MNI US MARKETS ANALYSIS - Risk On Falters as Lavrov Talks Targets

US TSYS SUMMARY: Treasuries Firm With Potential Russian Escalation and EU Gas Curbs

• After a steady overnight despite a further increase in China’s daily Covid-19 cases, Treasuries have followed European sovereigns higher this morning as European rate expectations have been trimmed and the EU proposes voluntary natural gas consumption curbs.
• The move is driven further by risk-off inducing comments from Russia’s Lavrov seemingly increasing the threat of escalation, with Russia’s geographical objectives to be advanced even further if the west delivers long-range weapons to Kyiv, and with its objectives already changed from just DPR and LNR to a number of other territories.
• 2YY -6.7bps at 3.171%, 5YY -5.7bps at 3.099%, 10YY -5.2bps at 2.969%, 30YY =3.6bps at 3.138%.
• TYU2 sits 12+ ticks higher at 118-11+ back towards the top end of yesterday’s range but still not troubling resistance at 119-06 (Jul 13 high). Volumes are broadly in line with average.
• Data: Housing focused with weekly MBA mortgage apps (1200ET) and existing home sales for June (1000ET)
• Bond issuance: US Tsy $14B 20Y Bond auction re-open (912810TH1) – 1300ET
• Bill issuance: US Tsy $30B 119D-bill CMB auction – 1130ET

STIR FUTURES: Fed Hikes Waiting On A Trigger

• Having only edged higher with yesterday’s risk-on, near-term implied Fed hikes have kept to those levels with the stabilisation in S&P e-minis overnight, at 81bps for next week and a cumulative 144bps for Sep (FOMC-dated Fed Funds).
• Further out there is a 4bp decline to 195bp over the four meetings to Dec but it’s simply back to where it was for most of yesterday.
• A peak of 3.57% in Feb’23 before 3.07% in Dec’23 keeps 50bps of cuts priced in 2023.

Source: Bloomberg

EGB/GILT SUMMARY: UK Inflation Continues Push Higher

European government bonds have rallied this morning alongside gains for equities and most G10 currencies against the dollar.

• UK inflation pushed higher again in June, reaching 9.4% Y/Y above the consensus estimate of 9.3% and the 9.1% reading of the previous month. Core inflation printed in line with expectations at 5.8% Y/Y.
• Gilts opened higher and have firmed through the morning with cash yields down 9-11bp on the day.
• The list of candidates to succeed PM Boris Johnson has now been whittled down to former Chancellor of the Exchequer Rishi Sunak, Foreign Secretary Lizz Truss and Minister of State for Trade Policy Penny Mordaunt. Another voting round today will see the list reduced further to the final two, who will then be voted on by party members.
• Bunds have edged higher with yields 6-7bp lower.
• The OAT curve has bull flattened with yields down 2-8bp and the 2s30s spread narrowing 5bp.
• The BTP curve has bull steepened with yields 8-12bp lower and the 2s30s spread widening 4bp.
• Supply this morning came from Germany (Green Bund, EUR1.282bn allotted).
• Next up on the calendar will be the ECB meeting tomorrow with a Reuters report yesterday citing sources who indicated that a larger than expected 50bp policy rate hike is being expected. As a reminder, our ECB Preview was published yesterday and is available online and by email.

EUROPE ISSUANCE UPDATE

Germany allots E1.282bln 0% Aug-30 Green Bund, Avg yield 1.05% (Prev. -0.20%), Bid-to-cover 1.06x (Prev. 1.16x), Buba cover 1.2x (Prev. 1.21x)

FOREX: EUR Holds Recovery as Draghi Looks to Fight On

• The single currency trades well in early European hours, with EUR/USD touching a new recovery high of 1.0273 through the London open as Draghi's speech in front of the Senate looks to confirm that he'll aim to continue his role as PM with a strengthened mandate from lawmakers. This has helped benefit Italian markets this morning, with the Italian-German 10y yield spread tighter as a result. The next upside level worth monitoring in EUR/USD is 1.0359, the Jun 15 low, with the 20-day EMA now broken.
• Growth- and commodity-tied currencies are extending their recent bout of strength, putting the likes of AUD and NZD at the top of the G10 pile. GBP/AUD is now through the uptrendline drawn off the early May lows, putting the cross on track to test next support of 1.7310.
• Equity markets support the risk positive backdrop, with US futures indicating the third positive open of the week today. The e-mini S&P is off the overnight highs, but is holding the bulk of the late Tuesday rally.
• At the other end of the table, the greenback remains weak, pulling lower for a fourth consecutive session and putting the USD Index on track to test its first level of major support at 106.24, the 38.2% retracement for the May - July upleg.

FX OPTIONS: Expiries for Jul20 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E1.1bln)
• USD/JPY: Y137.00($625mln), Y137.75($635mln), Y139.00($1.1bln)
• USD/CAD: C$1.2800-05($510mln), C$1.3285-00($1.0bln)
• USD/CNY: Cny6.6000($3.7bln), Cny6.7000($3.7bln), Cny6.8000(1.1bln)

EQUITIES: Energy, Financials, Industrials Lead Europe Gains

• Japan's NIKKEI closed up 718.58 pts or +2.67% at 27680.26 and the TOPIX ended 43.65 pts higher or +2.29% at 1946.44.
• China's SHANGHAI closed up 25.293 pts or +0.77% at 3304.724 and the HANG SENG ended 229.16 pts higher or +1.11% at 20890.22.
• The biggest contributors to early European gains have come from Energy, Financials, and Industrials, with the German Dax up 41.53 pts or +0.31% at 13317.24, FTSE 100 up 20.39 pts or +0.28% at 7320.4, CAC 40 up 5.29 pts or +0.09% at 6216.02 and Euro Stoxx 50 up 6.21 pts or +0.17% at 3584.12.
• U.S. futures are a little higher, with the Dow Jones mini up 43 pts or +0.14% at 31834, S&P 500 mini up 7 pts or +0.18% at 3944.5, NASDAQ mini up 34.5 pts or +0.28% at 12308.5.

COMMODITIES: Copper Continues To Claw Back From Recent Lows

• WTI Crude down $0.82 or -0.79% at $103.4
• Natural Gas down $0.03 or -0.37% at $7.253
• Gold spot down $2.9 or -0.17% at $1707.94
• Copper up $5.8 or +1.76% at $334.6
• Silver up $0.08 or +0.43% at $18.8318
• Platinum up $3.48 or +0.4% at $880.6