CREDIT RATING: Stellantis: S&P Downgrade

Trump's tariff deadline really helped support derivatives markets yesterday, with DTCC data showing over $140bln notional crossing FX options markets - among the busiest sessions of the year, but no surprise given the heavy intraday vol - particularly in CAD and MXN, but EUR/JPY, EUR and CNY also saw strong flows.

• Markets unsurprisingly favoured USD/CAD upside protection - evident in the put/call skew leaning in favour of calls. Calls with a strike at 1.50 and higher saw solid demand of $1.7bln, making up over 10% of all notional traded in the Monday session. While in outright terms that may not seem significant - the rate hasn't traded above that level since February 2003.
• This pattern was even more evident in USD/MXN, through which over $2 in calls traded for every $1 in puts. Markets identified 21.00 and 21.50 as points of topside weakness, although call demand was evident as high as 21.9650 - 22.7500.
• Today's trade has been far more contained - reflecting the turnaround in tariff sentiment this morning. This is typified by the reversal in yesterday's rally for front-end USD/CNH risk reversals, which corrects back to broadly flat.

• In the FI space, Bund futures traded higher Monday and the contract is holding on to the bulk of its recent gains. Price is through resistance at 132.22, the Jan 22 high, and has cleared both the 20- and 50-day EMAs. The break higher confirms a resumption of the corrective bull cycle that started Jan 14. This signals scope for an extension towards 133.73, 50.0% of the Dec 2 - Jan 14 bear leg. Firm short-term support has been defined at 131.00, the Jan 16 / 24 low. Initial support is at 132.14, the 20-day EMA.
• Recent gains in Gilt futures continue to highlight a corrective phase and signal scope for a continuation higher near-term. Last week’s high print and Monday’s climb, reinforce current conditions. The contract has traded through 93.09, the Dec 20 high. Sights are on 93.64, 61.8% of the Dec 3 - Jan 13 bear leg. Initial firm support lies at 91.52, the Jan 24 low. First support 92.11, the 20-day EMA.

• Treasuries have bear steepened today, with the front-end somewhat pinned by Fed rate expectations ahead of today’s data including the JOLTS report for December but with the longer end extending a sell-off seen after the US delayed tariffs on Canada following similar developments for Mexico earlier in the day.
• The deadline for setting 10% tariffs on China has passed and China has since announced targeted retaliatory measures of its own due to be effective Feb 10, leaving scope for negotiations.
• Cash yields are 0.6-2.7bp higher, with 20s leading the increase.
• 2s10s has pushed to 32.4bps (+1.4bp) but remains below Friday’s 35bps prior to the original Feb 1 tariff deadline.
• TYH5 sits at 108-25 off earlier lows of 108-23. Cumulative volumes of 375k are reasonable but far from yesterday’s outsized 770k at the same time of day.
• A corrective cycle remains in play and the contract is holding on to the bulk of its recent gains. Key resistance at 109-10 (50-day EMA) has been pierced. A clear break would strengthen a bullish theme and open 109-31 (Dec 18 high). The medium-term trend condition remains bearish, with initial firm support seen at 108-06 (Jan 23 low).
• Data: JOLTS Dec (1000ET), Factory orders Dec (1000ET)
• Fedspeak: Bostic (1100ET), Daly (1400ET) and Vice Chair Jefferson on the economic outlook and mon pol (1930ET, incl text). An addendum for Jefferson who we missed in the earlier STIR comment, his prepared remarks are worth watching having last spoken on Oct 9. We’ve previously seen him as on the dovish side of the spectrum but a lot has changed since then.
• Bill issuance: US Tsy $85B 42D CMB auction (1130ET)
• See our take on yesterday’s borrowing estimates, including how requirements were at the low end of expectations (here) and cash level assumptions are subject to downside risk (here).