April starts risk off, as few noticed impact of dividend cuts….(Thursday)

We open the books on April with risk seeking cover for the usual myriad of reasons. However, a new reason, one few noticed yesterday, was the announcement by European financial institutions that they were slashing dividends, the late day announcement missed by many, but not institutional IM accounts that will likely now be forced to shed holdings in those formerly high-dividend investments. This has caused equities, financials in particular, to feel the pain since late yesterday. As of 8 AM ET, Treasuries are 3-12 bps lower in yield in a rather impressive bull flattener while US equity index futures are down 3.5-4% ahead of the cash open.

The Asian session was all about seeing some recently absent accounts (quarter end and Japanese fiscal year end the reason they were sidelined) back to their usual marching orders: Asian banks were buyers of mortgages along with UST 5s and 7s, while our friends in the Japanese lifer business lifted 30s and US classic futures. RV account sold out some TUM and US 3s. Oh, and for good measure Japan’s enormous GPIF confirmed the whispers of the last month, officially announcing that it would increase foreign bond holdings (read: US Treasuries) from 15% to 25% of portfolio. There you go. Treasury curve flattened throughout the session, only pulling back marginally on the stronger-than-expected Chinese Caixin Manufacturing number (50.1 vs expected 45, like it matters really?); Japanese real money wasted little time buying the dip after the number in US 5s and 10s as continued risk off took Treasuries to their overnight highs on the European open.

Locally in Asia, aside from the Caixin number, Japanese final PMI manufacturing number printed spot in line at 44.8. Even with BoJ buying in front end, JGBs flattened after the US performance yesterday, also expecting to see new fiscal year demand for long end paper locally. One bright spot was the lack of demand for BoJ dollar facility, as 3m yen cross-currency basis has flipped positive for the first time since the crisis really heated up. Aussie 10s took their cue from US and Japan, staging a sharp rally after RBA announced more buying scheduled for long end. JGB yields were down .5 bps in 10s, with the curve bull flattening, while Aussie 10s were down 8.2 bps. Kiwi rates were a little bit different, as bond vigilanties there continue to rule: when Finance Department announced major ramp up to debt issuance, Kiwi rates were taken out to the woodshed, with New Zealand 10s 27.5 bps higher in yield on the session. Ouch! Opportunity there though, as world doesn’t have time for bond vigilanties right at this moment. I would buy NZGB against ACGB end of this week after the vigilante crew gets its fill. As for equities, China was small lower (-.3 to -1.5% across major indices) while rest of Asian bourses were down between 2% and 5%.

Early European trade saw Treasuries come off their frothy overnight highs as an already very large issuance slate in Europe saw deal-related selling of bunds and buxl shortly after the European open. There was opportunistic dealer and hedge fund selling of TYM and US 5s, expecting similar calendar to materialize in the US. Euro fixed income has stabilized after the early selling, while Treasuries have more than retraced half their move off the highs. Mid-morning in Europe, there was deal-related paying in USD 20y and 30y sector of the swap curve, but better RV receiving in USD 7y and 10y swaps, outright and against the wings. Macro account added 2s30s flatteners in Treasuries, while there has been better US bank buying in TYM contracts and cash 10s since NY arrived. A German bobl (5y) auction had a large tail and was uncovered, but that’s the normal story for issuance in Germany and the US: they may not show up for the auction party, but they will definitely grab some once the issue hits the shelf. Similarly, a UK 8y gilt also had a large tail and was not surprisingly very underbid. Italian manufacturing PMI missed at 40.3 vs 41, but does it really matter? Greece (12 bps) and Italy (6 bps) continue to lead the problem children wider to core. As for equities in Europe, we are down between 2.5 and 4%, with financials of course leading the way.

Today we get ADP at 8:15 AM ET, Markit PMI at 9:45, ISM at 10 AM and car sales throughout the day. I only mention all this because none of it matters, but for some reason analysts have enough free time now that they are back to writing about this data like it means something, kind of like the fact that MBA index was up 15.3% this week after being down 29.4% last week. It’s a very macro world right now, as witnessed by so many people not fully grasping the impact of yesterday’s announcements on dividend cuts at financial institutions. All that matters on the US slate is the normal buyback schedule that runs at usual times (starting at 9:50 AM ET and ending at 2:50 PM).

Speaking of missing, the great plan to get a correction within the bear trade is NOT going to happen. Could not even get our first target at 2660 (2641 high yesterday), which is extremely disappointing and for the first time in weeks “Balloon Tuesday” didn’t see equities rally. This in “no bueno” for sure! The projection now looks like 1780 in SPX, but not in a straight line. The dividend announcement, while it has to be expected, was the catalyst that led smart money to sell on principle, and now you will get institutional selling in the hole. Watch financial indices for bounces, but we have about 11% from here before it looks like there is a spot for such a bounce to happen. Very frustrating.

Then there’s fixed income. New quarter, new fiscal year for Japan…everyone wants to own some long end here. Uffff. Fixed income vols are relatively (as in crisis mode relatively) fair here, but that doesn’t mean cheap. And no, do NOT be short gamma for any reason. Hero may want to buy upper left in swaptions to sell lower right via exchange, but the problem is there is no liquidity in any “lower right” market in the world. Don’t like the idea. If I have to, will look to move back into buying gamma on 5y tails OTC, as that sector will remain fluid. It’s not much, but it’s all I got right now. As for today in TYM futures, for choice let’s call the range 139-28 to 138-27+, although if we pull back and hold 139-03+, it is going to get ugly. By the way, that projected range is VERY ugly and very risk off, but that’s what it says. Not sure, unless you are really going to melt equities today. As for support in TYM, watch the aforementioned 139-03+ and 138-27+ closely, then 138-23/22, 138-16+, 138-12+, 138-00+/137-31+, 137-24+. Resistance comes in at 139-11+ (the old resistance at 139-13+, also the overnight high, will be lift-off point if we take out 139-11+), 139-22, 139-28, 140-01+/03, 140-18, …and I think that is enough for now.

Good luck out there, be safe and have a great hump day,