Friday and snowing in Chicago, and late night at the office sending market updates, so let’s keep this simple today! Markets trade better to risk on, slightly higher volumes (nothing to write home about though), primarily on this story we sent out yesterday evening about the Gilead drug Remdesivir (GILD trades up 10% overnight). We will hope, but it’s a long road. Risk is better bid on the story for now, but off its early extremes. As of 8 AM ET, Treausry yields are 1.5 to 4.5 bps higher in a small steepener, well off their high yields and steeps of the night, while US equity index futures are up 2.5% to 3% ahead of the cash open.
*Lost in the shuffle today has been the Trump Administration’s announcement of the reopening plan for the country, that took place just before the Remdesivir story hit. Honestly, he has placed the ball in the court of the 50 governors of the United States; if this goes smoothly, he gets the credit and if it goes poorly, well we know who is to blame. Genius, except lives are not politics. Some of the pressure on risk overnight has been from various analysis (see UBS, Jeffries) that argue we just extended the shutdown. Time will tell, in a similar way that we are still 4-6 weeks at a minimum from seeing if Remdesivir is really the answer to our pandemic.
*Chinese data was worse than expected today, while the Q1 GDP numbers officially ended that country’s longest expansion on record. Q1 GDP printed -6.8% vs an expected -6%, while retail sales also disappointed at -15.8% in March vs expected 10%. Guess that’s why the following headline scrolled across Bloomberg at 7:10 AM ET: *CHINA POLITBURO VOWS STRONGER POLICIES INCLUDING RRR, RATE CUTS. Should see the next cut over the weekend.
*Flows in Asia saw early hedge fund selling in US and WN contracts further press the bear steepener, CTA selling in TY, and some Japanese bank selling of US 5s in cash. For the first time in weeks, activity was more focused on futures and Treasuries than swaps. Treasuries flat-lined after making the lows of the session just before Tokyo lunch, then traded slightly better on the release of the disappointing China data. For the third day in a row, there was a block flattener trade in futures before Tokyo lunch, same sizes and direction: client bought 800 USM for 179-26 and sold 2000 TYM at 138-20, today at 8:43 PM ET for the usual $180K of DV01 in 7s30s. After Tokyo lunch, there was also better hedge fund covering in cash 5s, central bank buying of 5s and 7s, along with some mortgages as usual, and some Asian real money buying of cheaper 30s.
*RBA and RBNZ both further cut official bond purchases, under the heading of normalization and not unexpected, but rates were underpinned by good demand for Aussie 2032 tap that stopped well through secondary market prices. Japan put in a quiet session. JGB yields closed 1 bp higher in 10s, 2.5 bps higher for Aussie and Kiwi 10s. Asian stocks traded better to risk on the Remdesivir story, with NIKKEI up 3.5% to lead the way, everywhere else up between 1% and 3%.
*Treasuries have clawed back a substantial part of their early losses and steepening during the European session, on the combination of mixed growth stories out of Europe, cautionary dealer strategy pieces on the recovery, and lack of follow through on last night’s early euphoria on hopes for a cure for the virus. There was continued central bank buying of 5s and 7s that underpinned the market, European real money buying of US 30s outright and on the curve against 5s, and RV buying of TY against 10y gilt futures. Swap flows were amazingly absent most of the night, maybe as today’s deal calendar is currently lighter, with only small interest to pay in USD 10y swaps mid-morning in Europe.
*The rising risk tide of course is supporting peripherals, with BTPs again outperforming everything, as they trade 8.5 bps tighter to bunds currently, off their tights of the day but still impressive. Real money continues to underpin on the belief that Eurogroup will support the Italian state. While volume has been fairly light in Europe, the activity is heavily skewed toward putting cash to work on the buy side in bunds, BTPs, and OATs today. Gilts trade mixed, with 10y sector outperforming in mild flattening that sees front end under pressure. European equities trade 3-4% better, led by the DAX and CAC.
*Only data on the docket is LEI at 10 AM ET. Big event will be Treasury’s release at 12 PM ET of the Primary Dealer Question and Discussion notes that will likely give traders a much better idea of what quarterly refunding will look like in a few weeks (week of May 11), and how the new 20y will fit into the schedule. This likely will be the biggest event of the day for you curve traders, and will help set the tone for the next few weeks. Fed will also conduct its normal buyback operation: begins at 9:50 AM ET and ends at 12:20 PM.
*As for today and the markets….take a look at crude….CLM0 is trading 18.47, which is only down 7% from yesterday’s close, after it was risk bid on the open last night. Says here that crude below $20 does not jive with equities up almost 3%, and below $25 doesn’t fit with SPX almost 30% above its lows!!! Just saying, something is rotten. Don’t really get this trade, don’t want to fight it, but everything came together on the “breakout” Wednesday to say stocks make move back to the lows, possibly even 1700 in SPX while 5s go to 0% and 10s to .25%. And then last night hit, not as retracement within the new bear move for risk but rather as projecting a much larger bullish correction. Don’t get it. But let’s see what happens next week. As for today, call the range in TYM at 139-04 to 138-22+, after an overnight range of 139-01 to 138-17. Support below 138-22+ comes in at 138-15/15+, 138-11+, 138-02, 137-25, 137-22. Resistance comes in at 139-01, the aforementioned 139-04, 139-08+/09, 139-13+, 139-18/19, 139-27. Here’s the deal: if we get really lucky, maybe can back up to 138-15, and just BUY IT there. As long as we stay above 138-08 in TYM or 178-27 in USM, there is no reason not to be long fixed income. And if we get really lucky, they continue to punish vol for all the wrong reasons; take some out of the wings and we can start adding some more synthetic call structures!
Have a great weekend, be safe and be healthy,
mjc