The sell-off in US Treasuries and steepening of the curve that has been the focus of markets this week initially extended further after I posted yesterday morning, but has since retraced. The US 10y yield reached a high of 2.595% before moving back to 2.55%. The intraday sell-off reflected press reports that (unnamed) Chinese officials had made an internal recommendation to slow or reduce purchases of US Treasuries. The move fully retraced after a solid $20bn 10y auction, which stopped inside prevailing bid levels and saw the highest coverage ratio and indirect bidding interest since mid-2016. The strength of demand is unsurprising given yields were approaching last year’s highs, speculators are short 10yrs according to surveys and leading into the auction the 10y note had been trading tight in repo.
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It is certainly not the first time press reports have circulated about fears of China dumping bonds. Global demand for US Treasuries is a major risk to watch, but one should be wary of extrapolating reports on China demand into views that yields are poised for an imminent surge higher. China is the largest single foreign holder of US debt, but their incremental changes tend to be small relative to other flows in the market and in recent years some periods where holdings have fallen correspond with risk-off moves that see Bond Yields move lower (sometimes helped by fears over China growth!). There are also clear negative consequences for the value of the US Dollar, which would concern China.
The proximity of key technical levels in Treasuries is a key short- term risk to watch with plenty potential for spill-over into FX and Equities. The 2.50% level in 10yrs has given way and focus is on last year’s high of 2.63%. This is holding for now. After years of pain and false starts for bond bears, a major sustained move higher in yields also requires signs of a meaningful pickup in inflation and a turn in global central bank policy.
In FX, the US Dollar did the round-trip with the reports on China, falling as much as 0.6% on an Index basis before recovering most of those losses. JPY remains the strongest currency after the BoJ reduced its purchases of longer-dated JGBs earlier this week. USD/JPY is down 0.9% (111.32) and seems intent on retesting the November low of 110.84. The AUD is up 0.3% to 0.7840, after hitting a high of 0.7867.
Sterling was one of the worst performers in FX yesterday after a weaker than expected Trade Balance release. The market brushed off better than expected Industrial and Manufacturing Production data and comments from Bank of England Deputy Governor Ben Broadbent that the BoE intends to keep tightening.
US stocks initially fell as much as 0.6% with the China story, but have erased most of those moves, led by financials ahead of bank earnings reports in the coming days.
This morning on the Economic Front we have German GDP at 9.00 am and this is followed at 9.30 am by the Bank of England Credit Conditions and Bank Liabilities Survey. Next we have the Euro-Zone Industrial Production at 10.00 am. At 1.30 pm we have the US Weekly Jobless Claims and PPI. Finally at 7.00 pm we have the Monthly Budget Statement.
March S&P 500
For the last 31 years I have been following the Sentiment Readings for all asset classes, a daily take on whether traders are bullish or bearish the asset they are trading and this is tallied and published as the Daily Sentiment Index. I tend to discuss this indicator when it reaches an extreme, because extremes in optimism and pessimism frequently attend the end of a move. The reason I mention this is on Tuesday the 5-Day Average for the DSI reached 92%, which is an all-time record for this data series since it commenced 31 years ago. Never before have traders been this optimistic toward the stock market which in my opinion will eventually result in a historic top. I mentioned these facts consistently in this column over the past few weeks and I cannot stress enough that the risk remains very high for equity investors. I am still flat the S&P as I patiently wait for a sell extreme that takes the market lower by at least 3% in order for me to put on a more macro short position. However there is a strong possibility of a further move higher with the next strong resistance level not until 2800/2817 before we finally get a sell-off that sticks for more than a few hours.Today I will now raise my sell level to 2765/2773 with a 2778 stop. Given how impressive the S&P rallied off yesterday’s 2736 low print I will now raise my buy level to 2735/2744 with a 2729 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any dip lower to 2698/2712 with a wider 2691 stop.
Finally the Euro rallied yesterday morning on the Chinese story and this move higher enabled me to cover my large 1.1960 Euro position for a small gain at my 1.1970 T/P level. With the Euro having spiked to a 1.2018 high print before reversing lower I again bought the Euro at 1.1968 and will add to this position on any move lower to 1.1920 with a 1.1895 stop.
March Dollar Index
My Dollar plan worked well with the Dollar trading lower to my 91.80 buy level before rallying to my 92.00 T/P level and I am now flat. Today I will again look to buy the Dollar on any dip lower to 91.30/91.70 with a 90.95 stop.
My DAX plan also worked well with the market trading lower to my 13250 buy level before rallying 35 points and I used one of these rallies to cut my long position at my revised 13268 T/P level and I am now flat. The DAX was heavy all day yesterday which is not surprising given the extent of its move higher from last week’s opening trading session low at 12733. Today I will again look to buy the market on any dip lower to 13110/13200 with a 13060 stop. Despite yesterday’s negative session I still do not want to be short the market at this time.
The renewed weakness in Sterling as mentioned in my Economic Commentary above helped to prevent the FTSE from trading lower. I am still flat and will not chase this market higher and I will leave my buy level unchanged from 7585/7625 with a 7555 higher stop.
Dow Rolling Contract
The Dow just missed my 25445 sell level with a 25404 rebound high before selling off and I am still flat. Today I will raise my sell level slightly to 25480/25560 with a 25620 stop. My only interest in buying the Dow is still on a dip lower to 25050/25180 with a 24980 tight stop.
No change as I am still a seller on any rally higher to 6715/6755 with a 6795 lower stop. The NASDAQ needs to break and close over 6760 for the bull market to extend.
As expected the Bund made a low in price high in Yield at the 0.5% rate as mentioned in yesterday’s commentary with the Bund again managing to close over its 200 Day Moving Average at 161.08. I am still flat and today I will now raise my buy level to 160.50/160.90 with a 160.20 tight stop. Given how close the Bund is to long-term support I still do not want to be short the market at this time.
Gold Rolling Contract
No change as I am still only interested in buying the market on any dip lower to 1294/1302 with the same 1286 stop.
Silver Rolling Contract
On the back of the Chinese news Silver rallied to my 17.20 T/P level on my latest long 17.10 position. Subsequently I emailed my Platinum Members to re-buy the market at 17.00 which was filled and I will keep my revised T/P level on this position to 17.10. I will only add to this position at 16.60 with a 16.30 stop and if either of these scenarios play out I will be back with anew update for my Platinum Members.