risk off to start the week on confluence of (for now) smaller events…(Monday)

Risk off tone ruled the start of this week, with a troubling outbreak of COVID-19 at Chinese outdoor food and fruit market (where have we heard this one before?), but all the more worrisome in Beijing. Concern about a spike in some regions of the US added to negative sentiment, while soft Chinese data didn’t help either. Volume was very strong early in Asia but has slowly tapered, with activity since early London slowing markedly. As of 8:20 AM ET, Treasuries are 1-6 bps lower in yield in a bull flattener, while US equity index futures are down roughly 2% ahead of the cash open.

With eminis opening down 1.5%, Treasuries were supported by early US levered short covering in TY and US classic contracts when we quickly took out Friday’s highs. Japanese real money lifted 30s, Asian bank actually received in USD 5y swaps while Asian lifer received in USD 30y swaps. Japanese banks lifted 5s and 7s, while Asian central bank lifted 5s and 30s, but did not see them buying spread product today. After Tokyo lunch, there was better hedge fund selling in intermediates and 7s, with a block sale of 3350 TYU0 for 139-00 ($301K of DV01) weighing on the 7y sector off the highs just before London open. Volume in Europe was lighter, and has continued tailing since mid-morning. There was better RV selling of rich 20y sector, with macro adding 5s30s steepeners of the tights. However, when US showed up, you had better portfolio buying of 10s and some option desk receiving in USD 10y swaps.

In Asia, most major markets largely repriced and then sat there. Flows in Asia into JPY, AUD, or NZD were sporadic at best, with Australia passing on buying 3s at the normal time, now having skipped any further QE since back on May 6th. Chinese industrial production, retail sales and fixed asset investment data were all weaker than expected, but largely ignored given the more important affairs. JGB yields dropped 1 bp in 10y space in small bull flattening, while AUD 10y was 5 bps lower in yield with stronger bull flattening, while Kiwi rates repriced 1.5 bps better in parallel bull shift. Asian stocks were down in sympathy with the move in US equity index futures.

The European session was actually very quiet. Eminis took an early run to new lows that Treasuries largely watched, which left European risk on back foot. Flows in Europe have been extremely light: some downside gamma covering (i.e., covering in RXU puts), some real money buying of bunds outright, against schatz (2y) and against peripherals. Gilts have been nondescript, following Treasuries and bunds higher. European equities are down between .75% and 1.3% ahead of the US open.

Today in the US, we will get Empire State Manufacturing at 8:30 AM ET, with TIC data coming out at 4 PM. Kaplan speaks at 10 AM ET, with Daly speaking at 12:30 PM. Tomorrow brings us Powell’s semi-annual update to Congress, beginning with the Senate and continuing before the House on Wednesday, while Treasury will reopen last month’s 20y refunding on Wednesday and issue 5y TIPs on Thursday.

It’s getting a bit warm in the kitchen again. Friday’s inability of risk to hold near the early highs for that session was a good omen of today’s risk-off mentality; now we’ll have to see if you get a break lower in US equities during the day. With US equities off roughly 9% from last Monday’s highs of the move, you are in a very important zone. 2896 in eminis is a big level for many but a break of 2845 will really stoke the flames. Let’s not get ahead of ourselves. In fixed income, want to take a second to look at commitment of traders report that covered the sell-off into the NFP report and the bounce through Tuesday. Very interesting that we saw spec longs cut out aggressively in FV as anecdotal evidence indicated; however, the spec position in TY, both outright and against shorts was up during the period, which is weird given we KNOW CTAs stopped out Wednesday, Thursday and Friday. Meanwhile, net short position for both US classic and WN ultra both increased during the period as we expected. While both have seen good buying in the flattening since last week, there is still a good short there. And that is the MOST important takeaway.

All right, what about today? Says here that stocks have to take a run back through their overnight lows if you are going to try and do some meaningful basing, which means that in fixed income we might actually make a run for the levels that were generated for Thursday’s trade before Treasuries decided to snooze on the 30y supply. So for choice today in TYU, let’s call the range at 139-09 to 138-27, although we could put a distribution tail down to 138-23. Support in TYU comes in at 138-27 level, the 138-23 level, 138-14, 138-07, 137-25+; resistance comes in at 139-03, 139-05 (objective in some measures), the 139-09 level, 139-13+, 139-16, 139-25.

Have a great day,