The last week of the first quarter kicks off with a solid risk-positive mentality after weekend speculation that the US and China are working to avert a trade war and cut tariffs and quotas, not to mention trimming rhetoric. Equity futures have retraced much of Friday’s carnage while Treasuries are trading 2.5-3.5 bps higher in yield to start the week.
The start of the Asian session saw a resumption of Friday’s risk averse mentality, as US equity index futures and cash equities in Japan opened softer, while Treasuries flirted with Friday’s late session highs. As market reconsidered Mnuchin comments over the weekend about seeking a solution to Chinese tensions, talk spread of quiet negotiations between Beijing and Washington on quotas and tariffs. By the European open, hope had sprung and risk had sprouted wing. As you may be able to tell, I am a little skeptical. As for flows, activity was surprisingly high for a Monday that kicks off a holiday week, albeit at more sociable volumes. Japanese accounts were better axed to pay in USD 2y swaps while Asian accounts were better buyers of 2s; the dollar found a footing and traded back through 105 in USDJPY. Asian bank was better buyer of 5s outright, while Japanese banks were seen receiving in USD 7y swaps while selling US 30s; Asian real money also paid in USD 10y swaps, both outright and on spread against USD 2y swaps. There was some deal-related buying of 30s and some interest in adding from credit desks as well. Aussie 10s traded marginally firmer, while JGBs were mostly quiet ahead of supply this week and fiscal year end on Friday. The NIKKEI reversed course and closed up .75%, while rest of Asian was marginally firmer although China still lagged slightly.
European session has seen growing risk sentiment, aided by the 45-handle round trip in Emini futures. Trade in European products has been slower this morning, largely following Treasuries and trading inversely to risk priced in equity assets on the Continent. Treasuries have seen RV selling of 2s shortly after the London open and then again as NY traders arrived; there has also been macro paying in long end of EUR and USD curve mid-morning in Europe. RV account has also sold US 5s to buy 5y gilts (USD 5y auction tomorrow, no supply outside a linker in UK this week), while UK real money has added some 5y. Flows and activity got very quiet by mid-morning in Europe, as Asian accounts seemed to drive more of today’s activity than European traders have. European stocks all trade slightly higher, content to watch the volatility in US equities for now, with gains of less than .5% being the norm for now. Peripherals are outperforming slightly at the moment, .5 to 1 bp tighter against core for now; the exception is Italy which is almost 3 bps wider to bunds given the issues in the boot. Activity since the NY arrival has not picked up much since it waned during the European morning, but there has been minor European real money interest to buy US 30s since about 7:30 AM ET.
Today’s calendar includes second tier data in the form of Chicago Fed National Activity Index for Feb at 8:30 AM ET, followed by Dallas Fed for March at 10:30. We will hear from Dudley (12:30 PM ET) on the future of financial regulation, from Mester at 4:30 PM on monetary policy, and Quarles will speak at 7:10 PM on the economy. The quarter end supply kicks off today with $30BN 2y notes to be issued at 1 PM ET, following the weekly issuance of $96BN in 3m and 6m bills at 11:30 AM. Come hungry please….
Well, it sure feels sunny today with S&P having recovered 2/3s of Friday’s disaster…now about the rest of that week. You have done some technical damage in equities that can’t be undone by reversing the Administration’s trade policies; at a minimum, you now have cleared the way for at least another 5% add to the correction if not an additional 10%. But in Treasuries, it’s also very interesting, as regardless of what risk/equities/fear do to equity and related risk markets, notice how 10s can’t get through 2.8% yield level. That is the level for now, and accounts have gotten paid for selling against that level; the payoffs haven’t been huge, but they have been consistent. Data shows much of the (small) short in fixed income having been forcefully liquidated after the strong employment report failed to push yields above important technicals; the absence of a short to squeeze is keeping rate market contained. Don’t look for that to change ahead of quarter end this week. As for choice in TYM today, call the range 120-24 to 120-08+. If I am wrong and there really is something afoot on a trade agreement, then look for market to make a dive for 119-28+, but I don’t think so. As for rest of levels in TY, resistance comes in at 120-17, the aforementioned 120-24, 120-27, 121-01+, 121-09, 121-17+; support comes in at 120-12, the aforementioned 120-08+, 120-02, 119-28+, and 119-23+.
Have a good day….
mjc