US EARLY MORNING: US equity futures are around flat; Treasury yields continue upside, with 5s30s latest major curve spread to invert

EQUITIES: US equity futures are trading around flat (YM +0.1%, RTY +0.0%, ES -0.2%, NQ -0.2%). Traders have been asking how equity price action continues to hold up in the face of increasing geopolitical uncertainties, the prospects of COVID lockdowns in the world's second largest economy, combined with a monetary policy tightening cycle where the Fed has threatened to move policy into restrictive territory to contain inflation, possibly hitting economic growth.  Some have explained the recent stock upside as technical, with many names becoming attractive at oversold levels as concerns over COVID in the West ease and supply chain dynamics slowly improve. Others, however, warn that inflation is still at eye watering levels (PCE data later this week, wages data will also be eyed in Friday's jobs data), valuations are still rich, while consumer sentiment is fragile. Goldman Sachs notes that leveraged investors have been cutting risk during the recent sell-off, and says the recent rally in long-duration equities -- which have rallied in the face of higher rates and the prospects of hawkish Fed policy -- has been a function of short-covering. And while institutional leveraged investors have been covering shorts, GS says that retail investors have been actively buying the dip. But ahead, Goldman continues to think that households will continue to pour cash into stocks, while strong buyback activity and slower issuance will drive net demand from corporations. Additionally, the bank argues that "geographic and economic distance from the conflict in Ukraine has made the US an attractive destination for capital allocators despite its premium valuation".

TREASURIES:  Treasury yields are once again rising sharply and the curve is bear-flattening. The underperformance is most notable in the short-end, where 2s yields are up by 10bps before of today's 2s and 5s auctions, and ahead of tomorrow’s 7-year supply, while long-end yields are around flat. Some continue to be concerned by the signalling power of the shape of the curve, where the 5s30s spread is the latest to invert today – these inversions are being taken as a sign of future recessions, given that they have historically portended downturns. However, as we have noted recently, many are more sanguine, and focussed on other parts of the curve, like the 3mth/10yr spread (which is narrowing a touch today, but has recently widened considerably). Morgan Stanley's strategists do not appear to be overly concerned by these inversions. They argue that this time is different: "The rules have changed, at least to some degree," it writes, "as usual, the curve has flattened with this hiking cycle. With the Fed set to hike into restrictive territory, the curve will invert," and while it acknowledges that a policy mistake that causes a recession is clearly possible (Fed making policy more restrictive in the face of slowing growth), its baseline is for an inversion without a recession.

FOREX: The bulk of attention is on the Japanese yen, where the central bank has been in the market twice today offering to buy unlimited amounts of JGBs to keep a lid on yields climbing. The interventions have seen 10yr yields at the 'ceiling' 0.25%, but many desks are questioning the BoJ’s policy efficacy; Nomura’s analysts said "the power of the BoJ's unlimited bond-buy offer is clearly waning." Technicians are arguing that the yen weakness raises risks that the currency can test 2015 highs around 125.86 vs the USD, and the yen has been underpinning the US Dollar on Monday, with the Dollar Index rising to highs just shy of 99.25. The EUR is also dancing to this song, as well as the longer-term theme of policy divergence between the ECB and Fed, has seen the single-currency breach the 1.0960-65 support region, although later garnered support via the EURJPY channel, as fresh highs in the currency saw EURUSD climb back to flat levels for the day just beneath 1.10. Activity currencies are mixed; the AUD is outperforming within the space, which may be due to the downside in NZD after Westpac argued that markets were overpricing the extent of RBNZ rate hikes over the next couple of years. EMFX trades mixed. For today, the data docket is thin ahead of this week's scheduled risk events, and accordingly, the tone of geopolitical commentary, evolving views from the analyst community on the course of Fed policy (the City hawkish Fed call on Friday was being framed as the catalyst for the Treasury sell-off), and technicals may exert influence.

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28 Mar 2022 - 10:02- EquitiesData- Source: Newsquawk

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