Guess we have officially entered the holiday market, with lighter volumes the theme since yesterday, as risk continues to outperform in an otherwise quiet market. Both US and China send signals of backing off the trade war mentality since Sunday, the latest being Chinese Premier Li comments just after 7 AM ET. Treasuries have clawed all the way back to unchanged just before 8 AM, with belly leading slightly, while equity futures have come off their highs but are still portending solid gains 90 minutes before the cash open.
“Risk on” was the early and persistent theme from the outset last night in Asia, albeit on lighter volume. Early trade saw small leverage selling of TY contracts, along with hedge fund paying in USD 7y swaps. Central bank was small seller of old 2s and 3s, while US real money account paid in USD 10y swaps. Treasuries took another leg lower as China arrived, with Asian equities and US index futures adding to early gains. After Tokyo lunch, we saw what looks like the first of month end extensions with Asian real money lifting US 30s and Japanese real money lifting 10s; this helped Treasuries crawl back to just about unchanged into the European open. Locally, JGB curve came under early steepening pressure on the back of better equities and consternation about JGB 40y auction today. After a decent concession, the auction priced better than feared although bidding was lower than last month; JGBs traded quietly after the supply event, with JGB 10y closing 1.4 bps higher in yield. Flows in Japan were heavier before the auction, with good domestic account receiving in JPY 4y swaps but better foreign real money paying in JPY 5y and 7y swaps. Australia rates followed Treasuries throughout the night, although interest remains on the bill sector where upward pressure on rates continued Tuesday. As for equities, NIKKEI led the rally, up 2.6%, with China up 1% and the rest of Asia solidly positive as well.
The European open saw bunds and gilts marked lower after late pressure on Treasuries Monday. With only a gilt linker on the docket today, hedging pressure was limited and European fixed income held well above yesterday’s lows. Soft Spanish CPI (+.1% m/m vs expected +.3%, +1.2% y/y vs +1.4%), kicking off the European inflation releases for this month, caused some fast money short covering in bunds, with hedge fund lifting RX contract and macro account buying schatz. There was also macro buying of gilts against US 10s, as gilts found even more support when Barclays revised the month end for UK Treasuries from +.20 years to +.30 years. The UK 40y linker went fine, especially after a good concession had been built in ahead of the pricing. Flows in Treasuries saw macro paying in USD 30y swaps, European real money buying of US 30s and 10s for month end extensions and more central bank selling in the front end. Peripherals are aggressively embracing the risk on mentality, highlighted by Italy and Spain outperforming core by roughly 3 bps. European equities are up 1.25% to 2% across the board ahead of the US cash open.
Today’s calendar remains light for data, with only S&P Corelogic at 9 AM ET, followed by Consumer Confidence and Richmond Fed at 10 AM. Bostic speaks at 11 AM before Atlanta’s Economic Conference. Of course, the biggest event of the day will be Treasury’s auction of $35BN in new 5y notes at 1 PM ET, following $65BN of 4-week bills and $24BN of 52-week bills at 11: 30 AM.
Barclay’s revised month end extensions are out this morning. In the US, Treasuries extend .06 years, agencies by .09 years, credit by .13 years (revised higher), MBS by .07 years, and the aggregate by .08 years; meanwhile, TIPS extend .01 years imperically and by .02 years in real terms. In Europe, the Euro aggregate extends .10 years, Treasuries extend .11 years, and agencies extend .13 years (revised higher); the UK aggregate extends .22 years while UK Treasuries extend .30 years (revised from an initial .20 years). In Japan, the aggregate extends .24 years and the Treasury index extends .25 years.
Well, the bounce we were looking for in equities came one trading day later than thought, which requires some pause for consideration. Reality is that the delay may signal chance to have a more meaningful bounce in the thinner holiday market. While impressive on its face, yesterday’s bounce didn’t even get us to aggressive sell levels; the continuation of the rally overnight has taken us right to aggressive resistance (2673 in SPX index), so let’s see what happens. Easily could see a trade to 2693 in the index before some decisions have to be made but we’ll see. For choice today in TYM, call the range at 120-09 to 120-24. Feels like the month end buying is poised to show up today, maybe coming out of the 5y auction. If we are going to prevent a double bottom at 120-11 (yesterday and today’s low thus far), we will need to make that move around the equity open, then we’ll see if the month end buying moves the market in thin holiday conditions. As for support in TYM today, watch 120-11, the aforementioned 120-09/08+, 120-03, 119-22, 119-14; as for resistance, watch 120-22, the aforementioned 120-24, 120-29, key 121-01+ level, 121-09/09+, 121-17+.
Have a good Tuesday,
mjc