MNI US MARKETS ANALYSIS - China Lockdown Fears Pinch Risk

US TSYS SUMMARY: Treasuries Rally On Growth Fears

• Cash Tsys see a belly-led rally as China lockdown fears come to the fore with the announcement of mass testing to begin in Beijing’s largest district as cases spread.
• With an aggressive path of Fed tightening already priced in, the market has put more weight on the demand hit rather than the inflationary pressure from further supply side disruption from more widespread lockdowns.
• 2YY -7.5bps at 2.592%, 5YY -9.1bps at 2.840%, 10YY -8.7bps 2.812% and 30YY =6.6bps at 2.878%.
• TYM2 is up 25+ ticks at 119-23+ in what’s seen to be a corrective bounce, albeit driven by above average volumes. Support is eyed at 120-00 (Apr 18 high) after which it could open 122-12+ (Apr 4 high).
• Data: Light docket with Chicago Fed and Dallas Fed activity indexes plus revisions to retail sales and inventories.
• Bill issuance: US Tsy $51B 13W, $45B 26W bill auctions (1130ET)
• Fed in media blackout ahead of the May 3-4 FOMC.

STIR FUTURES: Fed Hikes Step Back From Friday Highs

• Hikes implied by FOMC-dated Fed Funds have firmed through the London session but remain off Friday’s highs. It follows a particularly strong week, with almost an extra 25bp hike priced for the year compared to this time last week.
• A 50bp hike is still seen as locked-in for May, followed by 108bp for June, 155bp for July, 194bp for Sep (high just over 200bp) and 240bps for Dec (high just over 250bp).
• Mester, ’22 voter and at the hawkish end of the spectrum, was the last member to speak ahead of the media blackout on Fri and pushed back on the prospect of 75bp hikes with a preference for a methodical approach involving 50bp clips to get to a neutral rate of circa 2.5%.

Cumulative hikes for specific FOMC meetings, from Fed Funds futuresSource: Bloomberg

EGB/GILT SUMMARY: Risk Off Amid China Lockdowns & Inflation Concerns

European government bonds have rallied while equities and commodities have broadly pushed lower amid concerns about fresh lockdowns in China and persistent inflationary pressure.

• The gilt curve has bull steepened with cash yields down 4-8bp.
• Bunds opened higher this morning with yields now down 4-8bp from the Friday close and with the belly of the curve outperforming.
• It is a similar story for OATs where yields have pushed down 4-7bp on the day.
• BTPs have lagged the rally in core EGBs with yields down 2-4bp,.
• Supply this morning came from Germany (Bubills, EUR4.192bn) and Belgium (OLOs, EUR3.814bn).

CHINA: Lockdown Fears and Market Uncertainty Leave Equities Vulnerable

• The rise in cases in Beijing has sparked fears that the capital could face a Shanghai-style crisis, triggering a panic buying on Monday.
• Hence, lockdown fears combined with market uncertainty have been weighing on domestic risky assets.
• Hang Seng Index is down over 11% since its high reached in the beginning of the month, erasing 40% of its March gains (following the headline on ‘malicious short sellers in mid-March).
• The HSI index is currently testing its 19,865 support, which corresponds to the 61.8% Fibo retracement of the 18,235 – 22,500 range (March/April low high).
• A break below that level would open the door for a move down to 18,235.50, which was the low reached on March 15.
• The Chinese yuan has also been under the radar in the past week after USDCNY broke through some key technical levels; USDCNY broke above the 6.5125 level earlier and is approaching its ST key resistance at 6.5790 (March 30 2021 high).
  • A break above that level would open the door for a move up to 6.64 (38.2% Fibo retracement of the 6.307 – 7.1780 range).
• The recent WoW change is the biggest we have seen since the CNY ‘devaluation’ in August 2015, which triggered a market shock (SP500 was down 10% following the CNY move).

Source: Bloomberg/MNI

EUROPE ISSUANCE UPDATE:

Belgium sells 5/10/30-year OLOs:

• E1.372bln 0.80% Jun-27 OLO, Avg yield 0.864% (Prev. -0.443%), Bid-to-cover 1.52x (Prev. 2.23x)
• E1.542bln 0.35% Jun-32 OLO, Avg yield 1.412% (Prev. 0.880%), Bid-to-cover 1.80x (Prev. 2.10x)
• E900mln 1.40% Jul-53 OLO, Avg yield 1.912% (Prev. 1.424%), Bid-to-cover 1.87x

FOREX: Risk-Off Start Puts JPY On Top

• Markets are erring cautiously in early Monday trade, with risk proxies hit hard, while haven FX makes furtive gains. This puts JPY and the greenback at the top of the G10 table, while AUD, GBP and SEK are the poorest performers. Risk-off is also evident elsewhere, with equities weak and Treasury yields retracing sharply.
• Oil prices have taken a considerable leg lower, with Brent and WTI prices off close to 5% apiece as perceived commodities demand slips on concerns over renewed rolling lockdowns across China. Beijing is being watched carefully after reports of a COVID breakout in the city, with markets clearly worried the city will undergo similar measures to Shanghai. The worst case scenario would be a strict lockdown policy in adherence with China's COVID Zero approach, hampering economic growth that is already well below target.
• For the single currency - a relief rally on the re-election of Macron as French President was short-lived, with EUR/USD's gap higher at the open fading through Asia-Pac trade and well into the European morning. The pair's now put in a near 150 pip range so far today, keeping a number of option expiries in view for today's NY cut - most notably $1.0700(E712mln), $1.0800-03(E521mln) and $1.0825(E502mln).
• The Monday schedule is light, with few data points to digest and a quiet central bank speaker slate after the FOMC entered their pre-decision media blackout period over the weekend. As such, the highlights Monday include a speech from ECB's Panetta and an appearance from BoC's Macklem.

FX OPTIONS: Expiries for Apr25 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0700(E712mln), $1.0800-03(E521mln), $1.0825(E502mln), $1.0925(E503mln)
• AUD/USD: $0.7350(A$804mln)

Price Signal Summary - USD Resumes Its Uptrend

• In the equity space, S&P E-Minis traded sharply lower Friday and are trading lower once again today. This has confirmed a resumption of the current primary downtrend and signals scope for weakness towards 4200.00 next and the key supports at 4129.50, Mar 15 low and 4094.25, the Feb 24 low. EUROSTOXX 50 futures are under pressure too this morning. This follows a failure last week to hold on to the week’s highs. Support at 3684.00, Apr 12 low, has been breached and this opens 3626.50, the 50.0% retracement of the Mar 7 - 29 rally.
• In FX, EURUSD remains vulnerable and has traded lower this morning, clearing support at 1.0758, the Apr 14 low and a short-term bear trigger. This confirms a resumption of the downtrend and signals scope for a move towards 1.0636 next, the Mar 23 2020 low and the next major support. GBPUSD is under pressure again this morning as it continues to slide. The break on Friday of former support at 1.2974, Apr 13 low, confirms a resumption of the primary downtrend. The focus is on 1.2699, 1.382 projection of the Mar 23 - Apr 13 - 14 price swing. USDJPY is unchanged and trend conditions remain bullish. The focus is on 129.44 next, 0.764 projection of the Feb 24 - Mar 28 - 31 price swing. Sights are also on the psychological 130.00 handle.
• On the commodity front, Gold is lower today and the yellow metal has cleared support at the 50-day EMA, at $1927.7. The pullback from last week’s high of $1998.4 (Apr 18), highlights a bearish threat and attention is on key support that lies at $1890.2, the Mar 29 low. This level also represents an important bear trigger. In the Oil space, WTI futures are trading lower today and price has probed the 50-day EMA, at $97.80 today. A clear break of the average would strengthen the bearish threat and suggest scope for a deeper decline towards $90.37, the Mar 15 low.
• The trend condition in the FI space is unchanged and remains bearish. Bund futures delivered another fresh cycle low Friday. The focus is on 153.00 next. Short-term gains in Gilts are considered corrective. A resumption of weakness would open 117.04, 0.764 projection of the Mar 1 - 28 - Apr 4 price swing.

EQUITIES: Global Weakness After China Stocks Plunge

• Asian markets closed weaker, with Chinese stocks plunging: Japan's NIKKEI closed down 514.48 pts or -1.9% at 26590.78 and the TOPIX ended 28.63 pts lower or -1.5% at 1876.52. China's SHANGHAI closed down 158.407 pts or -5.13% at 2928.512 and the HANG SENG ended 769.18 pts lower or -3.73% at 19869.34.
• European equities are down sharply, with the German Dax down 264.68 pts or -1.87% at 13878.32, FTSE 100 down 171.69 pts or -2.28% at 7350.94, CAC 40 down 171.13 pts or -2.6% at 6411.79 and Euro Stoxx 50 down 96.65 pts or -2.52% at 3743.67.
• U.S. futures are lower, with the Dow Jones mini down 340 pts or -1.01% at 33388, S&P 500 mini down 46.5 pts or -1.09% at 4220.75, NASDAQ mini down 129.25 pts or -0.97% at 13225.25.

COMMODITIES: Oil And Copper Hit On China Covid Concerns

• WTI Crude down $5.02 or -4.92% at $97.09
• Natural Gas down $0.13 or -1.91% at $6.409
• Gold spot down $13.62 or -0.71% at $1918.28
• Copper down $11.15 or -2.42% at $449.05
• Silver down $0.39 or -1.63% at $23.7565
• Platinum down $5.64 or -0.61% at $925.64