MNI ASIA MARKETS ANALYSIS - 10y Yields Falter on Approach to 3.50%

US TSYS SUMMARY: Initial Weakness Reverses, Stemming Yield Charge on 3.50%

• Treasury futures initially sold off through European hours, with prices reversing the entirety of the post-FOMC move. Prices dipped to touch 114-10 follow rate hikes from the Swiss, UK and Taiwanese central banks, which helped the 10y yield narrow in on the key upside psychological level at 3.50%.
• This price action soon reversed, however, as equity weakness persisted and as reports continued to disclose more detail on the ECB's anti-fragmentation tool proposals. The reports suggested the ECB will have tolerance bands for peripheral European bond yield spreads, and the central bank could intervene to prevent disjointed markets from hampered the monetary policy transmission mechanism.
• The curve traded very slightly steeper, with 2y yields the largest mover. This tipped the 2y yield back to the week's lows ahead of the close, marking a ~30bps turnaround from the pre-FOMC high.
• The trend needle in Treasuries points south after this week’s weakness. The break of key support at 116-21, May 9 low, confirmed an extension of the bear leg from May 26 and a resumption of the primary downtrend. The move lower opens 114-00 next.
• Bank of Japan is the main risk event overnight before Fed Chair Powell speaks on Friday, due to deliver welcoming remarks at the Inaugural Conference on the International Roles of the US Dollar, in Washington DC.

ECB: Lagarde Reportedly Outlines Triggers For New Anti-Fragmentation Tool

Bloomberg cite sources in reporting that ECB's Lagarde told ministers that the ECB plans to put a limit on bond spread, and that the tool would address irrational market moves.

The sources report goes into some more detail on possible triggers for the policy:

• "the European Central Bank’s new anti-crisis tool will kick in if the borrowing costs for weaker nation rise too far or too fast"
• "new mechanism that central bank officials are devising is intended to prevent irrational market movements from putting pressure on individual euro nations "
• "She said the instrument may be triggered if bond spreads widen beyond certain thresholds or if market movements exceed a certain speed. Lagarde did not specify whether those limits would be made public."

OPTION FLOW SUMMARY 

Thursday's Europe rates / bond options flow included:
* RXN2 144/143ps vs 145/146cs, bought the ps for 45 in 5.25k
* RXN2 146/149/151c fly sold at 40 in 3k
* ERU2 99.25/99.375/99.50/99.625c condor, trades 3 in 10k
* SFIQ2 97.80/98.15 cs vs. 97.40/97.20 ps, bought the cs for 5.75 in 6k
* SFIQ2 98.05/98.25 cs vs 97.50/97.40 ps, bought the cs for half in 3.5k

FOREX: CHF Surges Following SNB Hike, USD Index Slides Over 1.5%

• The significant march higher in US yields during early trade on Thursday was entirely reversed throughout the US session, weighing substantially on the greenback. The USD index has retreated the best part of 1.5%, extending on the prior day’s minor pullback after the June FOMC decision.
• The Swiss Franc surged on Thursday against all G10 ccys to be the best performer globally following the SNB rate decision. The Bank surprised markets by raising rates by 50bps to -0.25%, a move markets had seen the SNB waiting until September to execute.
• The late dollar weakness has exacerbated the price action in USDCHF, which looks set to post losses of close to 3% on the day. USDCHF had been on a one-way mission throughout June, grinding from around 0.9550 all the way to yesterday’s high print of 1.0050. The SNB move, considerable weakness in major equity indices sparking safe haven flows and the greenback turnaround has seen the pair reverse almost the entirety of the June upswing in two swift sessions. The May lows at 0.9545 are the short-term point of focus.
• Bank of England also prompted GBP volatility. With markets pricing in a small chance of a larger than consensus rate hike, the 25bp increase initially weighed on GBP. Following the new hardened guidance however, sterling weakness was short-lived and cable forcefully reversed course to rise around 3% from worst levels and probe the 1.2400 handle.
• The other notable performers amid the USD weakness were NZD (1.64%) and the single currency. EURUSD (+1.45%) remained bid all session long and remains pinned to the highs approaching the APAC crossover following ECB’s Lagarde reportedly outlining triggers (limit on bond spreads) for the central bank’s new anti-fragmentation tool. Initial resistance is being tested at 1.0596, the 20-day EMA, however, the key channel top, currently intersecting at 1.0698 remains in focus.
• Bank of Japan is the main risk event overnight before Fed Chair Powell speaks on Friday, due to deliver welcoming remarks at the Inaugural Conference on the International Roles of the US Dollar, in Washington DC.

FX OPTIONS: Expiries for Jun17 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0425(E561mln), $1.0490-00(E1.7bln), $1.0650(E764mln), $1.0700(E650mln)
• USD/JPY: Y133.00($681mln), Y133.85-00($564mln)
• GBP/USD: $1.2110(Gbp1.3bln)
• EUR/GBP: Gbp0.8630-50(E1.9bln)
• AUD/USD: $0.7000-05(A$638mln)
• USD/CAD: C$1.2885($585mln)
• USD/CNY: Cny6.7000($1.5bln), Cny6.75($2.7bln)

EQUITIES: Stocks Extend Losses Despite Reversal of Bond Rout

• All three major indices sank Thursday, with weakness particularly acute in the NASDAQ mini contract as losses mounted into the close.
• The S&P 500 traded at the lowest level since December 2020, with energy names leading losses and particular downside noted in recession-sensitive consumer discretionary names.
• Moving average studies - the 20- and 50-day EMAs - are in a bear mode condition and recent corrections have stalled at price levels around the 50-day EMA. The 50-day EMA is regarded as a key resistance when the market is trending down.
• A broader bearish price sequence of lower lows and lows also clearly highlights a bearish direction and a sell-off to fresh cycle lows in a number of indices this week, has confirmed an extension of this price pattern.

COMMODITIES: Gold Gains as USD Hits Reverse

• WTI Crude up $2.02 or +1.75% at $117.41
• Natural Gas down $0.08 or -1.05% at $7.371
• Gold spot up $17.72 or +0.97% at $1850.63
• Copper down $5.25 or -1.26% at $413.05
• Silver up $0.25 or +1.16% at $21.9205
• Platinum up $10.31 or +1.09% at $952.82