MNI US MARKETS ANALYSIS - EUR/USD Downtrend Channel in Force

US TSYS SUMMARY: Consolidating Yesterday’s Rally, 2s5s Inversion Builds

• Relatively little change for cash Tsys overnight and through the European morning, largely consolidating yesterday’s large rally on heightened growth fears as they await ISM services and the FOMC minutes as part of a heavy calendar.
• The 2s5s spreads dips slightly further into inversion having turned negative for the first time since Feb-2020 yesterday, now extending to -2bps. The magnitude of moves in recent days has seen historically elevated vols, with TY 1M 50D yesterday hitting new highs since Mar-2020 at 10.4 and only easing to 10 currently.
• 2YY +2.4bps at 2.843%, 5YY +0.6bps at 2.823%, 10YY +1.3bps at 2.818% and 30YY +1.8bps at 3.057%.
• TYU2 trades 2 ticks lower at 119-27 as it sticks near the top of yesterday’s range (120-07 high), clearance of which would open a key resistance at 120-19+ (May 26 high). Volumes are broadly in line with average.
• Fed: Remarks from NY Fed’s Williams (0900ET) before the FOMC minutes (1400ET).
• Data: Headlined by ISM services for June (1000ET) but also have the final S&P Global US PMI for Jun plus JOLTS for May and weekly MBA mortgage apps.
• Bill issuance: US Tsy $30B 119d bill CMB auctions (1130ET).

STIR FUTURES: Fed Hike Path Maintains Yesterday's Softening

• Implied Fed hikes nudge higher to 70bps for the Jul 27 meeting (+1bp), still well within the 66-72bp range seen for much of the post-Jun FOMC range.
• Meetings further out hold onto yesterday’s slide after few drivers overnight and in the European morning, with 120bps for Sep and 169bp for Dec (four meetings).
• Implied rates are then seen peaking marginally higher with 173bp of hikes to 3.31% for Feb’23 followed by 63bps of cuts to end-2023.
• A solid calendar today, headlined by ISM services and the release of the minutes from the most recent FOMC decision. It also sees opening and closing remarks from NY Fed’s Williams, who last spoke on Jun 28, noting the debate at the July decision will be between 50 and 75bps whilst definitely seeing the need to get rates to 3-3.5% this year.

Cumulative hikes implied by FOMC-dated Fed FundsSource: Bloomberg

EGB/GILT SUMMARY: UK Political Pressures Boil Over

Euro area sovereign curves have twist steepened this morning, gilts have sold off and equities enjoy a modest relief rally following yesterday's sell off.

• Long running political instability in the UK has boiled over following yesterday's resignations from Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid. While PM Johnson has sought to shore up his position by quickly promoting loyal supporter Nadhim Zahawi to replace Sunak, fresh resignations from the Children's and Treasury ministers has further elevated the risk of a change in leadership.
• The BoE's Huw Pill has indicated a willingness to tighten monetary policy faster if needed.
• Gilts have sold off with cash yields up 5-8bp and the curve bear flattening.
• The ECB's Pierre Wunsch has stated in the FT "If the fragmentation in bond markets is unwarranted then we should be as unlimited as possible".
• German factory orders for May came in better than expected (0.1% M/M vs -0.5% survey).
• The bund curve has twist steepened with the 2s30s spread widening 8bp.
• OATs have traced out a similar path to bunds with the long end of the curve 6bp steeper.
• BTPs traded in line with core EGBs with the curve 6bp steeper.
• Supply this morning came from Germany (Bund, EUR4.009bn allotted), Greece (GTBs, EUR625mn) and the EU (Bills, EUR1bn).

EUROPE ISSUANCE UPDATE: German Auction Technically Uncovered

Germany allots E4.009bln New 1.70% Aug-32 Bund, Avg yield 1.22% (Prev. 1.33%), Bid-to-cover 0.87x (Prev. 1.37x), Buba cover 1.09x (Prev. 1.68x)

Total sold E5bln E4blnPortugal Exchange Auction:
IGCP sells:

• E531mln of the 2.125% Oct-28 OT at 102.88
• E232mln of the 0.90% Oct-35 OT at 82.17

• E538mln of the 4.95% Oct-23 OT at 105.488
• E255mln of the 5.65% Feb-24 OT at 107.625

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXQ2 157/158 cs, sold at 6 in 4k
RXU2 148/146.5/145.5p fly, bought for 19 in 3k

SX7E (19th Aug) 74.00 put bought for 3.35 and 3.40 in 12k
SX7E (16th Dec) 80c, bought for 4.80 in 10k vs 3.2k futures at 75.70

FOREX: EUR/USD Downtick Extends, Working in Favour of Parity Calls

• The downtick in EUR/USD has extended Wednesday, with the pair touching new multi-decade lows and feeding directly into recent calls for parity in the pair. This put EUR/USD through first support at 1.0233, the 1.382 proj of Feb 10 - Mar 7 - 31 price swing and now exposes 1.0200 - not just psychological support but also the 1.00 projection of the Jun 9 - 15 - 27 price swing.
• Following yesterday's crushing rally in the USD Index, price action has moderated somewhat, but the greenback still holds the vast majority of the Tuesday gains.
• JPY is the outperformer of the day, with the risk-off hangover persisting despite the equity bounce in the US afternoon yesterday. This puts EUR/JPY well through the 50-dma at 139.00 and opens a the mid-June lows of 137.85 for direction.
• Pressure on energy prices has persisted for a second session, with WTI and Brent futures again under pressure ahead of the NY crossover. This works further against the NOK, which remains one of the poorest performers of the week.
• Focus turns to the ISM Services Index for June, with markets watching for any clues ahead of Friday's jobs report - particularly in the absence of the ADP Employment Change report, which has been discontinued this month while the methodology is being reassessed.

FX OPTIONS: Expiries for Jul06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.2030(E530mln)
• USD/JPY: Y135.00($615mln)
• NZD/USD: $0.6410(N$1.2bln)
• USD/CAD: C1.2610-25($2.0bln), C$1.3200-10($595mln)

Price Signal Summary: EURUSD Continues To Depreciate

• In the equity space, S&P E-Minis are unchanged but remain vulnerable following the recent 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 traded sharply lower Tuesday and cleared support at 3384.00, the Jun 16 low. The break strengthens bearish conditions and confirms a resumption of the broader downtrend. This has opened 3321.30, 50.0% of the major 2020 - 2021 upleg. On the upside, key short-term resistance has been defined at 3584.00, the Jun 27 high.
• In FX, the EURUSD yesterday 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. The focus is on 1.0200 next, the 1.00 projection of the Jun 9 - 15 - 27 price swing. GBPUSD remains vulnerable. The pair traded sharply lower Tuesday, touching the lowest levels in 20 years. The extension lower highlights a continuation of the downtrend and opens 1.1795, 0.764 projection of the Mar 23 - May 13 - 27 price swing. The USDJPY trend condition remains bullish. Last week’s gains confirmed a resumption of the primary uptrend. 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 traded sharply lower Tuesday and confirmed a breach of key short-term support and the bear trigger at $1787.00, May 16 low. The break confirms a resumption of the broader downtrend and opens $1753.7, the Dec 15 2021 low. In the Oil space, WTI futures faced strong selling pressure Tuesday and this resulted in a break of support at $101.53, the Jun 22 low. This signals potential for weakness towards $95.47, May 11 low.
• In the FI space, Bund futures remain in a bull cycle. The focus is on 152.28, 76.4% retracement of the May 12 - Jun 16 bear leg. Gilts cleared resistance last week 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: US Futures A Little Softer After Tuesday's Late Rally

• Asian markets closed weaker: Japan's NIKKEI closed down 315.82 pts or -1.2% at 26107.65 and the TOPIX ended 23.15 pts lower or -1.23% at 1855.97. China's SHANGHAI closed down 48.675 pts or -1.43% at 3355.35 and the HANG SENG ended 266.41 pts lower or -1.22% at 21586.66.
• European markets are recovering some of yesterday's losses, with tech stocks leading the way higher (and financials and energy lagging): German Dax up 110.68 pts or +0.89% at 12518.32, FTSE 100 up 94.05 pts or +1.34% at 7119.71, CAC 40 up 64.08 pts or +1.11% at 5860.31 and Euro Stoxx 50 up 30.67 pts or +0.91% at 3392.77.
• U.S. futures are pulling back a little after Tuesday's late bounce: Dow Jones mini down 112 pts or -0.36% at 30824, S&P 500 mini down 14.5 pts or -0.38% at 3819.75, NASDAQ mini down 44.25 pts or -0.37% at 11764.75.

COMMODITIES: Crude Enjoys Modest Bounce, But Copper Keeps Dropping

• WTI Crude up $0.89 or +0.89% at $100.39
• Natural Gas up $0.12 or +2.08% at $5.639
• Gold spot up $1.78 or +0.1% at $1766.66
• Copper down $2.3 or -0.67% at $339.2
• Silver up $0 or +0.01% at $19.2222
• Platinum down $3.48 or -0.4% at $865.24