doesn’t look like capitulation Friday, meaning more to come…. (Monday)

Asia joined in the carnage of Friday’s risk off move for the rest of the globe, weighing on risk markets through Sunday evening. A bounce in risk markets since shortly after the European open has lessened the pressure slightly, but no one is breathing easily after Friday’s affair. Open interest and risk asset moves continue to argue that there are still plenty of bad positions out there. As of 8 AM ET, Treasuries were 1.75 to 2.25 bps higher in yield from 3 PM Friday while US index futures have bounced off their Asian-session lows to trade only marginally lower ahead of the cash open.

The Asian session saw Treasuries dragged higher early on a bid move to JGBs that underwrote Treasuries, although early flows were better to Japanese corporate types and banks selling US 10s and 30s ahead of fiscal year end this week, albeit in flows far less than we have been accustomed over the last decade. When China arrived and Asian equities took another leg lower, Treasuries rallied a quick 2-2.5 bps in the belly, with Asian real money lifting 5s, RV account buying 10s, and Japanese real money receiving in USD 2y and 5y swaps. As risk stabilized off its lows, Treasuries came under a second round of bank selling in 10y sector, giving back half their gains into the European open. JGBs rallied 1.5-2.5 bps across the curve in a flattener, somewhat impressive given the impending MoF supply in 40y due tonight. Aussie bonds put in an impressive session as well, with Aussie 10s rallying 7 bps to a new all-time low yield of 1.77%, and the AUD curve flattening another 2 bps in 3s10s. NIKKEI led stocks lower, closing down 3%, China was down between 1.5% (Shenzhen) to 2% (Shanghai), while rest of Asia was down 1.5 to 2%.

Europe has brought a calming for the first time in 24 hours of trading, with risk finding a base for now, although volume remains elevated with tensions high. Focus has been on today’s machinations around Brexit again. Slightly better-than-expected German IFO data has also helped the risk sentiment. Market barely acknowledged Evans comments that inflation (lack of) remains a concern for the market. First flows after the European open were a decent real money seller of bunds on block and a fast money seller of TY contracts (some 6500 down to 124-03+ in TYM). Another block mid-morning in London (6188 RXM sold at 165.48) has helped drag Treasuries and gilts lower as well. Treasuries led the risk on trade early, but bunds took over after the IFO data. Macro fund bought greens on short sterling curve against selling gilts, dealer selling of bunds ahead of sovereign supply early this week, hedge fund looking to add 2s10s steepeners on USD swap curve, and CTA selling of buxl contracts have been some of the key flows thus far today. We have traded sideways since just before New York arrived.

Today’s calendar is light, with only Chicago Fed at 8:30 AM ET and Dallas Fed at 10:30. Rosengren speaks at 8:30 PM tonight in Hong Kong. Final Treasury supply of week kicks off tomorrow with $40BN in new 2y notes. End of week will bring quarter end, Japanese fiscal year end, and month end extensions; early estimates show Treasuries extending .06 years, MBS adding .05 years, Euro govies extending .07 years, and gilts extending an imprressive .20 years. Should make for an interesting end to the week.

Well that was a fun day Friday; how about we try to avoid another one of those for a little bit? There are still a lot of open wounds and it will take awhile to heal. Open interest was up across the board and up big in the belly (preliminary shows TY up 71K, FV up 69K), so no sign that you saw an actual and complete capitulation. Oh boy. But it is Monday, so maybe we can hope for a quiet day and a pullback….yeah right. Not sure where this is headed, but do know we have seen the pain and it is deep enough that we aren’t done yet. For choice today in TYM, let’s call the range at 124-13+ to 123-24. However, if you don’t take out this support level from Friday at 123-28, which is also the daily pivot today, you are going to rip to the upside. Take out 124-13+ and it gets pretty ugly as well. Support beyond 123-24 comes in at 123-21+, 123-15/15+, 123-09 and 122-30. Resistance above 124-13+ comes in at 124-17+, 124-22+, 124-26, 125-01 and key resistance at 125-09 (2.288% equivalent, 50% RT of the long-term sell off). Like the idea of adding conditionals here in belly, targeting 5y sector. Think about adding synthetic calls in 2 month time (FVM) just in case we can get a back up first, but vols should stay pretty firm in that sector.

All right, enough for now….have a good Monday,