US MARKET WRAP: Quiet before the storm; USD flexes its muscles ahead of SOTU, FOMC, NFP

EQUITIES: SPX -19 points at 2853, DJI -181 points at 26436, NDX -35 points at 6988 
Top sectors: Healthcare +0.02%, Consumer Cyclicals -0.07%, Consumer Non-Cyclicals -0.08%
Bottom sectors: Energy -1.01%, Utilities -0.83%, Materials -0.71%

Stocks retreated from record highs in Monday trade, with losses broad-based across sectors. Energy losses were inspired by weaker crude prices; tech was hit after reports that Apple will slash iPhoneX production in half. Telecoms stocks were also in focus; US officials denied anything had been finalised to nationalise 5G networks on national security fears. In M&A, Keurig Green Mountain said it will but Dr Pepper in a $21bln deal.

The earnings slate has some huge hitters this week: On Tuesday, McDonald’s and Pfizer are the highlights; on Wednesday, Eli Lilly, Lockheed Martin and Anthem stand-out; on Thursday, Apple, Amazon, DowDuPont, Time Warner are on the slate; and on Friday, Exxon, Chevron and Merck are the standouts.

TREASURIES: US 10-Year T-Note futures settle 8 ticks lower at 121-26

Bear-steepening was the theme for the US Treasury curve on Monday, with yields on 10s rising above 2.72% to the highest levels since 2014. Technical analysts were pointing out that 10-year yields had broken key technical trendlines dating back to the 1980s. Major curve spreads were also wider at settlement (2s5s +c.2bps, 2s10s +c.3bps, 2s30s +c3bps). Traders are expecting the US Treasury’s quarterly funding announcement on Wednesday to see UST issuance raised.

Additionally, some are also expecting the FOMC to hawkishly tweak its language at the conclusion of its policy meeting on Wednesday, to prepare markets for a rate hike. CME Fedwatch indicates there is only a 4.1% probability of a hike at this week’s meeting, and a 60% chance of three hikes in 2018 (as the Fed has forecast).

FOREX: DXY up 0.3% heading into APAC trade

The USD was supported by a steepening US yield curve, driven by expectations that the Federal Reserve may hawkishly tweak its post-meeting statement at the conclusion of its meeting on Wednesday to prepare markets for an upcoming hike. There is also an eye on employment data at the end of the week, which is expected to show 180k nonfarm payrolls were added to the US economy in January, and AHE Y/Y is seen ticking up to 2.6%. The USD also gained vs the EUR on portfolio rebalancing on month-end, following another rise in spec longs to fresh all time highs for the single currency. The buck was little changed following the mixed PCE data.

The EUR continues to linger just beneath the 1.24 handle against the buck, having fallen to as low as 1.2340 in European trade as the dollar advanced. However, some traders find EUR weakness an opportunity to buy given the narrative of a recovering Eurozone economy, inflation expectations rising (the 5y5y inflation swap forward hit 1.80% last week), as well as a tilt towards righter policy among some ECB policymakers.

GBP was hit by USD strength, but managed to defend the 1.40 level successfully. There was little positive reaction from news that the EU has agreed its position on its Brexit stance, and that stance is aligned with the UK’s own position, though there remains a gap between the EU and the UK on a number of issues regarding the eventual transitional deal. EURGBP advanced to the 0.88 figure.

Havens were lower on USD strength, with gold slipping to the $1340 mark, while the yen is flirting with 109, though USDCHF couldn’t get its head back above 0.94.

CAD mostly drifted sideways, seemingly caught between positive comments after the conclusion of the sixth round of NAFTA talks, though crude prices slipping kept the Loonie negative against the Buck; but essentially trade was uneventful and horizontal. EM’s were generally on the back foot in the face of Greenback strength, and the MXN was no different, losing out by 0.66%.

CRUDE: WTI futures settle 58 cents lower at $65.56 per barrel; Brent futures settle $1.06 lower at $69.46 per barrel

With little fundamental newsflow, the dollar strength was being attributed to commodity weakness on Monday, though crude is still likely to put in the best January showing in five years. The Street looks for a small build in crude stocks this week, the first build in 11 weeks; headline crude stocks are seen rising by 100k barrels, distillates are expected to drawdown by 1.5mln barrels, gasoline is seen building by 1.4mln barrels. Genscape was said to have forecast Cushing stocks will draw by 2.6mln barrels in the latest week.