MNI US MARKETS ANALYSIS - AUD Outperforms on Chunky RBA Hike

US TSYS SUMMARY: Treasuries Follow Europe Richer, 3Y Auction

• Cash Tsys in the European session have more than unwound a net cheapening overnight through a combination of a dovish BoJ pledging a continuation of easing to support the economy and a hawkish RBA surprisingly hiking 50bps.
• The driving force appears to be Europe and Germany in particular, where yields have pulled back from yesterday’s new cycle highs (since 2011 for 2Y, 2014 for 10Y).
• Despite rallying, Tsy yields still sit above 3% through 5-30Y tenors: 2YY -1.6bps at 2.710%, 5YY -2.6bps at 3.008%, 10YY -2.6bps at 3.014% and 30YY -3.2bps at 3.164%.
• TYU2 sits 6 ticks higher at 118-03 in a return on above average volumes. It’s still well within yesterday’s range though as it continues to suggest the corrective cycle since May 9 is over whilst notably below the 50-day EMA of 120-04+. The intraday low of 117-22+ forms initial support after which it could ultimately open a bear trigger at 116-21 (May 9 low).
• Data/speak: Trade balance and consumer credit plus Tsy Sec Yellen speaks at the Senate Budget hearing at 1000ET.
• Bond issuance: US Tsy $44B 3Y note auction (91282CEU1) – 1300ET

STIR FUTURES: Fed Hike Pricing Cools After Bullish Asia Session

• Implied hikes are close to levels from late yesterday, having climbed higher overnight through both dovish BoJ commentary and a surprise RBA 50bp hike before cooling through European hours.
• FOMC-dated Fed Funds sit at 51bp for Jun, 102bp for Jul, 143bp for Sep and 200bps to year-end, the later off 204bp overnight in what was a new post-May FOMC high.
• FOMC media blackout but Tsy Sec Yellen to appear at the Senate FY’23 Budget hearing at 1000ET.

Cumulative hikes implied by FOMC-dated Fed Funds futuresSource: Bloomberg

EGB/GILT SUMMARY: UK PM Lumbers On

Euro area government bonds have traded firmer this morning, while gilts have traded mixed. Equities are broadly lower across the region, as is FX vs the dollar.

• UK Prime Minister Boris Johnson survived a no-confidence vote yesterday evening by a comfortable margin (211 vs 148). However, this still means that around 40% of his own party have declared that they have no confidence in Johnson's leadership, suggesting the possibility of further instability in the near term.
• The final estimates of the May Services and Composite PMIs for the UK were higher than the initial readings (53.4 vs 51.8 and 53.1 vs 51.8, respectively)
• Gilts have lacked clear direction so far, while the curve has slightly twist flattened.
• Germany Factory orders disappointed in April (-6.2% Y/Y vs -4.1% expected).
• Bunds have inched higher with yields down 1-2bp across much of the curve.
• OATs have slightly outperformed bunds, with yields down 2-3bp across most of the curve and the 2s30s spread narrowing 3bp.
• BTPs have outperformed core EGBs. Cash yields are 1-5bp lower on the day with the belly of the curve leading the way.
• Supply this morning came from the UK (Gilt, GBP3.00bn), Geramny (ILBs, EUR586mn allotted), Spain (Letras, EUR4.928bn), Belgium (TCs, EUR1.155bn), Netherlands (DTCs, EUR2.72bn), Austria (RAGBs, EUR1.2bn allotted) and the ESM (Bills, EUR1.056bn). In addition, Spain is selling EUR8bn of a 10-year bond with books last seen above EUR40bn).

EUROPE ISSUANCE UPDATE

Austrian auction results

• E690mln (E600mln allotted) of the 0.50% Apr-27 RAGB Avg yield 1.183% (bid-to-cover 1.79x)
• E690mln (E600mln allotted) of the 0.90% Feb-32 RAGB Avg yield 1.779% (bid-to-cover 1.99x)

German auction results

• E500mln (E420mln allotted) of the 0.10% Apr-26 ILB Avg yield -2.07% (bid-to-cover 2.49x)
• E200mln (E167mln allotted) of the 0.10% Apr-46 ILB Avg yield -0.93% (bid-to-cover 1.17x)

Gilt auction results

• GBP3.0bln of the 0.25% Jan-25 gilt Avg yield 1.951% (bid-to-cover 2.24x)

Spain syndication final terms

• E8.0bln of the 10-year Oct-32 Obli. Spread set at 0.70% Apr-32 Obli + 11bp

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXN2 150/148.5/146p ladder, sold at 41 in 1.5k
RXN2 151/149ps, bought for 104 in 2.15k
RXN2 153/155cs 1x2 bought for 8 1930 vs RXN2 153.5/155.5cs 1x2 sold at 5.5 in 1930 (rolling down)
RXN2 144/142ps 1x2, bought for 1 in 1k
RXN2 150/149/148p fly, sold at 12.5 and 12 in 5k
RXU2 150/153cs 1x2, bought for 7 in 2.5k
RXU2 154.50/158cs 1x2 sold at 21 vs RXU2 150/153cs 1x2, bought for 7 in 2.5k (rolling down, trades net 14)

ERU2 99.37/99.75^^ sold at 11 in 2k
ERU2 99.50/99.375 ps vs 99.75c, bought the ps for half in 5k

SX7E (16th Dec) 90/112.5cs, bought for 6.70 in 42k vs 16.8k CAM2 at 91.60

FOREX: Greenback Extends Bounce Off 50-dma Support

• The RBA surprised markets overnight, raising rates by 50bps against expectations of a 25bps move, initially providing a considerable leg higher for the AUD. AUD/USD spiked to touch 0.7246 before fading in the subsequent hour or so, putting AUD/USD in minor negative territory ahead of the NY crossover. The decision has prompted a number of sell-side analysts to bring forward forecasts for the next 50bps hike, putting the bank on a faster, quicker approach to policy than expected.
• Outside of the AUD, the USD is on the front foot, extending the late recovery seen during Monday hours as the USD Index bounces further off key support at the 101.81 50-dma. USD/JPY remains a key pair to watch, with Y133.00 the nearest handle as the JPY remains at the lower levels of the G10 table despite softer equity markets this morning.
• Trade data takes focus going forward, with US and Canadian trade balance figures for April on the docket. Canada's Ivey PMI follows shortly afterwards.

FX OPTIONS: Expiries for Jun07 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0525-45(E1.3bln), $1.0600(E1.4bln), $1.0700(E612mln), $1.0730-35(E1.4bln), $1.0780-00(E731mln)
• USD/JPY: Y127.50($1.2bln), Y128.90-00($567mln), Y129.95-15($686mln), Y131.00($531mln)
• GBP/USD: $1.2600-15(Gbp537mln)
• EUR/GBP: Gbp0.8650(E501mln)
• EUR/JPY: Y136.80-00(E581mln)
• AUD/USD: $0.7220-25(A$561mln)
• NZD/USD: $0.6445(N$546mln)
• USD/CAD: C$1.2695(C$610mln)

Price Signal Summary - USDJPY Resumes Its Primary Uptrend

• In the equity space, S&P E-Minis continue to trade inside its recent range and the current consolidation appears to be a bull flag formation. If correct, this reinforces short-term bullish conditions. Attention is on the 50-day EMA that intersects at 4178.95 today. A clear break of this average would strengthen a bullish outlook and open 4303.50, the Apr 26/28 high. Gains are still considered corrective and the primary trend direction is down. First support to watch is 3960.50, May 26 low. EUROSTOXX 50 futures are trading closer to recent highs and the short-term outlook remains bullish. This follows the recent break of the 50-day EMA. Scope is seen for a climb towards 3883.00, Apr 21 high and the key resistance at 3944.00, Mar 29 high. Short-term support has been defined at 3576.00, May 19 low. Initial support lies at 3736.70, the 20-day EMA.
• In FX, EURUSD is slightly softer and continues to trade just ahead of resistance - at 1.0760 today. This is the top of a bear channel, drawn from the Feb 10 high. The channel top is a key short-term pivot resistance, where a break would highlight a stronger bullish outlook. A reversal lower would instead open support at 1.0533 initially, the May 20 low. Initial support lies at 1.0627, the Jun 1 low. GBPUSD has found support at 1.2431 today. The pair maintains a positive short-term tone and attention is still on the key resistance highlighted by the 50-day EMA, at 1.2690 today. A reversal lower would instead expose 1.2317, the May 17 low. USDJPY has resumed its primary uptrend - the pair has cleared resistance at 131.35, May 9 high. Indications are that the USD has further to go. The focus is on 133.84, the Apr 1 2002 high and a key short-term resistance.
• On the commodity front, {O4} Gold has pulled back from its recent highs. A firm resistance is at the 50-day EMA, which intersects at $1874.3 today. A break of this average is required to suggest scope for a stronger recovery. For bears, a reversal lower would refocus attention on the key support and bear trigger at $1787.0, May 16 low. Initial support to watch is unchanged at $1828.6, Jun 1 low. In the Oil space, WTI futures remain bullish and the path of least resistance remains up. The recent break of $116.43, Mar 7 high, reinforced bullish conditions and confirmed a resumption of the primary uptrend. Price has also traded above the Psychological $120.00 handle. A continuation higher would open $122.00.
• In the FI space, Bund futures remain soft. Price has cleared support at 150.97, May 9 low and a recent bear trigger. The contract has also breached 150.00. The focus is on 148.23 Low Jun 10, 2015 (cont). Gilts remains in a clear downtrend and further downside is likely near-term. The focus is on 114.08, 2.236 projection of the May 19 - 24 - 26 price swing.

EQUITIES: Tech Underperforming Amid Broader Weakness

• Asian markets closed mostly higher: Japan's NIKKEI closed up 28.06 pts or +0.1% at 27943.95 and the TOPIX ended 7.92 pts higher or +0.41% at 1947.03. China's SHANGHAI closed up 5.391 pts or +0.17% at 3241.763 and the HANG SENG ended 122.23 pts lower or -0.56% at 21531.67.
• European equities are down slightly, with tech and communications services stocks underperforming: German Dax down 118.42 pts or -0.81% at 14544.52, FTSE 100 down 4.1 pts or -0.05% at 7609.57, CAC 40 down 30.42 pts or -0.46% at 6519.9 and Euro Stoxx 50 down 26.58 pts or -0.69% at 3811.5.
• U.S. futures are weaker, with the Dow Jones mini down 110 pts or -0.33% at 32802, S&P 500 mini down 13.25 pts or -0.32% at 4107.25, NASDAQ mini down 51.75 pts or -0.41% at 12553.25.

COMMODITIES: Oil And Copper Reverse Early Gains

• WTI Crude up $0.44 or +0.37% at $119.02
• Natural Gas up $0.09 or +0.95% at $9.36
• Gold spot up $6.52 or +0.35% at $1844.74
• Copper down $3.5 or -0.79% at $438.25
• Silver down $0.05 or -0.24% at $21.9596
• Platinum down $11.31 or -1.11% at $1005.33