Markets are roiled again this morning after the official resignation of Gary Cohn shortly before the Asian open yesterday evening. US equity futures quickly dropped 2%, while Treasuries rallied 3-4 bps led by the belly. Since then, markets have reversed about half that move, but nervous remains the theme ahead of the today’s cash open in equities.
News service and market focus overnight has generally been on Cohn’s resignation yesterday and the early 2% drop in US stock index futures during the Asian session, but there are several other items to note heading into this Wednesday ahead of NFP on Friday. While early flow in Asia was concentrated on some fast money short covering in TY contracts, hedge fund buying of 5s, central bank buying of 2s and real money receiving in USD 10y swaps, the better flows throughout the night have been better macro paying in USD belly out to 10y swaps, RV selling of Treasuries to buy bunds early in the European session (as fears about a hawkish Thursday ECB meeting kept bunds down early), and European real money selling of 5s and 7s. Early in the London session, SDR page showed $250K in DV01 of USD 5s30s steepeners going through as well. You get the idea: sell Treasuries/ pay fixed in swaps into the strength.
On the heels of more hawkish Kaplan comments yesterday calling for higher funds rate, Lael Brainard seemingly shed some of her dove feathers as she was quoted overnight saying, “with greater confidence in achieving the inflation target, continued gradual increases in the fed funds rate are appropriate.”
While chatter and news feeds focus on the Cohn story, DAX manages to shrug off rest of world and trade up today on the positive growth story there as peripherals outperform core by .5 to 1.5 bps in 10y sector, a signal that not everyone sees the glass as half empty this morning.
Today’s calendar includes ADP in a few minutes, followed by ULC/NF productivity and Trade Balance at 8:30, ahead of consumer credit at 3 PM. More importantly, Bostic and Brainard both speak in the next 30 minutes while Fed will release Beige Book at 2 PM ET.
So Treasuries may be higher this morning, but it feels exhaustive on the trade higher. Market opened right at top of value for last Thursday/this Monday, and failed the first test. We aren’t that far off the highs, but if equities turn positive, yields should make a break for higher ground, especially ahead of the Beige Book. As an aside, there should be some positioning that goes through today ahead of Friday’s data, and it bears remembering that February NFP data has a strong history of overshooting the estimates; that will not be lost on market as accounts get to positioning ahead of Friday. Keep it simple for now, so for choice call the range in TYM today at 120-19 (next test of last night’s high should take it out, look for that to happen early today) to 119-26+. As for resistance levels, watch 120-14/15, then the aforementioned 120-19, 120-26, 121-01, 121-07; support comes in at 120-03, 120-01, the aforementioned objective at 119-26+, 119-20+, 119-08.
Have a good hump day….
mjc