MNI US MARKETS ANALYSIS - EU Reach Agreement to Crimp Gas Demand

US TSYS SUMMARY: Treasuries See A Growing Bid As Growth Concerns Remain

• Cash Tsys have found a growing bid led by the belly to long end with the US coming in to see a softer growth backdrop. It started with Walmart’s disappointing earnings after close plus further EU gas limitations with both the members agreeing to reduce gas usage even if details are light plus potential for further curbs in Russian supply. The belly will get further attention with 5Y supply later after yesterday’s 2Y stopped through.
• 2YY -1.2bps at 2.998%, 5YY -3.9bps at 2.841%, 10YY -4.0bps at 2.756% and 30YY -2.9bps at 2.987%.
• TYU2 trades 15+ ticks higher at 120-04+ in a resumption of the bullish focus with support eyed at 120-11 (Jul 22 high) and the bull trigger of 120-16+ (Jul 6 high) just above it, although volumes are below average.
• Data: Solid second tier docket with house prices and new home sales, the Richmond Fed manufacturing index and Conf. Board consumer confidence (from 0900-1000ET)
• Bond issuance: US Tsy $46B 5Y Note auction (1300ET)
• Extensions: Month-end Tsy extensions seen at 0.08y (average) for the Bloomberg index or 0.066y for the Morgan Stanley 1y+ index, in line with the average July (0.064) but lower than the average month (0.085y).

STIR FUTURES: Holding Fire For Now Ahead Of FOMC

• Fed Funds implied hikes keep to 78bp for tomorrow’s decision.
• Meetings further out hold onto yesterday’s gentle gains with 138bp for Sep and 181bp for the four meetings to Dec, with little impact from Walmart’s disappointing earnings after close or other developments including EU gas reduction plans coming so close to tomorrow’s decision.
• The implied peak is still seen in Dec at 3.39% with 61bps of cuts to end-2023, where it’s broadly been since the Philly Fed and EA/US PMI misses last week, with further earnings plus housing data and activity/confidence indicators ahead.

EGB/GILT SUMMARY: Risk-Off Gains

European government bonds have rallied this morning, while the dollar has been on the front foot against G10 FX.

• EU member states have reached an agreement to reduce gas use by 15%. This comes amid indications that Russian supplies through the Nord Stream 1 pipeline are expected to fall to 20% of capacity from Wednesday.
• Bunds opened lower, but have made gains through the morning with yields now 6-9bp lower.
• OATs have performed in a similar fashion with yields down 5-10bp.
• BTPs have had a choppier session, while still trading higher on the day across much of the curve.
• The final two candidates to succeed UK PM Boris Johnson - Rishi Sunak and Liz Truss - took part in a televised debate yesterday. Both candidates and their campaign teams have stepped up attacks on each other in recent days as the contest becomes increasingly competitive with no clear winner in the debates.
• Gilts have firmed across much of the curve, although the very long end has traded weaker.
• Supply this morning came from Italy (BTP-ST/BTPei, EUR3.75bn), Austria (ATBs, EUR1.378bn)
• Focus turns to the FOMC decision tomorrow with another 75bp policy rate hike expected.

Kremlin: Sanctions Work Against Nord Stream, As EU Agrees 15% Gas Cut

Wires carrying comments from the Kremlin stating that sanctions against Russia complicate work of Nord Stream 1 gas pipeline.

• Maintenance on a Siemens-made turbine carried out in Canada was cited by Russia as a factor in the notable reduction in gas supplies through Nord Stream to Germany in recent months.
• Kremlin: We hope that Nord Stream 1 turbine will be installed 'sooner rather than later'.
• Comes as Czech Council of the EU presidency confirms that the EU has reached an agreement on reducing gas demand by 15% (link: https://www.consilium.europa.eu/en/press/press-rel...).
• Statement: "In an effort to increase EU security of energy supply, member states today reached a political agreement on a voluntary reduction of natural gas demand by 15% this winter. The Council regulation also foresees the possibility to trigger a ‘Union alert’ on security of supply, in which case the gas demand reduction would become mandatory."
• EU statement: "The purpose of the gas demand reduction is to make savings ahead of winter in order to prepare for possible disruptions of gas supplies from Russia that is continuously using energy supplies as a weapon. Member states agreed to reduce their gas demand by 15% compared to their average consumption in the past five years, between 1 August 2022 and 31 March 2023, with measures of their own choice."

FOREX: Dollar Stronger Within a Range

• Treasury yields have drifted lower across European hours Tuesday, while US equity futures have improved - albeit only slightly. The greenback is generally firmer putting both EUR/USD and GBP/USD at the session's worst levels at the NY crossover. Nonetheless, both pairs have respected the recent range, with the Monday lows still out of reach on both counts.
• Oil prices are extending the recovery off the Monday lows, with the imminent restrictions on Nord Stream 1 pipeline gas flows (due to limit capacity to 20% tomorrow) supporting energy prices across the board. This has lent support to the NOK, putting NOK/SEK at the best levels since Jul12 and through the 200-dma. Next resistance crosses at the 100-dma of 1.0492 and July's highs at 1.0539.
• JPY is on the front foot, putting EUR/JPY just below the 50-dma crossing at 139.78. 138.72 marks the first support for the cross, but the trend direction remains higher for now.
• Data picks up Tuesday, but are largely tier 2 releases, with S&P house price data, June new home sales, Richmond Fed manufacturing index and the July consumer confidence print. ECB's de Cos is scheduled to speak on inflation at 1800BST/1300ET.

FX OPTIONS: Expiries for Jul26 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0190-00(E623mln), $1.0260-65(E896mln)
• USD/JPY: Y139.00($970mln)
• EUR/JPY: Y141.00(E727mln), Y143.00(E734mln)
• USD/CAD: C$1.2750($701mln), C$1.2900($763mln)

Price Signal Summary - Flag Formation In EURUSD Reinforces Current Bull Cycle

• In the equity space, S&P E-Minis are unchanged and the contract is holding on to the bulk of its recent gains. Last week’s climb resulted in a move above the 50-day EMA. This reinforces short-term bullish conditions and a resumption of gains would open 4145.75 next, the Jun 9 high. The 20-day EMA, at 3898.26, is the first support to watch. EUROSTOXX 50 futures are consolidating. This pause in the current bull cycle appears to be a bull flag. If correct, it reinforces short-term bullish conditions and suggests scope for a stronger recovery towards 3689.00, Jun 10 high. Initial support is at 3467.00, Jul 18 / 19 low.
• In FX, the short-term outlook in EURUSD remains bullish following the recent recovery from the base of its bear channel, drawn from the Feb 10 high. The current consolidation appears to be a bull flag and this reinforces the current uptrend. The focus is on 1.0359 next, the Jun 15 low. GBPUSD is consolidating and holding onto its recent gains. A continuation higher would signal potential for a climb towards 1.2220, the 50-day EMA. Key support and the bear trigger is at 1.1760, the Jul 14 low. The recent move lower in USDJPY is still considered corrective and attention is on two key support levels; 135.10, the base of a bull channel drawn from the Mar 4 low, and 134.27, the Jun 23 low. A break of this support zone would signal scope for stronger reversal. The primary uptrend remains intact and 139.39 is the bull trigger, Jul 14 high.

• On the commodity front, Gold remains in a downtrend and the latest recovery is considered corrective. The bear trigger is $1681.0, the Jul 21 low. Key short-term resistance to watch is at $1745.4, the Jul 13 high. In the Oil space, WTI futures trend conditions remain bearish. The contract continues to trade below the 50-day EMA that intersects at $101.43. The average represents an important pivot point - if breached, the move higher would signal scope for a stronger rally. On the downside, first support to watch is $93.01, the Jul 25 low.
• In the FI space, a short-term bull cycle in Bund futures remains in play, and the contract has traded higher today to once again confirm a resumption of the upleg. The focus is on 155.87, the May 12 high. The trend condition in Gilts remains bullish. The focus is on 118.16, 1.382 projection of the Jun 16 - 24- 29 price swing.

EQUITIES: Energy Leads Europe Gains

• Asian markets closed mixed: Japan's NIKKEI closed down 44.04 pts or -0.16% at 27655.21 and the TOPIX ended 0.04 pts lower or 0% at 1943.17. China's SHANGHAI closed up 27.048 pts or +0.83% at 3277.436 and the HANG SENG ended 342.94 pts higher or +1.67% at 20905.88.
• European markets are stronger, with energy easily outperforming: German Dax down 40.26 pts or -0.3% at 13176.52, FTSE 100 up 55.31 pts or +0.76% at 7362.17, CAC 40 up 1.56 pts or +0.03% at 6238.57 and Euro Stoxx 50 down 5.89 pts or -0.16% at 3599.97.
• U.S. futures are a little softer, with the Dow Jones mini down 116 pts or -0.36% at 31851, S&P 500 mini down 10.25 pts or -0.26% at 3959.5, NASDAQ mini down 41.5 pts or -0.34% at 12312.75.

COMMODITIES: Copper Continues To Claw Back

• WTI Crude up $1.74 or +1.8% at $98.5
• Natural Gas up $0.19 or +2.22% at $8.921
• Gold spot up $2.53 or +0.15% at $1722.16
• Copper up $8.75 or +2.61% at $344.25
• Silver up $0.18 or +0.96% at $18.6125
• Platinum up $4.32 or +0.49% at $887.5