China and US engineer risk on affair ahead of tomorrow’s NFP report (Thursday)

An announcement after Tokyo lunch by Chinese MOFCOM that trade talks will occur at a senior level in Washington during October (following low level meetings this month, all confirmed by US) has turned the markets risk on today, a very orderly trade on decent volume, with belly of curve leading fixed income lower. ADP was a nonevent. There is nothing real here, but in this crazy market…. As of 8:20 AM ET, Treasuries are 5-6 bps higher led by the belly, while US equity index futures are trading 1-1.25% higher ahead of the cash open.

Treasuries opened softer, in a slight bear steepener, with front end supported by JP Morgan now switching its call to three more easings this year. Flows through Tokyo morning were confined to futures as BrokerTec experienced technology issues that effectively halted trading in cash markets. Hedge funds were active in TU/FV steepeners, with asset manager seen adding FV/TY steepener. When cash Treasuries finally got going, the flows turned better to Asian bank selling of US 5s; after the MOFCOM statement, flows were much better to Asian real money buying of US 10s and Japanese real money buying of MBS and spread product against the risk on backdrop. There was a block seller of 5000 TUZ9 at 10:23 PM ET ($187K of DV01 in 2s), before Treasuries crept of their overnight lows ahead of the European open. Asian markets were quiet, although better bid on the trade news.

Soft German factory orders led to a bid for fixed income that was quickly sold by dealers and those taking down supply in Europe. French OAT supply was well bid, Spain was very mixed in 5y and 10y, soft in 50y, Gilts were sloppy at best, weigh in gilt market before and after supply. Treasuries were dragged lower by pressure in Europe. Flows were mixed throughout the session but again saw better real money buying in Treasuries out of Japanese and Asian real money accounts, while central bank was a seller of 5s and 7s, with macro account adding front end steepeners (2s3s and 2s5s). The issuance calendar remains pretty heavy in corporates for the rest of today, with sovereign supply largely out of the way. European equities trade either side of 1% better, with the exception the FTSE that trades down for some crazy political reason. Crude higher, gold lower, spreads trade tighter in the usual risk on mentality.

Today’s calendar is chock full of releases, one out of the way (ADP) and only one more that may matter (NM ISM): ADP at 8:15 AM ET, claims and productivity at 8:30, Markit PMI at 9:45, with factory orders, durables and Non Manufacturing ISM at 10 AM ET. There are no appearances or events on the schedule as of now.

Well, this is a nice risk breather for now, orchestrated by the governments in China and the US, so let’s see how long it lasts. Chinese markets continue to price in further RR cuts, rest of world is getting ready for more cuts in September, just a matter of time before US feels the pressure again, circa back in early summer. Look for a little more backup today as the bears will feel in control early, but don’t be surprised to see some short covering around the European close and into the US close. For choice today in TYZ, let’s call the range at 132-05+ (high overnight on the open was 132-07+, shouldn’t get through 132-05+) to 131-16+. Could stop at 131-22+ good support, while if we take out 131-16+, we will finally get our trade to 131-11+, but ahead of tomorrow I think the shorts will be aggressive to cover on downticks. Support below there comes in at 131-07+, 131-02+ and 130-29+. Resistance above the overnight high at 132-07+ comes in at 132-09, 132-13, 132-20+, 132-25, 133-03+. If vol gets hit aggressively enough during the US morning, might be worth it to pick up some cheap gamma in FV or greens for 1m expiries. Worth a look around the London close.

Good luck out there today,