MNI US MARKETS ANALYSIS - Markets Flashing Recession Risk

US TSYS SUMMARY: Treasuries Rally As Growth Fears Remain In Focus

• Cash Tsys have seen a sizeable rally already today with the combination of China demand fears on rising Covid cases, both German and European ZEW financial analyst sentiment sliding and a further decline in the US NFIB small business survey in the only data of the day.
• The result has been the largest inversion in 2s10s inversion since 2007 at -8bps whilst the 3M to 10Y spread continues its slide, touching 74bp having been 120bp just at the start of July and 176bp at the start of June.
• 2YY -5.8bps at 3.014%, 5YY -6.8bps at 2.987%, 10YY -6.8bps at 2.924% and 30YY -5.0bps at 3.124%.
• TYU2 trades 16 ticks higher at 118-28 off an earlier high of 119-03 on solidly above average volumes. It stopped just show of resistance at 119-05 (Jul 7 high), clearance of which could open the bull trigger at 120-16+ (Jul 6 high).
• Fedspeak: Barkin (’24 voter) to discuss his speech on The Recession Question from Jun 21 with Q&A.
• Bond issuance: US Tsy $33B 10Y Note auction re-open (91282CEP2) – 1300ET
• Bill issuance: US Tsy $34B 52W bill auction – 1130ET

UST 2Y, and 10Y yields top panel, 2s10s and 3M to 10Y spreads bottom panel (showing last price and not ask price in text)Source: Bloomberg

STIR FUTURES: Resilient Near-Term Fed Hike Expectations

• Near-term hike expectations are proving reluctant to change ahead of tomorrow’s CPI, with 74.5bp priced for the July meeting and 130bp for Sep in FOMC-dated Fed Funds.
• Later meetings are more in keeping with front end Tsy yields reversing Friday’s post-payrolls gains, with 180bps for the four meetings to Dec (-6bps) and a peak just 4bps higher at the Feb’23 meeting with 184bps for a rate of 3.42%. It’s followed by 54bp of cuts to end-2023.
• Bostic (’24 voter) late yesterday repeated support for a 75bp hike whilst seeing a neutral rate around 3%. He sees signs that supply-chain bottlenecks are easing and the economy slowing is in an orderly way, expecting to avoid recession.
• Barkin (’24 voter) is set for a discussion on the Recession Question at 1230ET with no text but prepared remarks very similar to his Jun 21 speech, followed by Q&A.

Source: Bloomberg

EGB/GILT SUMMARY: Risk-Off Continues

European government bonds have rallied sharply this morning while equities push lower, marking a continuation of yesterday's broadly risk-off move.

• The combination of rising recessionary risks on the back of more aggressive monetary tightening and concerns over a fresh wave of Covid infections have underpinned the latest bout of risk aversion.
• Gilts rallied from the open with yields down 13-15bp on the day.
• Former Chancellor of the Exchequer Rishi Sunak has won backing from former cabinet ministers Dominic Raab and Grant Shapps in his bid to replace the outgoing UK prime minister.
• The bund curve has bull flattened. Cash yields are down 8-14bp while the 2s30s spread has narrowed 6bp.
• It is a similar story for OATs where the curve is 5bp flatter on the back of the long end outperforming.
• BTPs have firmed with yields 5-12bp lower on the day,.
• Supply this morning came from the UK (Gilt, GBP2.75bn) Germany (Schatz, EUR4.513bn allotted) Italy (BTOs, EUR7bn), Spain (Letras, EUR1.796bn) and Belgium (TCs, EUR3.005bn)

EUROPE ISSUANCE UPDATE

UK DMO Gilt auction result

• GBP2.75bln of the 1.00% Jan-32 Gilt. Avg yield 2.145% (bid-to-cover 2.45x, tail 0.2bp)

• E1.985bln of the 0.50% Jul-32 DSL. Avg yield 1.488%

• E5.5bln (E4.513bln allotted) of the 0.20% Jun-24 Schatz. Avg yield 0.34% (bid-to-cover 0.97x)

• E5bln of the new Dec-29 NGEU bond. Spread set at MS-11bp, books E27bln (inc E1.8bln JLM)
• E3bln of the 0.45% Jul-41 NGEU bond. Avg yield 0%. Spread set at MS+24bp, books E25bln (inc E1.4bln JLM)

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXQ2 151/153cs, sold at 100 in 4.5k
RXU2 151.00/150.50/140.00p ladder, bought for -0.5 in 3.4k

0RN2 98.50^, sold at 23 and 22 in 1.5k

UK:
SFIZ2 96.80/97.10/97.60/97.90c condor, bought for 9.5 in 3k

FOREX: EUR/USD Seeing Fierce Support at Parity... So Far

• Currency markets continue to keep a very close eye on EUR/USD as the pair trades at new multi-decade lows and within striking distance of the key psychological parity level - a price markets haven't traded below since 2002.
• Today's test of the level is notable for a number reasons - the USD is seeing broad-based strength as has been the case in a number of recent sessions, but the EUR is also weaker on Tuesday, with a soft ZEW Survey and continued concerns surrounding the outage of the Nord Stream pipeline knocking sentiment.
• Additionally, today 1.0000 does not only mark psychological support, but also the base of the bear channel drawn off the February high (see chart below) - a technical indicator that has successfully provided support on numerous occasions this year. Additionally, this week's price action has put EUR/USD solidly in oversold territory. On an RSI basis, EUR/USD is now the most technically oversold since Q1 2020 and the depths of the COVID crisis.
• GBP is the worst performer in G10 so far Tuesday, closely followed by the EUR. JPY is seen strongest, closely followed by the dollar.
• With no major data releases due Tuesday, focus turns to speeches from ECB's Villeroy, Fed's Barkin and BoE's Bailey.

FX OPTIONS: Expiries for Jul12 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0175-85(E521mln), $1.0260-70(E1.2bln)
• USD/JPY: Y135.55-60($1.0bln), Y137.60-65($1.2bln)
• NZD/USD: $0.6250(N$1.2bln)
• USD/CNY: Cny6.7000($1.3bln)

Price Signal Summary - USD Bulls Remain Firmly In The Driver’s Seat

• In the equity space, S&P E-Minis continue to trade above recent lows. Trend conditions remain bearish though and a deeper pullback would open 3735.00, the Jun 23 low. A break 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 suggest scope for a stronger recovery. EUROSTOXX 50 futures remain above last week’s 3343.00 low on Jul 5. Gains are considered corrective and the trend outlook is bearish. Last week’s breach of support at 3384.00, 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 3584.00, the Jun 27 high.
• In FX, EURUSD attention is on parity, the base of a channel drawn from the Feb 10 high and a key psychological level. A break would strengthen bearish conditions and open 0.9944, 1.618 projection of the Jun 9 - 15 - 27 price swing. Firm resistance is at 1.0378, the 20-day EMA. GBPUSD remains vulnerable and has resumed its downtrend today as the pair trades to a fresh trend low. The focus is on 1.1795, 0.764 projection of the Mar 23 - May 13 - 27 price swing. USDJPY started the week on a firm note, trading above 137.00 resistance on Monday and resuming the primary uptrend. The focus is on the 138.00 handle next.
• On the commodity front, Gold remains vulnerable following last week’s move lower that resulted in a breach of the bear trigger at $1787.00, May 16 low. The break confirmed a resumption of the broader downtrend and has opened $1706.3 next, 1.618 projection of the Mar 8 - 29 - Apr 18 price swing. Today’s fresh trend low also reinforces current conditions. In the Oil space, WTI futures remain vulnerable following last week’s move lower and break of support at $101.53, the Jun 22 low. Potential is for weakness towards $93.45 next. Recent short-term gains are considered corrective.
• In the FI space, a short-term bull cycle in Bund futures remains in play and today’s climb has confirmed a resumption of the current short-term uptrend. The focus is on 154.65 next, the May 27 high. Gilts trend conditions remain bullish and scope is seen for a climb towards 117.48, 1.236 projection of the Jun 16 - 24 - 29 price swing.

EQUITIES: Defensives Shine Again Amid Broad Losses

• Asian markets closed lower: Japan's NIKKEI closed down 475.64 pts or -1.77% at 26336.66 and the TOPIX ended 31.36 pts lower or -1.64% at 1883.3. China's SHANGHAI closed down 32.117 pts or -0.97% at 3281.467 and the HANG SENG ended 279.46 pts lower or -1.32% at 20844.74.
• European equities are softer, with defensives (eg Utilities, Consumer Staples) alone in the green the German Dax down 87.42 pts or -0.68% at 12790.44, FTSE 100 down 7.67 pts or -0.11% at 7177.74, CAC 40 down 10.72 pts or -0.18% at 5974.07 and Euro Stoxx 50 down 20.28 pts or -0.58% at 3458.99.
• U.S. futures are lower, with the Dow Jones mini down 165 pts or -0.53% at 30974, S&P 500 mini down 20.75 pts or -0.54% at 3835.75, NASDAQ mini down 57.75 pts or -0.49% at 11824.75.

COMMODITIES: Dollar Continues To Weigh

• WTI Crude down $2.36 or -2.27% at $103.89
• Natural Gas up $0.06 or +0.96% at $6.489
• Gold spot up $1.35 or +0.08% at $1735.94
• Copper down $6.45 or -1.88% at $341.95
• Silver down $0.19 or -1.01% at $19.182
• Platinum down $16.91 or -1.94% at $872.33