MNI US MARKETS ANALYSIS - Broad USD Bid Extends as Backdrop Looks Risk-Off

US TSYS SUMMARY: Treasuries Flatten With Growth Fears

• Cash Tsys have fluctuated through Asian and European sessions, with the long end rallying intraday on growth fears, but ultimately sit with a solid bear flattening from Friday’s close after the US holiday.
• It leaves the curve extremely flat through 2-10Y tenors as growth concerns continue to weigh, but with only factory orders today, the next significant steer could wait until tomorrow’s ISM services after Friday’s miss in the manufacturing report sparked a further substantial rally before ultimately reversing.
• 2YY +7.1bps at 2.904%, 5YY +2.5bps at 2.902%, 10YY +2.4bps at 2.904% and 30YY +2.3bps at 3.126%
• TYU2 has unwound the bulk of yesterday’s gradual dip in very thin markets to leave it just half a tick lower from Friday’s close at 119-07+. It still trades close to recent highs with the bull cycle still in play: resistance is eyed at 120-04 (Jul 1 high) and support at 118-06 (Jul 1 low).
• Data: Limited to factory orders/final durable goods at 1000ET before a heavy schedule tomorrow including ISM services, JOLTS and the FOMC minutes.
• Bill issuance: US Tsy $45B 13W and $42B 26W bill auctions (1130ET)

STIR FUTURES: Fed Hikes Cool Intraday But Firmer Since Friday

• Hikes implied by FOMC-dated Fed Funds cooled through the European morning as S&P e-minis have fully unwound a move higher after open, with a modest upward revision in the Eurozone service PMI having little impact.
• Having ground higher with the US out yesterday, hike expectations have firmed since late Fri, with 71bp for Jul 27 (+2bps), 124bp for Sep (+2.5bps) and 176bp for Dec (+3bps).
• Similar trend with the peak of 3.38% (180bp of hikes) at the early Feb meeting, nudging up from late Fri but still at the low end of the recent range.

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

EGB/GILT SUMMARY: Recession Fears Mounting

European government bonds have traded firmer this morning alongside broad losses for equities and G10 FX vs the dollar. Mounting concerns about recession risks and a fresh surge in Covid infections in China has underpinned the risk-off move.

• BoE Governor Andrew Bailey warned that the global economic outlook has "deteriorated materially" and specifically cited the impact of the Russia-Ukraine war.
• UK government bonds have rallied with cash yields 3-5bp lower on the day.
• Bunds have similarly pushed higher with yields down 4-7bp and the curve bull steepening.
• It is a similar story for OATs where the 2s30s spread is 3bp wider.
• The BTP curve has twist steepened with the 2s30s spread trading up 2bp.
• Supply this morning came from the UK (Gilts, GBP2.0bn), Germany (ILB, EUR416mn allotted), Spain (Letras, EUR5.334bn), Belgium (TCs, EUR2.055bn), Austria (RAGB, EUR747.5mn) and the ESM (Bills, EUR1.064bn).
• Focus shifts to US durable goods and factory orders for May, published later today.

EUROPE ISSUANCE UPDATE:

Gilt auction results
GBP2bln of the 1.25% Jul-51 Gilt. Avg yield 2.531% (bid-to-cover 2.24x, tail 0.4bp).

Austria auction results
E748mln (E650mln allotted) of the 0% Oct-28 RAGB. Avg yield 1.428% (bid-to-cover 1.43x)
E748mln (E650mln allotted) of the 0.90% Feb-32 RAGB. Avg yield 1.805% (bid-to-cover 1.58x)

German auction results
E500mln (E416mln allotted) of the 0.10% Apr-33 ILB. Avg yield -0.90% (bid-to-cover 2.22x).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXQ2 151/152/154c ladder, bought for -9 (receive) in 3.8k

ERZ2 99.125/99.25/99.875c ladder, bought for 1 in 6k
ERZ2 99.125/99.25/99.75c ladder, bought for -0.5 (receive) in 4k
ERZ2 99.25/99.50 cs vs ERZ2 98.50/98.25/98.00 p fly, bought the cs for 7.5 in 4k

FOREX: EUR/USD Plummets to New Multi-Decade Low

• The EUR/USD primary downtrend resumes Tuesday, with the pair taking out the earlier YTD lows at 1.0350 to put prices at levels not seen since 2002. The acceleration lower in the pair coincides with the return of US markets after the July 4th holidays, with lower-than-expected French services and composite PMI data adding extra weight.
• This underpins a broader risk-off theme, evident in lower equity markets and lower Treasury yields headed into the NY crossover. The US 10y yield has reversed early upside to sit within range of the July lows printed on Friday at 2.7873%. A break below that level would mark the lowest 10y yield since late May and a ~75bps turnaround off the mid-June highs.
• The Reserve Bank of Australia raised rates by 50bps overnight to 1.35% - alongside expectations. The decision prompted little immediate market response, with the RBA signaling further tightening steps to come. Through the European open, however, broad greenback strength has worked against AUD/USD, putting the pair briefly below 0.68 and within view of the 2022 lows at 0.6764.
• Focus going forward turns to factory orders and the final durable goods data for May, while BoE's Tenreyro is also due to speak following the publication of the BoE's Financial Stability Report.

FX OPTIONS: Expiries for Jul05 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450-70(E981mln), $1.0500-05(E596mln), $1.0600(E508mln)
• USD/JPY: Y137.00($1.7bln), Y139.00($2.2bln)
• EUR/GBP: Gbp0.8670-85(E1.5bln), Gbp0.8850(E1.1bln)
• EUR/JPY: Y144.00(E1.6bln), Y146.00(E1.6bln)
• USD/CAD: C$1.2900($675mln)

Price Signal Summary - EURUSD Cracks Support

• In the equity space, S&P E-Minis remain vulnerable following last week’s move lower and reversal from 3950.00, the Jun 28 high. A resumption of weakness would open 3735.00, the Jun 23 low. A breach of this level would expose key support at 3639.00, the Jun 17 low and bear trigger. Clearance of 3950.00 is required to strengthen a bullish case. EUROSTOXX 50 futures are trading lower and approaching the 3400.00 handle. Conditions remain bearish following last week’s reversal from 3584.00, the Jun 27 high. This has exposed the key support and bear trigger at 3384.00, Jun 16 low. A break would resume the primary downtrend. On the upside, clearance of 3584.00 is required to reverse the short-term outlook.
• In FX, the EURUSD has breached support at 1.0359, Jun 15 low, and 1.0350, the May 13 low. The break confirms a resumption of the primary downtrend and an extension lower within the bear channel drawn from the Feb 10 high. This has opened 1.0233, the 1.382 projection of Feb 10 - Mar 7 - 31 price swing. GBPUSD remains vulnerable. The focus is on the bear trigger at 1.1934, Jun 14 low. Resistance to watch remains 1.2406, the Jun 16 high. Initial resistance is at 1.2256, the 20-day EMA. The USDJPY path of least resistance remains up. Last week’s gains delivered a fresh cycle high and confirmed a resumption of the primary uptrend. Short-term retracements are considered corrective and initial support is at 134.27, the Jun 23 low. A resumption of gains would open 137.30 next, 1.50 projection of the Feb 24 - Mar 28 - 31 price swing.



• On the commodity front, Gold remains vulnerable. The yellow metal weakened last week and this reinforces bearish conditions. Attention is on the key support and bear trigger at $1787.00, May 16 low. This level was breached, briefly, on Friday. A clear break would confirm a resumption of the downtrend and open $1780.4 Jan 28 low. Key trendline resistance intersects at $1859.2. The trendline is drawn from the Mar 8 high. In the Oil space, WTI futures found resistance last week at $114.05, the Jun 29 high. A break of this hurdle is required to confirm a resumption of the recent recovery and open $116.58, the Jun 17 high. For bears, an extension lower would open key support at $101.53, the Jun 22 low. The first key support to watch is $104.56, the Jul 1 low.
• In the FI space, Bund futures resumed their short-term uptrend last week and a bull cycle remains intact. The focus is on 152.28, 76.4% retracement of the May 12 - Jun 16 bear leg. Gilts cleared resistance on Friday at 114.55, Jun 24 high The break highlights potential for a stronger short-term recovery and this has opened 117.48, 1.236 projection of the Jun 16 - 24 - 29 price swing.

EQUITIES: Financials, Industrials And Materials Dragging Down Europe Stocks

• Asian markets closed mostly higher: Japan's NIKKEI closed up 269.66 pts or +1.03% at 26423.47 and the TOPIX ended 9.41 pts higher or +0.5% at 1879.12. China's SHANGHAI closed down 1.402 pts or -0.04% at 3404.025 and the HANG SENG ended 22.72 pts higher or +0.1% at 21853.07.
• European stocks are lower, with cyclicals faring poorly (defensives such as Utilities are outperforming): the German Dax down 122.32 pts or -0.96% at 12773.38, FTSE 100 down 71.43 pts or -0.99% at 7232.65, CAC 40 down 54.92 pts or -0.92% at 5954.65 and Euro Stoxx 50 down 29.89 pts or -0.87% at 3452.42.
• U.S. futures are falling ahead of the return from the long holiday weekend, with the Dow Jones mini down 161 pts or -0.52% at 30900, S&P 500 mini down 22 pts or -0.57% at 3805, NASDAQ mini down 85.25 pts or -0.73% at 11526.

COMMODITIES: Copper Drop Continues

• WTI Crude up $1.57 or +1.45% at $110
• Natural Gas down $0.03 or -0.52% at $5.7
• Gold spot down $7.34 or -0.41% at $1805.67
• Copper down $9.3 or -2.58% at $351.15
• Silver down $0.08 or -0.41% at $19.9053
• Platinum down $16.44 or -1.85% at $874.22