US TSYS SUMMARY: Treasuries Continue Yesterday's Sell-Off After Brief Retracement

• Cash Tsys have resumed yesterday’s sell-off after initially trading richer in Asian hours, with the more recent move lower helped by Pelosi set to leave Taiwan and EA PMIs being revised higher in final July readings as attention turns to the US PMI surveys and more importantly ISM Services in the US session.
• 2YY +4.3bps at 3.096%, 5YY +3.9bps at 2.892%, 10YY +3.6bps at 2.785% and 30YY +2.3bps at 3.029%. It sees 2s10s little changed on the day and still close to 2000 lows (-0.5bps at -30.5bps) although the 3M to 10Y spread continues to shift higher to +26.5bps as it sharply bounced yesterday having fleetingly dipped into inversion early on.
• TYU2 trades 8+ ticks lower at 119-27+ as the rally stalls further amidst above average volumes. It moves further through yesterday’s low and closer to support at 119-19+ (Jul 27 low), clearance of which would open the 50-day EMA of 118-23+.
• Data: ISM Services is in focus today but there is also finalised S&P Global PMIs and factory orders plus the usual weekly MBA mortgage applications.
• Fedspeak: Bullard (’22) at 0730ET, Harker (’23) at 1030ET, Daly (’24) at 1115ET, Barkin (’24) at 1145ET and Kashkari (’23) at 1430ET.
• Bill issuance: US Tsy $30B 119D bill auction – 1130ET

STIR FUTURES: Fed Hikes Consolidate Yesterday's Surge

• Fed Funds implied hikes have consolidated yesterday’s surge higher, with a 61bp hike priced for the Sept FOMC before a cumulative 91.5bp for Nov and 105bps over the three meetings to Dec.
• A peak is pushed out to Feb/Mar’23 meetings with 109bps of hikes to an implied 3.425% whilst yesterday’s larger increase s further out in 2023 seeing priced inversion trimmed from 60bps of cuts to 44bps currently.
• Bullard late yesterday repeated he wants a policy rate at 3.75-4% by year-end whilst noting that a soft landing doesn’t require gradualism. It didn’t move the needle from earlier comments by Daly (nowhere near done), Evans (3.75-4% rate by 2Q23 is sufficiently high) or Mester (haven’t seen inflation peak yet, prices only cooling if you squint).
• Further heavy Fedspeak schedule with repeat Bullard (’22) at 0730ET, Harker (’23) at 1030ET, Daly (’24) at 1115ET, Barkin (’24) at 1145ET and Kashkari (’23) at 1430ET.

FOMC-dated Fed Funds implied rate for Sep (white), Dec (yellow) and Dec'23-Dec'22 spread (green)Source: Bloomberg

EGB/GILT SUMMARY: Trading Lower

European government bonds have sold off this morning alongside gains for equities, marking a reversal from yesterday's risk-off theme.

• Gilts initially opened higher but have sold off through the morning. Cash yields are now 5-7bp higher on the day.
• It is a similar story for bunds where yields are now up 6-11bp.
• OAT yields have pushed up 3-8bp with the belly of the curve leading the way.
• The BTP curve has bear flattened with the 2s30s spread narrowing 6bp.
• German trade data for June surprised to the upside on the back of stronger than expected export receipts (4.5% M/M vs 1.0% expected). Elsewhere, final euro area PMI estimate for July were better than the initial readings.
• OPEC+ members will meet today to discuss production volumes. While Western countries have urged an increase in supply to combat spiraling inflation, the consensus seems to expect that output will remain steady,
• Global political tensions continue to simmer in the background following US House Speaker Nancy Pelosi's visit to Taiwan. Pelosi has now left Taiwan, but not before stating "our delegation came to Taiwan to make unequivocally clear that we will not abandon Taiwan” and “now, more than ever, America’s solidarity with Taiwan is crucial, and that’s the message we are bringing here, today". In response, China is due to hold live fire military drills near Taiwan from Thursday.
• Supply this morning came from Germany (Bund, EUR1.232bn), Greece (GTBs, EUR625mn) and the Eurozone (Bills, EUR3.0bn).
• Focus later today shifts to US factory orders and durable goods.

US-CHINA: Relations To Remain In Deep-Freeze As Pelosi Taiwan Trip Ends

Speaker of the US House of Representatives has departed Taiwan following a brief but highly controversial trip. She now heads to South Korea before moving onto Japan as part of a multi-leg Asia trip.

• Pelosi held meetings with Taiwan's President Tsai Ing-wen and delivered an address to the Taiwanese Legislative Yuan (parliament).
• Despite Pelosi leaving Taiwan, the repercussions of the visit look set to be felt for some time. China is already set to engage in major military exercises near the island from 4-7 August, and aerial incursions into Taiwan's Air Defence Identification Zone (ADIZ) are seen as likely to increase in size and frequency.
• The longer-term impact on US-China relations is too early to assess, but the prospect of any advancement in trade talks between the two sides appears to have been extinguished.
• Beijing's anger over the visit could also spur China to offer more support to Russia as it struggles with the economic fallout from being isolated from the West over its invasion of Ukraine, in an explicit rebuke to the US. So far, while China has talked up relations with Russia, it has sought to remain a step removed from the conflict in Ukraine in an effort to avoid Western sanctions.

EUROPE ISSUANCE UPDATE

German auction results

• E1.5bln (E1.232bln allotted) of the 1.00% May-38 Bund. Avg yield 1.04% (bid-to-cover 1.19x).

EUROPE OPTION FLOW SUMMARY

Eurozone:

• OEU2 122.75p, sold at 7 in 30k vs OEU2 126.50c, bought for 1.845 in 30k vs 22.5k future at 127.82
• SFRZ2 96.125/97.125 combo, sold the call at 1.25 in 20k (48 del)

FOREX: Dust Settles as Pelosi Set to Depart Taiwan

• US Treasury yields are holding the bulk of the Tuesday rally, with the 10y oscillating either side of the 2.75% level. This keeps currency markets in line, with markets holding the bulk of Tuesday's greenback strength. As a result, EUR/USD remains below 1.02, with USD/JPY close to 3 points above the week's lows.
• Gains are considered corrective - for now. Recent weakness has resulted in the break of a number of important technical chart points. A bull channel breakout - drawn from the Mar 4 low - signals a short-term reversal.
• For equity markets, the dust has settled somewhat following Pelosi's visit to Taiwan yesterday, with the e-mini S&P holding above 4,100 as the House Speaker departs Taipei and concludes the visit shortly. While China announced a series of trade measures against Taiwan and tabled an extended series of war games around the island, the broader impact is seen as limited as this stage.
• NOK is the firmest currency so far, closely followed by SEK. The CHF and NZD hold at the bottom of the G10 pile.
• Focus turns to the final PMI data from the US, as well as June factory orders. ISM Services numbers also cross, and are expected to show a slowing to 53.5 from June's 55.3. Fed speakers on the docket include Bullard, Harker, Daly, Barkin and Kashkari.

FX OPTIONS: Expiries for Aug03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0150(E589mln), $1.0193-00(E1.8bln), $1.0245-50(E654mln)
• USD/JPY: Y131.25($530mln), Y131.50($495mln), Y132.25($500mln)
• EUR/JPY: Y135.85-00(E664mln)
• USD/CNY: Cny6.75($1.1bln)

Price Signal Summary - Bunds Reinforce S/T Bullish Conditions

• S&P E-Minis remain below recent highs. The short-term outlook is bullish and short-term dips are considered corrective. For bulls, a break of Monday’s 4147.25 high would confirm a resumption of recent gains and open 4204.75 next, the May 31 high and the next key resistance. EUROSTOXX 50 futures trend conditions remain bullish following last week’s gains and short-term pullbacks are considered corrective. The contract has recently pierced the 76.4% retracement of the Jun 6 - Jul 5 downleg, at 3722.40.
• EURUSD faced resistance yesterday, pulling back from the session high. The short-term outlook remains bullish though, as long as support at 1.0097, the Jul 27 low, remains intact. USDJPY recovered losses into the Tuesday close, having found support at 130.41. Gains are considered corrective - for now. Recent weakness has resulted in the break of a number of important technical chart points. AUDUSD traded higher Monday, but has since faced resistance and traded sharply lower Tuesday. The short-term outlook is bullish and for now, the pullback is considered corrective.
• Gold maintains a firmer tone despite the pullback from yesterday’s high. Attention is on resistance at the 50-day EMA, at $1783.80. The average was pierced yesterday, a clear break would suggest potential for a bullish extension and expose trendline resistance at $1807.1. WTI futures remain vulnerable, having traded sharply lower Monday. The contract has recently failed to clear key resistance around the 50-day EMA - the average intersects at $100.25.
• Bund futures maintain a bullish tone and yesterday’s fresh trend high reinforces current short-term conditions. The move higher confirms a resumption of the uptrend and maintains the bullish price sequence of higher highs and higher lows. The short-term outlook in Gilt futures remains bullish and fresh highs yesterday reinforce this setup. Continued gains highlight an extension of the recent break of resistance at 117.09, the Jul 6 high.

COMMODITIES: LEVELS UPDATE: More limited moves this morning

• WTI Crude down $1.17 or -1.24% at $93.12
• Natural Gas (NYM) up $0.05 or +0.65% at $7.737
• Natural Gas (ICE Dutch TTF) up $0.3 or +0.15% at $205.055
• Gold spot up $5.8 or +0.33% at $1766.64
• Copper down $1.8 or -0.51% at $349.45
• Silver down $0.05 or -0.27% at $19.927
• Platinum up $3.23 or +0.36% at $901.43

EQUITIES: LEVELS UPDATE: Equities continue to grind higher

• Japan's NIKKEI up 147.17 pts or +0.53% at 27741.9 and the TOPIX up 5.28 pts or +0.27% at 1930.77.
• China's SHANGHAI closed down 22.592 pts or -0.71% at 3163.674 and the HANG SENG ended 77.88 pts higher or +0.4% at 19767.09.
• German Dax up 30.07 pts or +0.22% at 13468.83, FTSE 100 down 2.7 pts or -0.04% at 7406.28, CAC 40 up 10.34 pts or +0.16% at 6420.58 and Euro Stoxx 50 up 15.65 pts or +0.42% at 3698.38.
• Dow Jones mini up 90 pts or +0.28% at 32452, S&P 500 mini up 15 pts or +0.37% at 4106.25, NASDAQ mini up 36.25 pts or +0.28% at 12951.25.