MNI US MARKETS ANALYSIS - GBP Sinks as Sturgeon Renews Indy Threat

US TSYS SUMMARY: Bull Steepening As Hike Pricing Pulls Back From Extremes

Treasury yields have retreated from Monday's highs, but remain well above levels at the start of the week.

• The curve has steepened with the front end outperforming as Fed rate hike expectations pull back from extremes. Total hikes priced by end-2022: 277bp, a few bps lower than late Monday, but 12bp below overnight highs. 75bp hikes in Jun and Jul are still roughly fully priced though.
• The 2-Yr yield is down 7.2bps at 3.2819%, 5-Yr is down 6.9bps at 3.4135%, 10-Yr is down 6.5bps at 3.2952%, and 30-Yr is down 5.1bps at 3.2967%.
• The market tone remains cautious. The USD has held Monday's gains, while stock futures have faded most of the Asia-Pac rebound.
• Main item on the calendar aside from the beginning of the 2-day FOMC meeting is May PPI (0830ET), which could have implications for the Fed's perceptions of inflationary pressures.
• We'll be publishing a short update to our Fed preview to account for late Monday's developments.
• Earlier, May NFIB Small Business Optimism came in line w expectations (93.1 vs 93.0 survey).

EGB/GILT SUMMARY: EZ FI Trades Lower While Gilts Hold On To Gains

European government bonds broadly firmed early into the session with gilts holding on to most of the initial gains while euro area bonds have sold off.

• Having opened higher, gilts have traded sideways through the morning with yields 7-10bp lower on the day.
• UK data on payrolled employees for May was higher than expected (90k vs 70k) although the previous month was revised lower (107k vs 121k) and the 3m/3m employment change series for April surprised higher (177k vs 106k). Headline wage data missed in April (6.8% 3M Y/Y vs 7.4%) , while the ex-bonus series was slightly higher than consensus (4.2% vs 4.0%).
• With the FOMC announcement up tomorrow, speculation around the possibility of a 75bp hike have been building. That the ECB indicated last week that a 50bp hike in September is likely, signals the increasingly hawkish direction of monetary policy.
• Bunds have continued to inch lower, extending the sell-off following last week's ECB meeting.
• OAT yields are broadly 1-3bp higher on the day, although the very long end of the curve has marginally firmed.
• BTPs have underperformed core EGBs with yields up 3-9bp and the curve bear flattening.
• Supply this morning came from Germany (Schatz, EUR4.5818bn allotted), Italy (BTPs, EUR6bn), Spain (Letras, EUR1.796bn), Belgium (TCs, EUR2.06bn).

EUROPE ISSUANCE UPDATE

Italy auction results:

• E2bln of the 1.20% Aug-25 BTP. Avg yield 3.04% (bid-to-cover 1.63x)
• E2.5bln of the 2.80% Jun-29 BTP. Avg yield 3.75% (bid-to-cover 1.48x)
• E748mln of the 3.85% Sep-49 BTP. Avg yield 4.2% (bid-to-cover 2.2x)
• E752mln of the 2.15% Sep-52 BTP. Avg yield 4.23% (bid-to-cover 2.25x).

German auction result:

• E5.5bln (E4.518bln allotted) of the 0.20% Jun-24 Schatz. Avg yield 1.18% (bid-to-cover 1.28x).

• E4-5bln of the 0.50% Jan-40 Green DSL with spread of 4.75% Jul-40 DSL + 37.0bp. Books closed at E14bln.

EFSF syndication:

• E2bln of the new Jun-32 EFSF bond has launched with books closed in excess of E2.7bln (ex JLM interest).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU2 142.50/140.50/138.50p fly, bought for 15 in 2.5k

OEQ2 126c, bought for 9 and 9.5 in 25k

ERU2 99.12/99.37/99.87/100.12c condor, sold at 12.75 in 12k
ERZ2 98.25/98.00ps sold at 7.75 in 15k

FM Sturgeon: 'Scottish Parliament Has Mandate For IndyRef2'

Scottish First Minister Nicola Sturgeon delivering aspeech at present seeking to outline how the Scottish gov't will seek a second independence referendum, in what is a notable escalation in the Scottish National Party's efforts to pursue separation from the United Kingdom.

• Scottish gov't document presenting the case for independence can be found here: https://www.gov.scot/binaries/content/documents/go...
• Sturgeon states that the second independence referendum (first unsuccessful vote held in 2014) 'must be lawful', although also implies that the Scottish gov't could proceed without UK gov't approval. Says she will present to Holyrood 'very soon' how a legal referendum could take place without a Section 30 order (the doc giving UK gov't approval) - unclear whether this is actually possible.
• Opinion polling shows 'no' to independence ahead in all recent polls, with the last 'yes' to independence lead recorded in February. Average 'no' lead in May (latest polling carried out) stood at 3.6%.
• From the UK gov't side there remains no legal impetus to allow another independence referendum, and given widespread unpopularity of PM Boris Johnson in Scotland recorded in opinion polls they would be very reluctant to grant one at present.
• Should Sturgeon proceed with a referendum without UK gov't approval it risks significant political division. Most recent European comparison of this situation would be Catalonia's illegal independence referendum in 2017 that the gov't in Madrid deemed illegal resulting in mass protests, arrest of individuals leading the referendum and long-term damage to relations.

FOREX: Prices Settle, But Underlying Sentiment Still Fragile

• Following the dollar's fierce Monday rally, the USD Index is fading slightly ahead of Tuesday's NY crossover, allowing EUR/USD, GBP/USD and others to recover off the lows. This puts EUR/USD closer to 1.05 headed into US hours, after trading as low as 1.0397 overnight.
• A stabilisation of sentiment is also evident in equity markets, with futures uniformly higher, albeit still well short of the week's best levels - solidifying the scale of the risk sell-off on Monday. Despite the more stable outlook for spot prices today, markets remain fragile, with implied volatility across G10 FX still well elevated. Today, 1m USD/JPY implied vols cleared 14 points, the highest since the depths of the COVID-19 crisis.
• CAD is the sole currency underperforming the greenback at this stage, putting USD/CAD north of 1.29 for the first time since mid-May, cementing the recent short-term reversal. The extension higher has resulted in a test of resistance at 1.2896, the May 19 high. Sights are on a Fibonacci retracement at 1.2945, where a break would open key resistance at 1.3077.
• US PPI takes focus going forward, with markets continuing to look for any further clues on burgeoning inflationary pressure in the US. PPI is seen decelerating slightly on a Y/Y basis across both the core and non-core readings. ECB's Schnabel is also slated to speak, although a policy focus is unlikely today.

FX OPTIONS: Expiries for Jun14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0413-25(E3.2bln), $1.0430-40(E930mln), $1.0635-50(E1.0bln)
• USD/JPY: Y131.00($850mln), Y132.30-50($796mln)
• GBP/USD: $1.2200-05(Gbp518mln)
• AUD/USD: $0.7130-40(A$688mln)
• USD/CNY: Cny6.7500($688mln)

Price Signal Summary - Bond Market Bear Trend Accelerates

• In the equity space, S&P E-Minis started the week on a clear bearish note. Monday’s sell-off resulted in a print below 3810.00, the May 20 low and bear trigger. The break confirms a resumption of the primary downtrend and opens 3697.99, 0.618 projection of the Mar 29 - May 20 - 31 price swing. EUROSTOXX 50 futures remain vulnerable and the contract appears set to weaken further. The pace of the latest sell-off signals potential for a move towards key support and a bear trigger at 3466.00, May 10 low. Key short-term resistance has been defined at 3857.00, Jun 6 high. Initial resistance is seen at 3729.60, the 50-day EMA.
• In FX, the short-term EURUSD outlook remains bearish. This follows the reversal lower from the top of a bear channel, currently at 1.0716. The channel is drawn from the Feb 10 high. The move lower has opened 1.0350, the May 13 low and bear trigger. Initial firm resistance is at 1.0632, the 20-day EMA. The latest move lower in GBPUSD has confirmed a resumption of the [primary downtrend - support and the bear trigger at 1.2156, May 13 low, has been cleared. This signals scope for weakness towards 1.2081, 76.4% retracement of the Mar ‘20 - Jan ‘21 bull cycle. USDJPY remains in a clear uptrend and Monday tested levels above 135.00. Trend signals still point north and a resumption of gains would open 136.04, 1.382 projection of the Feb 24 - Mar 28 - 31 price swing.
• On the commodity front, Gold faced resistance Monday and closed at the day low. The yellow metal has failed to remain above the 50-day EMA, signalling the potential end of the recent correction between May 16 - Jun 13. An extension lower would open the key support and bear trigger at $1787.0, May 16 low. A break would resume the downtrend. In the Oil space, WTI futures remain bullish and the uptrend is intact. The focus is on $123.35, 1.236 projection of the May 11 - 17 -19 price swing. Key short-term support is at $115.35, the 20-day EMA
• In the FI space, Bund futures continue to weaken and the downtrend has accelerated. The focus is on 143.17, 2.236 projection of the Apr 28 - May 9 - 12 price swing. Gilts continue to head south, the focus is on 111.81, 3.382 projection of the May 19 - 24 - 26 price swing.

EQUITIES: Steadying After Rout

• Asian equity markets closed off overnight lows: Japan's NIKKEI closed down 357.58 pts or -1.33% at 26629.86 and the TOPIX ended 22.61 pts lower or -1.19% at 1878.45. China's SHANGHAI closed up 33.355 pts or +1.02% at 3288.906 and the HANG SENG ended 0.41 pts higher or +0% at 21067.99.
• European equities are trading mixed, with the German Dax down 18.8 pts or -0.14% at 13427.03, FTSE 100 up 13.89 pts or +0.19% at 7205.81, CAC 40 down 17.64 pts or -0.29% at 6022.32 and Euro Stoxx 50 down 5.76 pts or -0.16% at 3535.15.
• U.S. futures are up slightly, with the Dow Jones mini up 109 pts or +0.36% at 30641, S&P 500 mini up 19.5 pts or +0.52% at 3770.25, NASDAQ mini up 85.25 pts or +0.75% at 11384.25.

COMMODITIES: Oil Continues To Hold Up

• WTI Crude up $0.8 or +0.66% at $121.68
• Natural Gas up $0.06 or +0.65% at $8.564
• Gold spot up $3.53 or +0.19% at $1830
• Copper up $0.4 or +0.09% at $426.35
• Silver up $0.05 or +0.23% at $21.3336
• Platinum up $0.32 or +0.03% at $946.98