 10-year benchmark has weakened below the Friday close.
  • BTPs have sold off with the curve bear flattening. Cash yields are up 1-5bp.
  • Supply this morning came from Germany (Bubills, EUR5.077bn) and the Netherlands (DTCs, EUR2.68bn). Later today France will offer EUR4.-5.7bn of BTFs.

ECB: How is today's move changing market pricing?

We had noted last week that some of the moves seen in European markets recently have been consistent with repricing of ECB moves rather than a traditional risk-off move. For example, we had seen peripheral spreads tighten as growth concerns hit markets and markets priced in a delay to ECB tapering despite the infationary pressures.

  • However, inflationary pressures have hit new heights today despite with spike in European gas prices (and also in oil prices) (see earlier bullet on Euro 5y5y forward inflation swap). Euribor futures have not really shown much movement, perhaps as there is little monetary policy can do to control energy prices and the ECB still remains fairly calm about the passthrough to wider inflation. Markets continue to price around 21bp of hikes in 2022. Peripheral spreads have widened on the growth implications, however.

FOREX: Oil's Gap Higher Unsettles Currencies, Regional FX Sharply Lower

  • Oil's notable gap higher at the open has led risk notably lower across equities, currencies and bond markets early Monday, with the risk of a full embargo on Russian oil and gas products looking more likely over the weekend. Regional currencies have been the hardest hit in G10, putting SEK and NOK at the bottom of the pile.
  • The single currency is coming under further pressure from lofty inflation expectations, as the EUR 5y5y inflation swap forward soars north of 2.2%, a new 10-year high. EUR/USD has already posted a notable intraday range, dropping from north of 1.0950 to just above 1.0820 at pixel time.
  • Extending the recent streak of outperformance, commodity-tied antipodean FX is notably strong, with AUD and NZD at the top of the pile.
  • The data schedule is typically light for a Monday, with no real releases on the docket. Instead, focus remains on the ongoing Ukraine crisis, with furtive commitments to humanitarian corridors and regional civilian ceasefires continuing to fall through. BoE's Cunliffe is also due to speak.

FX OPTIONS: Expiries for Mar07 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.1085-00(E525mln), $1.1165-75(E1.2bln)
  • USD/JPY: Y114.20-30($871mln), Y115.00-05($717mln)
  • EUR/GBP: Gbp0.8230-35(E549mln), Gbp0.8510-15(E1.2bln)
  • USD/CNY: Cny6.3000($699mln), Cny6.4000($783mln)

Price Signal Summary - Oil Is Volatile But Still Defying Gravity

  • In the equity space, S&P E-minis traded above the 20-day EMA at 4386.89 last Thursday. The failure to hold above this EMA is a bearish development. Broader trend signals remain bearish and a deeper pullback would open the 4101.75 key support handle and bear trigger. EUROSTOXX 50 futures have traded sharply lower again today to confirm a resumption of this year’s downtrend. The contract has cleared the 61.8% retracement of the bull cycle between Mar ‘20 - Nov ‘21, at 3468.60. The focus is on 3379, Dec 21 2020 low.
  • In FX, EURUSD remains in a downtrend and still facing selling pressure. With the 1.0800 handle looking exposed, the focus is on 1.0767 next, the May 7 2020 low. GBPUSD continues to weaken and has cleared a key near-term support at 1.3163, the Dec 8 low. The break reinforces the bearish condition and confirms a resumption of the downtrend. This opens 1.3104 next, a 1.382 projection of the Jan 13 - 27 - Feb 10 price swing. EURGBP remains below the 0.8300 handle, the base of a broad multi-year range that was recently breached. The focus is on 0.8193, a 1.236 projection of the Feb 7 - 24 - 25 price swing. USDJPY key short-term support at 114.16, the Feb 2 low, remains intact. The trend outlook is bullish but a break of 116.35, this year’s high on Jan 4, is still required to confirm a resumption of the trend. EURJPY remains under pressure as a strong impulsive sell-off extends. Sights are on 124.28, 50.0% of the 2020 - 2021 bulls cycle.
  • On the commodity front, Gold is trading higher and has cleared the Feb 24 high of $1974.3. This confirms a resumption of the uptrend and also highlights the fact that prices have cleared the top of the recent bull channel, drawn from the Aug 9 2021 low. The focus is the psychological $2000.0 handle that has been probed and $2004.4, 2.236 projection of the Dec 15 - Jan 25 - 28 price swing. Oil markets are volatile but remain in an uptrend. The gap higher today in WTI suggests scope for a climb towards $132.75, 3.618 projection of the Aug - Oct - Dec ‘21 price swing.
  • In the FI space, Bund futures remain in a short-term uptrend. A resumption of gains would open 169.44, 0.764 projection of the Feb 25 - Mar 1 - Mar 3 price swing. Gilts have pulled back from Tuesday’s high of 126.81. Support is seen at 123.50, the Mar 1 low. A resumption of recent gains would open 126.90, 2.00 projection of the Feb 16 - 18 - 23 price swing.

EQUITIES: European Financial Stocks Lead Losses

  • Asian equities closed sharply lower: Japan's NIKKEI closed down 764.06 pts or -2.94% at 25221.41 and the TOPIX ended 50.91 pts lower or -2.76% at 1794.03. China's SHANGHAI closed down 74.794 pts or -2.17% at 3372.855 and the HANG SENG ended 847.66 pts lower or -3.87% at 21057.63
  • European stocks have dropped to start the week, with the German Dax down 549.77 pts or -4.2% at 12545.51, FTSE 100 down 129.67 pts or -1.86% at 6860.94, CAC 40 down 226.57 pts or -3.74% at 5854.55 and Euro Stoxx 50 down 126.17 pts or -3.55% at 3426.23.
  • U.S. futures are down too though off overnight lows, with the Dow Jones mini down 540 pts or -1.61% at 33044, S&P 500 mini down 74 pts or -1.71% at 4253.25, NASDAQ mini down 258.75 pts or -1.87% at 13581.

COMMODITIES: Energy And Gold Continue To Surge

  • WTI Crude up $8.1 or +7% at $123.17
  • Natural Gas up $0.12 or +2.31% at $5.118
  • Gold spot up $28.99 or +1.47% at $1997.92
  • Copper up $5.35 or +1.08% at $501.15
  • Silver up $0.27 or +1.06% at $25.9744
  • Platinum up $20.41 or +1.81% at $1147.45

DateGMT/LocalImpactFlagCountryEvent
07/03/20221500/1500UKBOE Cunliffe at Lords European Affairs Committee
07/03/20221630/1130*US US Treasury Auction Result for 26 Week Bill
07/03/20221630/1130*US US Treasury Auction Result for 13 Week Bill
07/03/20222000/1500*US Consumer Credit
08/03/20220001/0001*UK BRC-KPMG Shop Sales Monitor
08/03/20220700/0800**DE industrial production
08/03/20220800/0900**ES industrial production
08/03/20220900/1000*IT retail sales
08/03/20221000/1000**UK Gilt Outright Auction Result
08/03/20221000/1100***EU GDP (2nd est.)
08/03/20221100/0600**US NFIB Small Business Optimism Index
08/03/20221330/0830**US trade balance
08/03/20221330/0830**CA International Merchandise Trade (Trade Balance)
08/03/20221355/0855**US Redbook Retail Sales Index
08/03/20221500/1000**US wholesale trade
08/03/20221500/1000**US IBD/TIPP Optimism Index
08/03/20221800/1300***US US Note 03 Year Treasury Auction Result

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