MNI US MARKETS ANALYSIS - UK Assets Look Through Political Tumult

US TSYS SUMMARY: Treasuries Cheapen Some More, Fedspeak To Headline

• Cash Tsys currently trade with a modest bear flattening on the day as Treasuries continue to cheapen, helped by China considering unprecedented acceleration of infra funding which has supported risk. It follows yesterday’s pullback in US recession fears following the ISM services beat and the FOMC minutes noting officials saw a possibility of an “even more restrictive” stance, although both 2s5s and 2s10s remain inverted.
• Lagging a large sell-off in European sovereigns, 2YY +1.2bps at 3.014%, 5YY +2.0bps at 3.000%, 10YY +2.0bps at 2.948% and 30YY +2.3bps at 3.141%.
• TYU2 trades 11+ ticks lower at 118-22, the low end of the week’s range amidst broadly average volumes in a corrective pullback. Support is formed at the earlier intraday low of 118-15 and then the 20-day EMA of 117-27+, whilst resistance is eyed at yesterday’s high of 120-16+.
• Fedspeak: Governor Waller and ’22 voter Bullard to both speak at 1300ET at separate events – see STIR comment.
• Data: A quieter docket today with weekly jobless claims, the trade balance and challenger job cuts.
• Bill issuance: US Tsy $35B 4W, $30B 8W bill auctions (1130ET).

US Tsy curve inversion and periods of recessionSource: Bloomberg

STIR FUTURES: Fed Hike Expectations Drift Higher

• Hikes implied by FOMC-dated Fed Funds continued to drift higher through Asian and European sessions, continuing a move after the FOMC minutes noted possibility of an "even more restrictive" stance could be appropriate, with risk later supported by China considering unprecedented acceleration on infra funding.
• Sitting at 72bps for July, 126bp for Sep and 180bp for Dec. The latter is up from yesterday’s low of 160bp prior to the ISM service beat, but only back to levels from earlier in the week and still towards the low end of the post-June FOMC range.
• Gov Waller and Bullard (’22 voter) both speak at 1300ET at separate events. Latest commentary saw Waller view recession fears a “bit over blown” whilst backing 75bps in July (Jun 18) whilst Bullard saw TIPS pricing a 3.5% Fed Funds rate as a good sign and the US in the early stages of the expansion (Jun 24).

Source: Bloomberg

EGB/GILT SUMMARY: UK PM Resigns, Political Instability Will Linger

European government bonds have sold off sharply alongside broad gains for equities and G10 FX vs the dollar.

• Following a slew of ministerial resignations yesterday and with some of the prime minister's closes allies urging him to stand down, Boris Johnson has today indicated that he will resign. Cable traded up on the announcement, although gains have been modest.
• While the PMs resignation has eliminated the uncertainty around his premiership, this marks the beginning of a period of prolonged political instability as Conservative party members jostle for the leadership.
• Gilts have traded lower and the curve has bear flattened. Cash yields are up 3-8bp on the day, while the 2s30s spread has narrowed 5bp.
• Bunds have underperformed gilts with yields up 5-11bp and with the short end of the curve leading the way.
• OAT yields have pushed up 4-11bp.
• BTPs have underperformed core EGBs with yields up 11-15bp.
• Supply this morning came from France (OATs/Green OAT, EUR11.998bn) and Spain (Obli/Obli-Ei, EUR5.201bn).

EUROPE ISSUANCE UPDATE

Spain auction results:

• E1.174bln of the 5.9% Jul-26 Obli. Avg yield 1.299% (bid-to-cover 2.66x)
• E2.263bln of the 2.55% Oct-32 Obli. Avg yield 2.454% (bid-to-cover 1.45x)
• E1.294bln of the 1.90% Oct-52 Obli. Avg yield 3.192% (bid-to-cover 1.44x)
• E470mln of the 1.00% Nov-30 Obli-Ei. Avg yield 0.002% (bid-to-cover 2.38x).

• E5.622bln of the 2.00% Nov-32 OAT. Avg yield 1.92% (bid-to-cover 1.93x)
• E2.229bln of the 0.50% Jun-44 Green OAT. Avg yield 2.38% (bid-to-cover 1.88x)
• E1.455bln of the 2.00% May-48 OAT. Avg yield 2.44% (bid-to-cover 2.01x)
• E2.692bln of the 0.75% May-53 OAT. Avg yield 2.52% (bid-to-cover 1.58x).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXQ2 155.5/157.0cs, bought for 14.5 in 2k

ERU2 99.875/100.00cs, bought for half in 14k
ERZ2 99.125/98.875/98.625p fly, bought for 3 in 4.5k
ERZ2 99.125/99.00/98.875p fly, bought for 1 in 4k

FOREX: GBP Looks Through Political Tumult

• Following several days of strength amid a risk-off backdrop, the JPY is the poorest performer so far Thursday, undoing yesterday's drop below Y135.00 in USD/JPY. The pair remains below the week's best levels of Y136.36 but a break above here would open again the cycle highs of Y137.00.
• The more favourable equity price action so far Thursday puts commodity-tied currencies on the front foot, resulting in AUD and NZD rising against most others. AUD/USD, however, remains close to the recent cycle low of $0.6762 and the downtrend drawn off the early June highs keeps the outlook bearish for now.
• Political tumult continues in the UK, with the PM Johnson set to resign at some point Thursday. The PM is expected to express his intent to carry on as caretaker PM until a new leader is elected before the Conservative party conference in October. GBP is taking the news in its stride, showcasing how well priced the currency was for political uncertainty. GBP trades better against both the USD and EUR ahead of the NY crossover, with attention turning to the leadership race likely across the Summer months.
• Weekly jobless claims and US trade balance data cross later today as well as the Ivey PMI from Canada. The central bank speakers slate could prove more interesting, with ECB's Lane, Knot, Stournaras and Centeno due as well as BoE's Pill & Mann and Fed's Waller & Bullard.

FX OPTIONS: Expiries for Jul07 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E1bln), $1.0215-25(E1.2bln), $1.0275(E830mln), $1.0290-00(E1.1bln), $1.0325(E578mln), $1.0345-55(E1.1bln)
• USD/JPY: Y135.00($957mln), Y136.00-20($1.2bln), Y137.00($760mln)
• GBP/USD: $1.2000(Gbp850mln)
• NZD/USD: $0.6270-80(N$680mln)
• USD/CAD: C$1.3000($651mln)
• USD/CNY: Cny6.7000($985mln)

Price Signal Summary - S&P E-Minis Still Trading Below Key Short-Term Resistance

• In the equity space, S&P E-Minis are trading slightly higher and remain above recent lows. Trend conditions are bearish though and a resumption of weakness would refocus attention on 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, Jun 28 high is required to strengthen a bullish case. EUROSTOXX 50 futures have recovered from Tuesday’s low. Gains are likely corrective and the trend outlook remains bearish. This week’s breach of support at 3384.00, the Jun 16 low, reinforces bearish conditions and confirms a resumption of the broader downtrend. The focus is on 3321.30, 50.0% of the major 2020 - 2021 upleg. Key short-term resistance is at 3584.00, the Jun 27 high.
• In FX, EURUSD on Tuesday, 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 1.0102 next, 1.236 projection of the Jun 9 - 15 - 27 price swing. GBPUSD remains vulnerable and short-term gains are considered corrective. This week’s extension lower highlights a continuation of the downtrend and opens 1.1795, 0.764 projection of the Mar 23 - May 13 - 27 price swing. USDJPY continues to consolidate. The trend condition remains bullish and price is trading above support 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 following this week’s move lower that resulted in a breach of the bear trigger at $1787.00, May 16 low. The break confirms a resumption of the broader downtrend and opens $1706.3 next, 1.618 projection of the Mar 8 - 29 - Apr 18 price swing. In the Oil space, WTI futures faced strong selling pressure Tuesday and traded lower again yesterday. This week’s sell-off has resulted in a break of support at $101.53, the Jun 22 low and potential is for weakness towards $93.45 next. Short-term gains are considered corrective.
• In the FI space, Bund futures remain in a bull cycle. The focus is on153.36, May 31 high. 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. The latest pullback is considered corrective.

EQUITIES: Energy Stocks Soar In Europe

• Asian markets closed higher: Japan's NIKKEI closed up 382.88 pts or +1.47% at 26490.53 and the TOPIX ended 26.36 pts higher or +1.42% at 1882.33. China's SHANGHAI closed up 9.048 pts or +0.27% at 3364.398 and the HANG SENG ended 56.92 pts higher or +0.26% at 21643.58.
• European equities are on the front foot, with energy names leading the way higher (up 3.2% in aggregate; defensives such as consumer staples are lagging): German Dax up 211.35 pts or +1.68% at 12518.32, FTSE 100 up 46.87 pts or +0.66% at 7119.71, CAC 40 up 74.12 pts or +1.25% at 5860.31 and Euro Stoxx 50 up 54.67 pts or +1.6% at 3392.77.
• U.S. futures are a little higher, with the Dow Jones mini up 85 pts or +0.27% at 31098, S&P 500 mini up 10.75 pts or +0.28% at 3859, NASDAQ mini up 52.5 pts or +0.44% at 11932.75.

COMMODITIES: Metals See Some Relief As USD Eases Off

• WTI Crude down $0.36 or -0.37% at $98.34
• Natural Gas up $0.03 or +0.62% at $5.56
• Gold spot up $4.59 or +0.26% at $1766.66
• Copper up $2.35 or +0.69% at $343
• Silver up $0.17 or +0.87% at $19.3806
• Platinum up $9.06 or +1.05% at $869.14