risk off to end October, positioning the theme ahead of busy next week (Monday)

Markets resumed trading on Sunday night better to risk averse on the combination of stalling stimulus negotiations in Washington and continued uptrend in COVID cases globally, especially in Spain, France and Italy. Volume and activity are showing some signs of life finally, with a BIG week on tap to start November. But we still have to get through this last week of Rocktober first. As of 9:15 AM ET, Treasuries are 1-4 bps lower in a bull flattener, while US equity index futures are roughly 1% lower ahead of the cash open.

Treasuries were supported from the outset, with hedge fund buying of US classic futures, along with Japanese bank buying of US 5s and receiving in USD 5y swaps. There was deal-related paying in USD 10y swaps early in the session that turned to Japanese bank receiving later in the session. Asian bank was a better payer in USD 5y and 7y swaps, while after Tokyo lunch there was better deal-related paying in USD 30y swaps. Swaps actually traded at a brisk pace throughout the entire overnight session, better to receive in the belly, better to pay on the wings (3s and 30s highlight of the paying interest).

Into the London open, central bank lifted US ultra (WNZ) futures and bought 10s, along with receiving in USD belly (3s and 5s), while London macro account faded the flattening to add USD 5y10y steepener. There was European CTA buying of FVZ and TYZ contracts on the European open as well, while block trade saw 5000 USZ 172/177 riskies sold, selling the put at 52/64, with USZ trading 173-09 at the time. Around the same time, bout of front end flatteners went through: 6600 EDU2/EDU4 (red sep/blue sep) flatteners at 37.5 bps; 2500 EDZ2/EDZ3 (red dec/green dec) flatteners at 17.5 bps; and, 2500 EDZ3/EDU4 (green dec/blue sep) flatteners at 17.5 bps as well. There have been sellers of bunds to buy 10s in unwind of popular trade ahead of November and what should be a busy month. There was fast money selling of 10s, US Classics, and small 30s just before NY arrived on story that AstraZeneca vaccine shows good promise and even could be distributed in small quantity to London hospitals by second week of November.

Asian session for locals markets was fairly quiet, with Hong Kong holiday and some general apathy in trading. Aussie 10s rallied 4.5 bps on good auction results and domestic buying of Aussie 3s. Equities were mixed to slightly lower but really just noise.

European markets opened risk off, and while equities have continued to trade risk averse, bunds have come under pressure on a number of fronts and actually trade flat to worse now, but maintaining flattener bias. The worsening conditions in Italy and France spurred early risk off, as peripherals, led by Italy, trade 1-5 bps better on spread to bunds. Bunds have been sold outright and on spread to US, Italy, and Spain throughout the morning. A story that Nippon Life has announced plans to cut back on their “exposure to foreign bond markets” next year has weighed on bunds, but not USD where some 70% of Japanese lifer longs currently sit. Maybe it’s because Japanese Lifers have not been big buyers of Treasuries, or any foreign bonds for the matter, in over three years; they have actually been net sellers the last 15 months in Treasuries. Now, if you say pension funds and real money, then we have something to discuss. European equities are off their early lows, but still trading down between .3% (FTSE) and 2.6% (DAX).

Today in the US, we already got Chicago Fed (non event at +.27 vs expected +.73, but big revision higher in August), while we wait on New Home sales (10 AM ET) and then Dallas Fed Manufacturing (10:30 AM). There are no Fed speakers on the docket, nor will there be for the next 12 days as Fed is in blackout period through FOMC next Thursday. Just normal 3m and 6m bills today, but we kick off month end supply with tomorrow’s offering of 2y.

A couple things to discuss here. 1) Latest COT data shows big jump in spec shorts in the US classic contract, and there is no indication they shaved that since Tuesday. 2) MS out with piece over the weekend saying the Fed was “in play” if contested election in Trump loss or split Congress (just not sure what “in play” means) as they see fiscal stimulus delayed. 3) This is the time of year that Japanese Lifers traditionally announce their plans for next year (see the Nippon story above), but it’s only noise unless they are going to reverse recent course and actually join pension funds in buying. 4) Month end extension look like .10 years in Treasuries, just average but should be supportive. 5) Lastly, you have the whole election/FOMC next week, plenty to pay attention to for everybody.

As for today and early this week, think we are in a retracement of the sell off since mid-October. Using TY contract as general proxy, if you do a measured move off the bounce from October 5th to 15th, after the larger selloff from end of September, it lines up almost perfectly with a bounce to 138-30+, and that would be a .618 retracement of the second half of October sell off. Neat when that all lines up. That’s for you bears; many other signals are telling me this was the last leg of the sell off to buy. Don’t have buy signal yet, but let’s see. As for choice today in TYZ, call the range at 138-21+ to 138-12 rest of the day, after overnight range of 138-19+ to 138-11. Support below the market comes in at 138-08, 138-01, 137-25/24, 137-18; resistance comes in at 138-21+, 138-30/30+ retracement objective, 139-01+, 139-05+, 139-11, 139-15.

Have a good start to the week,