Well, first day of a new month and the script remains amazingly similar to last month’s story line. China, geopolitical tension remain the headline, but structural shorts continue to be the driver no one wants to discuss (see JP lowering EOY call for 10s from 2.25% to 1.35%). You banged against key resistance overnight, so there’s a chance that we can put in an interim top for now. Volume and activity have been 2.5 to 3 times average. As of the cash open in equities, stocks are mixed, while Treasuries are 1-3 bps lower in yield in a bull steepening.
Risk was on the defensive from the outset last night in Asia, as weekend news reports in China highlighted a review of FedEx and potential for blacklisting the US delivery company. Emini’s opened down .5% amid defensive risk trading in Asian equities. Political unrest in UK and Italy was joined by Germany now, as head of Merkel’s coalition partnership resigned, throwing her leadership into turmoil. You get the idea. Only bright spot during Asia was that Japan, Aussie, and Chinese PMI were at least in line with expectations. The opening bid caused large CTA buying of US, TY, and smaller buying of TU contracts through Friday’s highs, but the early Asian trade actually saw better Japanese real money selling of 2s and 3s along with Asian real money selling of 5s. There was better receiving that materialized after Tokyo lunch from Asian banks in 5s, but Asian real money was a better payer in USD 10y and 30y swaps. Meanwhile, some funny things happened in Asia: yields actually ticked higher, despite risk off, for local fixed income markets. JGBs were under pressure as BoJ disappointed market with unappealing levels for buybacks in 5y and 10y sector this month; meanwhile, Aussie 10s backed up 5 bps as there was heavy unwinding of AGB/UST cross-currency trades as dollar strength is killing the Pnl on what was a good idea until currencies got in the way. As for equities, NIKKEI and ASX were down 1%, while China and rest of Asian bourses were mixed to actually slightly better to start the new month.
Hand off to Europe was smooth enough, until it really wasn’t. It took a few seconds for bunds to go bid without, given the somewhat surprising turn of events in German politics, taking Treasuries and to a far lesser extent gilts along for the ride. There was very aggressive hedge fund buying of German bunds on the open, followed by CTA buying of RXU and UBU (buxl, 30y). Central bank buyers of schatz along with RV covering in front end out to bobls limited some of the aggressive curve flattening in Europe. Treasuries saw nothing short of capitulation out of a number of account types: there have been six block trades of 2500 TYU9 between 4:00 AM ET and 8 AM ET, all buys taking a total of roughly $1.15MM in DV01 in the 7y sector of the curve. There was European real money receiving in EUR 10y and 30y swaps, followed by the same account aggressively receiving in USD 10y and 30y swaps, macro account receiving in USD 2s and 5s to pay in USD 7s and GBP 10y swaps (that’s interesting). Asian real money bought both cash 10s and TYU contracts (7y) in good size mid morning in Europe taking cash 10s to 2.07% (2.069% to be exact) and TYU to 127-10+. Since NY walked in, there has better interest to fade the overnight move as US banks were good sellers of 5s outright and on the curve against 2s, while RV account stepped in to add 5s30s flatteners, taking advantage of the swap curve steepening from overnight. European stocks have rallied around the lunch break in Europe, to now trade basically flat.
The US calendar today is all about Markit PMI at 9:45 AM ET and ISM at 10 AM; we will also get construction spending at 10 AM as well. As for speakers, Quarles is discussing libor right now, Barkin will talk economics in Charlotte at 12:40 PM ET, and Bullard will speak at 1:15 PM.
Okay, so it was ugly, there was pain, and there were more than a few people who were quite bloodied by the time NY walked through the door. Said last week that this could very well wrap up early this week. So going out on a limb here and saying we saw an interim (and I do mean NOTHING MORE THAN INTERIM) top here. Hitting 2.07% was an objective for many technical analysts, as we discussed last week. At this point, will take pains to say this is NOT the way we make important tops and bottoms. But just like end of March, there is ample reason to take a little more aggressive profit than one might normally (i.e., perfect world look at getting out of some long gamma positions) and look at some small bear steepeners (on a break of unchanged though for the latter idea). As for range today, let’s go with 127-04+ to 126-18 for choice in TYU9, with the caveat that the low will likely be between 3 PM ET and 5 PM today if I am right. Before then, support should come at 126-28, 126-23, while below 126-18 support comes in at 126-10+ and 126-06. Resistance comes in at 127-04+, then the 127-10+ level (2.07% equivalent in cash 10s), 127-12, 127-17+, 127-22+. Okay, sorry this was so late….
Have a great morning,
mjc