MNI US MARKETS ANALYSIS - Pelosi Trip Sends Ripples Through Markets

US TSYS SUMMARY: Risk Off Helps Push 3M-10Y Spread Briefly Into Inversion

• Cash Tsys are largely holding onto an overnight bid amidst broad risk-off sentiment with close attention on whether a US plane indeed heading to Taiwan and whether or not House Speaker Pelosi is on board.
• The moves see front-end yields trade closer to lows after weak Q2 GDP last week whilst the long-end continues to trade below following yesterday’s sizeable rally, in turn cranking 2s10s lower still to -30bps (-1bp on the day) and the 3M to 10Y spread at 4.5bp but off overnight lows of -0.6bps having briefly turned inverted for the first time since Mar’20.
• 2YY -1.6bps at 2.854%, 5YY -2.2bps at 2.612%, 10YY -2.5bps at 2.548%, 30YY -3.9bps at 2.876%.
• TYU2 trades 13 ticks higher at 121-25, through yesterday’s range but off a session high of 122-02 having touched the highest since Apr 5.
• Data: JOLTS for June at 1000ET
• Fedspeak: Daly (’24 voter) on CNBC at 0945ET, Evans (’23 but retiring early in the year) at 1000ET, Mester (’22) at 1300ET and Bullard (’22) at 1845ET
• No issuance.

US Tsy yields - showing last price vs ask price in textSource: Bloomberg

STIR FUTURES: Fed Hikes Cool With Plenty Of Speak Ahead

• Fed Funds implied hikes have cooled some more overnight, with the 55bp of hikes implied for Sept (-1.5bps overnight) the lowest in the limited post Jul-FOMC range to date.
• Beyond that, looking at 93bps for Dec (-1bp) to drive a peak at 3.26% in both Dec and Feb’23 before just shy of 60bps of cuts through 2023.
• Solid line up of Fedspeak today, starting with Daly (’24 voter) on CNBC at 0945ET before Evans (’23 but retiring early in the year) at 1000ET, Mester (’22) at 1300ET and then much later Bullard (’22) at 1845ET.

Fed Funds implied rates for Sep and Dec'22 meetings plus cuts through 2023 (green)Source: Bloomberg

EGB/GILT SUMMARY: Risk-Off Shift

European government bonds have rallied this morning while equities and commodities have broadly traded lower.

• Gilts opened higher and have continued grinding out gains through the morning, particularly at the longer end. Cash yields are 9-12bp lower on the day with the curve bull flattening.
• Bund yields are now down 6-10bp on the day.
• The OAT curve has bull flattened with the 2s30s spread narrowing 6bp.
• BTPs have underperformed core EGBs with yields down 2-4bp.
• Global geopolitical tension has increased on the back of the planned visit by US House Speaker Nancy Pelosi to Taipei. News reports indicate that Chinese fighter jets flew near to the median line which divides the Taiwan Strait
• The European data slate was light this morning. Data published by Nationwide show UK house prices increasing 11.0% Y/Y in July, below consensus estimates (11.4%) but still marking an acceleration from the previous month.
• Supply this morning came from the UK (Gilt, GBP2.75bn), Belgium (TCs, EUR805mn) and the ESM (Bills, EUR1.099bn).

China FM-Some US Politicians Play w/Fire On Taiwan, Won't End Well

Comments from Chinese Foreign Minister Wang Yi hitting wires:

• Wang: "One-China principle is the universal consensus of the international community, the political foundation for China's exchanges with other countries, the core of China's core interests, and an insurmountable red line and bottom line."
• Wang: "Some people in the United States have been challenging China's sovereignty over the Taiwan issue, hollowing out the one-China policy, and even deliberately causing trouble in the Taiwan Strait. The Chinese people will never accept this, and the international community scoffs at such unprovoked provocations."
• "During the [ASEAN] visit, leaders of all countries clearly stated in their meetings and talks that they firmly adhere to the one-China policy, and they all believe that Taiwan is an inalienable part of China's territory and oppose external forces interfering in China's internal affairs on the Taiwan issue. This once again shows that the one-China principle is the popular aspiration of the international community and the general trend."
• Statement: "Wang stressed that the perfidy of the US side on the Taiwan issue is deplorable and can only further bankrupt the US's national credibility. Some politicians in the United States only care about their own interests, openly play with fire on the Taiwan issue, and become enemies of the 1.4 billion Chinese people, which will never end well. The exposure of the US bullying face to the world can only make it clearer to the people of all countries that the US is the biggest destroyer of today's peace."
• Foreign ministry statement:https://www.mfa.gov.cn/web/wjdt_674879/gjldrhd_674...

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU2 155/152ps bought for 38 in 10k vs 158.93 12 del

DUU2 109.60/109.30 ps vs DUU2 110.30/110.60 cs, bought the cs for 8 and 8.25 in 16k (unwind, buying back the cs)

EURUSD (expiry Friday) 1.0200 put , bought for 0.0024 in 1,052
EURUSD (9th Sep) 1.0100p bought for 0.0070 in 4,400

EUROPE ISSUANCE UPDATE

UK DMO sells GBP2.75bln of the 1.00% Jan-32 Gilt. Avg yield 1.782% (bid-to-cover 2.38x, tail 0.4bp)

FOREX: Pelosi Plane Trip Drives Bond Yields Lower

• The JPY trades on the front-foot, extending the recent rally to put USD/JPY at new pullback lows. The pair is narrowing in on the next key support at the 100-dma of 130.24, a level last crossed in September 2021. The JPY continues to rally alongside rate differentials, with the US 10y yield slipping further to near 2.50% - a level last crossed in early April.
• The driver behind the move continues to be a rippling of tensions between the US and China as the House Speaker Pelosi heads toward Taiwan for a rumoured formal visit. Chinese authorities have warned of considerable pushback should the visit take place, even including military options.
• Equity markets are suitably lower to match the risk-off theme in currency and bond markets, with the e-mini S&P back below 4,100 and the 100-dma.
• AUD is the poorest performer so far Tuesday, despite the RBA's rate hike overnight, with the bank pointing toward a slower pace of rate hikes going forward. The hike to 1.85% puts rates at their highest levels since 2016, but the data dependent nature of policy going forward could see the pace of rate rises slow sharply going forward. As such, AUD/USD is targeting Friday's lows of 0.6911, a break below which opens Jul 21's 0.6859 for direction.
• Data are few and far between Tuesday, with just the US JOLTS data on the docket. The speaker slate could take more interest, with comments from Fed's Bullard, Mester and Evans all due.

FX OPTIONS: Expiries for Aug02 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9900(E1.0bln), $1.0000(E1.4bln), $1.0240-45(E556mln)
• EUR/GBP: Gbp0.8647-65(E1.2bln)
• EUR/JPY: Y135.85-00(E664mln)
• AUD/USD: $0.7160(A$641mln)
• USD/CAD: C$1.2890-00($647mln)

Price Signal Summary - Gold Focus Turns to 50-day EMA

• Despite today’s pullback, S&P E-Minis continue to trade closer to recent highs. The contract traded higher again Monday, reinforcing bullish conditions and this maintains the current bullish price sequence of higher highs and higher lows. Potential is for a climb towards 4204.75 next, the May 31 high and the next key resistance. EUROSTOXX 50 futures trend conditions remain bullish following last week’s gains. The contract has pierced the 76.4% retracement of the Jun 6 - Jul 5 downleg, at 3722.40. A clear breach of this chart point would signal scope for a climb towards 3774.00 next, Jun 9 high.
• EURUSD traded higher again initially Tuesday and above resistance at 1.0278, the Jul 21 high. A clear break here would once again resume short-term bullish conditions and signal scope for an extension higher within the bull channel - the top intersects at 1.0406. USDJPY is trading lower again today and the move has resulted in a break of support at 131.50, the Jun 16 low. This strengthens current bearish conditions that were confirmed last week, following the break of support at 135.50, the base of a bull channel drawn from the Mar 4 low. AUDUSD traded higher Monday, but has since faced resistance and is trading lower to sit below Monday’s low. The short-term outlook remains bullish and for now, the pullback is considered corrective.
• Gold maintains a firmer tone and has traded higher. Current gains are considered corrective and attention is on resistance at the 50-day EMA, at $1784.80. WTI futures traded sharply lower yesterday. The contract has recently failed to clear the key resistance around the 50-day EMA - the average intersects at $100.49. Price has also pierced support at $93.01, the Jul 25 low.
• Bund futures maintain a bullish tone and last week’s gains reinforce current conditions. The contract is also trading higher this week. Fresh gains confirm a resumption of the uptrend and the break higher maintains the bullish price sequence of higher highs and higher lows. The S/T outlook in Gilt futures remains bullish and fresh highs last week reinforce this set-up. The contract traded higher Monday, starting the week on a firm note. Continued gains highlight an extension of the recent break of resistance at 117.09, Jul 6 high.

EQUITIES: Asian stocks lead the way lower

• Japan's NIKKEI down 398.62 pts or -1.42% at 27594.73 and the TOPIX down 34.62 pts or -1.77% at 1925.49.
• China's SHANGHAI closed down 73.692 pts or -2.26% at 3186.266 and the HANG SENG ended 476.63 pts lower or -2.36% at 19689.21.
• German Dax down 84.69 pts or -0.63% at 13394.85, FTSE 100 up 3.98 pts or +0.05% at 7416.58, CAC 40 down 33.36 pts or -0.52% at 6403.5 and Euro Stoxx 50 down 26.83 pts or -0.72% at 3679.79.
• Dow Jones mini down 149 pts or -0.45% at 32618, S&P 500 mini down 26 pts or -0.63% at 4094.75, NASDAQ mini down 100.5 pts or -0.78% at 12863.25.

COMMODITIES: European natgas continues to push higher

• WTI Crude down $0.59 or -0.63% at $93.29
• Natural Gas (NYM) down $0.14 or -1.67% at $8.144
• Natural Gas (ICE Dutch TTF) up $5.45 or +2.71% at $206.105
• Gold spot up $1.77 or +0.1% at $1774.14
• Copper down $3.5 or -0.99% at $350.75
• Silver down $0.07 or -0.35% at $20.292
• Platinum up $2.55 or +0.28% at $913.22