MNI US MARKET ANALYSIS - Markets Watch for Clues on July ECB Hike

US TSYS SUMMARY: Treasuries Twist Flatten Ahead Of ECB

• Cash Tsys have seen a mild twist flattening, in part following Shanghai’s announcement of a partial lockdown in a district for mass testing with the usual higher inflation and lower growth implications.
• The impact has been subdued with the ECB policy decision ahead plus low cases elsewhere in China but is another remember of the ripples that can continue to follow from China’s zero Covid policy, with 5-30Y tenors now hovering above 3%.
• 2YY +0.4bps at 2.778%, 5YY -0.5bps at 3.025%, 10YY -1.5bps at 3.007% and 30YY -1.9bps at 3.153%.
• TYU2 sits 3 ticks higher at 118-05+, well within yesterday’s range on marginally above average volumes. The outlook is still seen as bearish, with support eyed at 117-22+ (Jun 7 low) whilst resistance remains 119-16+ (Jun 1 high).
• Data: Limited to weekly jobless claims and then Q1 household net worth later on.
• Bond Issuance: US Tsy $19B 30Y Bond auction re-open (912810TG3) – 1300ET
• Bill issuance: US Tsy $35B 4W, $30B 8W bill auctions – 1130ET

STIR FUTURES: Fed Hike Pricing Climbs With ECB Ahead

• Having climbed yesterday, Fed Funds implied hikes saw a further boost to new post-May FOMC highs overnight as Shanghai announced a partial lockdown in a district before unwinding some of the move.
• It sees a nudging higher across meetings, touching 52.5bps for next week, 104bps for Jul, 146bps for Sep and 206bps over the five meetings to year-end (207bp earlier).

Source: Bloomberg

EGB/GILT SUMMARY: Markets Looking For Sign Of Potential 50bp ECB Hike

Euro area government bonds have traded firmer this morning ahead of the ECB meeting. Equities are commodities are broadly lower, while FX performance has been mixed on the day.

• The ECB's action plan has been well telegraphed by this point: net purchases under the APP will conclude in early July, setting the stage for a hike at the 21 July meeting. Any material deviation from this announcement constitutes a risk.
• The balance of risks are tilted in a hawkish direction, with markets focused on any signals of a potential 50bp, rather than 25bp, policy rate hike.
• Bunds have had a choppy start to the session and now trade firmer on the day with yields broadly 1-2bp lower. and the curve trading close to flat overall.
• OAT yields are down 2-3bp and trading near the lows of the day.
• BTPs have outperformed core EGBs with yields down 2-4bp and with the belly of the curve leading the way.
• Gilts have weakened slightly across the curve, but lack strong direction.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXN2 152.00/153.50cs, bought for 14 in ~4.4k
RXN2 155.50/157.00cs, bought for 1.5 in 13.5k (short cover)

OEQ2 122/121ps 1x1.5, bought for 7 in 2k

DUN2 109.10/109.20/109.30/109.40c condor, bought for 2 in 1.5k

Notable flow in options today have covered a possible ECB Hawkish response today, and a possible hawkish rate path outlook:
ERN2 99.37/99.25/99.15p fly, bought for 1.5 in 8k 36 days to expiry, doesn't cover the ECB July meeting, but still looking for a hawkish ECB
ERQ2 99.375/99.25/99.125 put fly, bought for 1.5 in 15k
ERU2 99.50/99.375/99.25p ladder, bought for flat in 2.5k
ERU2 99.50/99.375ps vs 99.75c, bought the ps for 2 in 5k

Other flows:
0RM2 98.37p vs 2RM2 98.12p, sold the 1y at 5 in 3k
ERZ2 99.50/99.37/99.25/99.12p condor, sold at 1.75 in 4.75k

FOREX: JPY Bounce Soothes Oversold Condition

• In contrast with Wednesday's price action, the JPY is the strongest currency in G10 so far Thursday, with the currency bouncing off the multi-decade lows printed earlier in the week. Having printed 134.56 overnight - the highest level since 2002.
• JPY's recovery appears fleeting, however, with USD/JPY's primary uptrend still intact and the pattern of higher highs still running after 10 consecutive sessions. The modest moderation in the pair has allowed the overbought condition in USD/JPY to unwind somewhat, putting the RSI back toward the 70 level - a similar pattern as seen during the March and April rallies this year.
• GBP is among the poorest performers in G10 so far, with focus turning to an appearance from the PM Johnson, who looks to revive his fragile leadership position after a leadership challenge earlier in the week. 1.2431 and 1.2317 mark the first key levels of support in GBP/USD.
• The ECB rate decision takes focus going forward, with the Bank seen keeping headline policy unchanged but hinting heavily that rate hikes could come as soon as July. Weekly jobless claims data is the focus in the US, while the Bank of Canada release their financial system review, with governor Macklem then addressing reporters.

FX OPTIONS: Expiries for Jun09 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0560-70(E1.4bln), $1.0595-05(E1.1bln), $1.0750-55(E1.3bln), $1.0800(E500mln)
• USD/JPY: Y129.80-00($1.3bln)
• GBP/USD: $1.2600-05(Gbp574mln)
• AUD/USD: $0.7165-85(A$1.4bln)
• USD/CAD: C$1.2500($679mln), C$1.2820($682mln), C$1.2900($570mln)
• USD/CNY: Cny6.7000($2.3bln)

Price Signal Summary - Path Of Least Resistance In The FI Space, Remains Down

• In the equity space, S&P E-Minis continues to trade sideways and inside its recent range. The current consolidation still appears to be a bull flag formation - a bullish continuation pattern that reinforces current trend conditions. Attention remains on the 50-day EMA that intersects at 4178.11 today. A clear break of this average would strengthen a bullish outlook, confirm the bull flag pattern, and open 4303.50, the Apr 26/28 high. First key support to watch is 3960.50, May 26 low. EUROSTOXX 50 futures continue to consolidate too, closer to recent highs. The short-term outlook is bullish. A positive theme follows the recent break of the 50-day EMA and 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 is at 3576.00, May 19 low. Initial support is at 3745.40, the 20-day EMA.
• In FX, EURUSD is unchanged and still trades just ahead of resistance marked by the bear channel top that is drawn from the Feb 10 high. The resistance intersects at 1.0742 today and remains a key short-term hurdle for bulls. A clear break would highlight a stronger bullish outlook. A reversal lower would instead open support at 1.0533 initially, the May 20 low. Initial support to watch lies at 1.0627, Jun 1 low. GBPUSD remains above Tuesday’s low of 1.2431 and this level represents a key short-term support. Attention is still on the 50-day EMA, at 1.2680 today. A break is required to strengthen bullish conditions. A reversal lower and breach of 1.2431 would expose 1.2317, the May 17 low. USDJPY remains in a clear uptrend and this week’s gains have confirmed a resumption of the primary uptrend. Sights are set on 135.00 and 135.15, the Jan 31 2002 high and a key congestion area.
• On the commodity front, Gold is unchanged and remains in consolidation mode. Firm resistance is still seen at the 50-day EMA, which intersects at $1872.7 today. A break of this average is required to suggest scope for stronger gains. 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 $1828.6, Jun 1 low. In the Oil space, WTI futures remain bullish and the contract traded higher again on Wednesday, as it extends gains above the $120.00 handle. The focus is on $123.35, 1.236 projection of the May 11 - 17 -19 price swing.
• In the FI space, Bund futures remain in a clear downtrend and indications are that futures are likely to continue moving lower. The focus is on 148.23, the Jun 10, 2015 low (cont). The path of least resistance in Gilts, remains down and attention is on weakness towards 114.08 next, 2.236 projection of the May 19 - 24 - 26 price swing.

EQUITIES: Energy Stocks Gain Amid Broader Losses In Europe

• Asian markets closed mostly lower: Japan's NIKKEI closed up 12.24 pts or +0.04% at 28246.53 and the TOPIX ended 0.93 pts lower or -0.05% at 1969.05. China's SHANGHAI closed down 24.839 pts or -0.76% at 3238.954 and the HANG SENG ended 145.54 pts lower or -0.66% at 21869.05.
• European equities are a little weaker pre-ECB, with the German Dax down 62.57 pts or -0.43% at 14382.92, FTSE 100 down 33.42 pts or -0.44% at 7560.1, CAC 40 down 13.29 pts or -0.21% at 6438.61 and Euro Stoxx 50 down 5.74 pts or -0.15% at 3782.71.
• U.S. futures have edged higher, with tech stocks leading: Dow Jones mini up 114 pts or +0.35% at 33003, S&P 500 mini up 17 pts or +0.41% at 4131, NASDAQ mini up 63.75 pts or +0.51% at 12679.5.

COMMODITIES: U.S. NatGas Slumps After LNG Export Terminal Fire

• WTI Crude down $0.17 or -0.14% at $122
• Natural Gas down $0.41 or -4.7% at $8.3
• Gold spot down $3.05 or -0.16% at $1850.45
• Copper down $7.1 or -1.59% at $438.5
• Silver down $0.05 or -0.22% at $22.0069
• Platinum down $21.32 or -2.11% at $987.82