MNI US MARKETS ANALYSIS - Peripheral Europe Bid on ECB Report

US TSYS SUMMARY: Curve Bull Steepening With Fed Awaited

The FOMC decision is in focus Wednesday, with a 75bp hike fully priced but the path ahead seen slightly more moderate than it looked yesterday.

• Mar through Dec '23 rates contracts are outperforming, with Fed funds now pricing a peak Funds rate <3.9% in mid-2023, a quarter point lower than early Tuesday's peak and down 18bp implied on the day.
• Whether that is a sudden reappraisal of the Fed's outlook or merely reverting from oversold conditions, the Tsy curve has bull steepened: the 2-Yr yield is down 13.3bps at 3.2934%, 5-Yr is down 11.8bps at 3.4687%, 10-Yr is down 9.4bps at 3.3792%, and 30-Yr is down 4.7bps at 3.3778%.
• MNI's outlook for the 2023 Median Dot today is probably more dovish than analyst consensus and certainly lower than market pricing - our preview (updated Tuesday) is available here.
• Most early Weds focus has been on the eurozone, where the ECB are holding an unscheduled meeting to address market volatility (helping risk assets bounce, weakening the USD).
• Retail sales and Empire Manufacturing are the data highlights at 0830ET, with the FOMC decision out at 1400ET.

EGB/GILT SUMMARY: Unscheduled ECB Meeting Triggers Spread Compression

European government bonds have rallied sharply this morning on the back of the ECB announcing that an unscheduled meeting is taking place today to "discuss market conditions", although specific details are sparse.

• The rally has been led by the EGB periphery, with spreads narrowing on speculation that the ECB could be ready to announce a new anti-fragmentation tool. Again, for the time being, details are sparse with no indication of what is being discussed beyond current market conditions.
• The ECB's Pierre Wunsch has said that the next 150-200bp of hikes are 'no brainers' and that the ECB is 'very open' to stepping in if markets overreact.
• According to a Bloomberg report, people familiar with the meeting have indicated that PEPP reinvestments are the first response tool. Given that the intention to use PEPP reinvestments if needed has already been signalled, an announcement today along these lines could trigger a sell-off in EGBs. Markets are instead looking for details of a new instrument to tackle widening spreads.
• BTPs have outperformed the wider region with yields now down 26-40bp. The 10-year BTP-bund spread has narrowed to 219bp from yesterday's intraday high of 244bp.
• The bund curve has bull steepened with the 2s30s spread widening 6bp.
• OATs have rallied with the belly of the curve outperforming. Cash yields are 9-13bp lower.
• Gilts have followed EGBs higher with yields now down 7-14bp.
• Supply this morning came from Portugal (BTs, EUR500mn) and Finland (RFGB, EUR666mn).

CENTRAL BANK PREVIEWS:

FED (MNI): We put out an update to our Fed preview yesterday, following the WSJ/CNBC stories that led the market to price 90+% probability of a 75bp hike. The Fed is likely to deliver just that on Wednesday. The Statement will incorporate stronger hawkish language in order to justify the surprise acceleration in the hike pace. June's Dot Plot will become much more hawkish vs March's and vs what was expected prior to a 75bp hike becoming consensus. But the outlined rate path will probably fall short of current market pricing. Full MNI Fed Preview Update here. https://marketnews.com/mni-fed-preview-june-2022-update-justifying-75

BOE (MNI): A 25bp hike is fully priced forthis week's MPC meeting, with markets pricing in around a 1/3 probability that the Bank of England vote for a larger 50bp hike. We think that there is likely to be enough support for most (or "the majority") of members to continue with the previous forward guidance for this month at least. Full MNI BOE Preview here: https://marketnews.com/markets/central-bank-reports/central-bank-preview/bank-of-england-preview/mni-boe-preview-june-2022-25bp-but-what-next

SNB (MNI): FX language could be first sign negative rates will be reversed
The SNB are expected to lay the groundwork for the first change to the policy rate in seven years at this week’s meeting. But the bank will likely hold rates for a further three months so as not to add to market uncertainty by prematurely widening the ECB/SNB policy rate differential and inducing FX market volatility. Full MNI SNB Preview here: https://marketnews.com/-2657511324

EUROPE ISSUANCE UPDATE

Finland auction result
E666mln of the 0.50% Apr-43 RFGB. Avg yield 2.51% (bid-to-cover 1.38x). Low demand - bids didn't meet the "Up to E1bln" target, and only 2/3 of the target amount was sold, at pretty much the prevailing market price.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXN2 145/144ps vs 146/147cs, bought the ps for 46.5 in 5.25k (rolling down)
RXN2 140/139ps, bought for 12 in 2k
RXQ2 150.5/151cs, bought for 4.5 in 2k

OEN2 127.75/119.75ps, sold at 75 in 4k

ERZ2 97.75/97.25ps, bought for 8.25 and 8.5 in 20k
ERZ2 99.50c, sold at 0.75 in 25k
ERZ2 99.25/99.50/99.75c fly blocked at 1 in 5k
ERZ2 100.37c, bought for half in 10k

IKN2 114/111/107p fly, sold at 22 in 5k (closing)

SX5E 16th Sep 3100p, bought for 73.00 in 12k

FOREX: EUR Tilts Higher as ECB Convene to Address Market Volatility

• After a sanguine overnight session, the single currency ripped higher ahead of the NY crossover on reports of an unscheduled meeting of the ECB Governing Council, who have convened to discuss and address recent market volatility. The widening of peripheral European government bond yield spreads are said to the root of concern, prompting the ECB to stress that their PEPP reinvestment program will see proceeds invested into more peripheral debt than the capital key dictates. Markets await any formal statement from the bank, with the unscheduled meeting already underway.
• Reports of the meeting helped support the single currency, putting EUR/USD either side of 1.05 ahead of US hours, with a hawkish speech from ECB's Wunsch adding to the upside. The June 13th highs remain the next upside level, in range at 1.0523.
• The USD Index sits lower, led by the single currency, with attention turning to today's FOMC rate decision and press conference. The Fed are firmly seen raising rates by 75bps - the sharpest rate of increase for decades - as markets look to gauge the future rate path from the accompanying dot plot. The USD Index remains just below the cycle highs printed yesterday at 105.65. Scandi currencies are faring better, while the CAD extends the recent downtick.
• Outside of the FOMC decision, it's a busy US data session, with Empire Manufacturing, May retail sales and import/export price indices due to cross.

FX OPTIONS: Expiries for Jun15 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500-11(E817mln)
• USD/JPY: Y131.50($550mln), Y134.00($593mln)
• GBP/USD: $1.2180-90(Gbp827mln)
• EUR/GBP: Gbp0.8515-20(E551mln), Gbp0.8600-20(E523mln)
• AUD/USD: $0.7050(A$651mln)
• USD/CNY: Cny6.6500($1.3bln)

Price Signal Summary - S&P E-Minis Still Trade Closer To Recent lows

• In the equity space, S&P E-Minis remain vulnerable. 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 next, the 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 near-term. Scope is seen for a move towards key support and a bear trigger at 3466.00, May 10 low. Initial firm resistance is seen at 3719.60, the 50-day EMA.
• In FX, the short-term EURUSD outlook remains bearish despite today’s gains. A bearish theme follows the reversal lower from the top of its bear channel, 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 1.0612, the 20-day EMA. Recent weakness 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 an extension below 1.2000 with the focus on Tuesday’s 1.1934 low. USDJPY remains in an uptrend and near-term restracements are considered corrective. 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 traded lower again Tuesday. 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 Tuesday’s high of $123.68. Key short-term support is at $115.70, the 20-day EMA
• In the FI space, Bund futures continue to weaken. The focus is on 142.00. Gilts continue to head south and the focus is on 111.00.

EQUITIES LEVELS UPDATE: Grinding higher ahead of central bank announcements

• Japan's NIKKEI down 303.7 pts or -1.14% at 26326.16 and the TOPIX down 22.52 pts or -1.2% at 1855.93.
• China's SHANGHAI closed up 16.5 pts or +0.5% at 3305.406 and the HANG SENG ended 240.22 pts higher or +1.14% at 21308.21.
• German Dax up 133.65 pts or +1% at 13437.76, FTSE 100 up 77.22 pts or +1.07% at 7264.97, CAC 40 up 61.03 pts or +1.03% at 6010.46 and Euro Stoxx 50 up 31.34 pts or +0.9% at 3506.6.
• Dow Jones mini up 114 pts or +0.38% at 30489, S&P 500 mini up 17.75 pts or +0.48% at 3754.5, NASDAQ mini up 63.25 pts or +0.56% at 11377.5.

COMMODITIES LEVELS UPDATE: Crude bucking the trend of moves higher

• WTI Crude down $1.04 or -0.87% at $117.95
• Natural Gas (NYM) up $0.11 or +1.49% at $7.291
• Natural Gas (ICE Dutch TTF) up $1.76 or +1.81% at $99.545
• Gold spot up $14.31 or +0.79% at $1823.64
• Copper up $2.3 or +0.55% at $419.8
• Silver up $0.34 or +1.64% at $21.4106
• Platinum up $17.36 or +1.88% at $942.92