Let’s call today the last day of a brutal quarter, one that we should all be happy to put behind us. Oh, AND it’s Balloon Tuesday with stocks opening lower. Can’t fade what works so I’ll bet you lunch we get a risk rally by the end of this day!
Market was better to risk on throughout the evening, but has pared that sentiment into the last day of the month, quarter, and (for Japanese firms) fiscal year end since mid-morning in Europe. The end of this month can’t come soon enough. As of the cash open in equities at 9:30 AM ET, Treasuries are flat to 1.5 bps higher in yield, with the belly underperforming, while equities have opened roughly .5% lower in the early rotation.
The month end brings us a couple important items to consider. Many services and providers are not supplying month end extension data. There are too many moving parts, and just like rebalancing, there is reason to believe that many managers will look to “readjust” at the end of April when there is a better sense of what benchmark durations in fixed income sectors actually look like. April is usually a fairly large month for extensions as is, so it could be interesting in 30 days. One service has Treasuries extending .03 years, but Barclay’s came out over the weekend, redoing their index to exclude dropping out under 1-year tenors which effectively then flips their index from +.03 years to -.03 years. So there you have it. That said, we continue to see buying in Asia and to a lesser extent in Europe that is month-end driven by real money types. It’s smaller but the reality is that some people are not going to wait until the end of April have some kind of massive extension to deal with when we also have the ever-present threat of the Fed targeting 10y at some great level like 25 bps!
In a similar vein, the same can be said for this month’s rebalancing. As an academic excercise, the rebal number is MASSIVE. Largest it’s been in US since 2018 and largest in Europe since the depths of the sovereign crisis in 2011. Some index providers in Europe have already announced a delay in reporting until April, but everywhere else is still an open book. Not that we don’t have an idea of the performance of this sector for March and Q1, but academic exercises don’t always become programs. There will certainly be some who choose “prudence in sticking with our governance,” but the question is how many. Plus, have not seen much mention, but this is the end of a brutal quarter and if stocks don’t come out of this hole shortly, you run the risk of some other account bases locking in their losers for tax purposes and “starting clean” next quarter.
As for the market, it was another quiet night, more about managing the roll off of this quarter. There were some violent moves on crosses against JPY during the early Asian session last night, especially against the dollar, which net of net, left Treasuries softer for most of the early Asian session. “Strong” Chinese PMI data (52 vs 44.8 on the manufacturing and 52.3 vs 42 for the service sector) took Treasuries to their lows of the session, but they bounced back into the range quickly as market actually ignored the data. JGB 2y auction weighed on local markets, with healthy concession in the front end of JGB market into the pricing. Once the FX machinations were out of the way in Japan, Treasuries began a steady climb back toward unchanged. Flow saw some month end buying in US 30s from Asian real money accounts, all after Tokyo lunch. Japanese rates closed 1 bp higher in yield (10y sector), Aussie 10s were .5 bps higher in yield after RBA buybacks supported market most of session, while New Zealand 10s closed 5.5 bps higher on some selling of Kiwi 10s to buy JGB 10s for fiscal year end.
Europe has seen a growing slate of issuance today, yet again. Meanwhile, Italy issued BTPs in 5s and 10s, sloppy but it’s done. Italian 10s are only 5 wider to bunds after the supply, with most peripherals underperforming slightly, although for anyone who actually does extensions in these products, the numbers especially in Italy and Greece would mean some good buying. Treasuries were quiet, although there was a wave of macro paying in USD 3y, 10y, and 30y swaps shortly after the European open, with better deal-related paying in USD 20y swaps and receiving in 5y swaps. Futures saw RV selling of TY outright and on the curve against FV and US.
Okay, so what’s a person to do here? Well, the best would be to get ALL the accounts in one room and come up with a plan, but I guess that ain’t gonna work in our brave new world of “Social Distancing.” SOOOOO, barring that, we have to go back to what has worked so far: technicals during this “correction in the bigger (risk) bear market.” As we noted last week, EVERYONE is looking for 2700 in the SPX. Good for you. That means that you have to be ready to sell a failure just above 2660 (2667 target loosely), but prefer to let them have their 2700s, and then some. Says here that means you have to patiently wait for a trade through the 2707 level they are all looking at, potentially all the way to 2800/2835, squeezing out all those weak shorts. Then sell! So taking out all the guessing on how much rebalancing we get, how much selling for quarter end we get, etc etc, have to stick with the technicals that have worked so far. That means stocks must be up by the end of the day. If they aren’t, then it’s time to go back to the dark room…
As for fixed income, see above. Too many options this month end. Guessing that at least a few extensions will get done ignorant of the new levels (i.e., no managers are going to sell to match a made up contraction!), with some buying getting done as a way of Dollar Cost Averaging for the “March/April” extensions in 30 days. So let’s stick with what we know. For choice today in TYM, let’s call the range at 139-03+ to 138-03, after the range thus far has been 138-27+ to 138-11. There is one signal that says getting back to 139-11 would be a massive bull signal, but everything else argues for more pressure first. Resistance here comes in at 138-27+ (overnight high and pivot), 139-03+, 139-11/11+, 139-28, 140-01+, 140-18, 140-24, 140-28+; support comes in at 138-17+/16+, 138-12+, 138-11 (overnight low as well), 138-03, 138-00+, 137-27, 137-24+, 137-15.
Have a good end of the month, and be safe out there,
mjc