risk on trade- until story about China cutting US imports….jeez (Monday)

We kick off the sixth month of the year, with mixed on to slightly better risk mentality, better in Asia led by Hang Seng, but giving some back in Europe and hedging bets ahead of US open. Volume has been a bit better than recent although still lacking any thematic flow. As of 8:30 AM ET, Treasuries are 1-4 bps higher and steeper, while US equity index futures have now broken lower, trading down small ahead of the cash open.

Treasuries were better bid on the Asian open against the backdrop of the domestic violence in the US, but those gains quickly eroded as Hang Seng made nice risk move higher after the Trump announcement on Friday was not nearly as hawkish as feared. Early US money manager buying of 10s and TY contracts quickly gave way to better Asian real money selling of 10s and 30s, along with better Asian bank paying in USD 5y and 10y swaps. Central bank buying took place in 30s and mortgages after Tokyo lunch, with some Japanese real money receiving in USD 10y and 30y swaps. Treasuries came under a second round of selling just ahead of European open, European macro accounts selling 5s and paying in USD 5y swaps.

Treasuries put in their lows of the session as talk that German stimulus package on the order of EUR 75BN to 80BN has largely been agreed to among the parties in Germany. US 30s were sold aggressively, with buxl getting hit as soon as all of Europe got rolling. Talk that China would halt some US farm product purchases reversed the risk sentiment and Treasuries traded almost back to their highs of the night made on the Asian open. European dealers lifted 10s, hedge fund buying of 2s and adding USD 2s10s steepeners in swaps, as curve continues it steepening bent. Since NY walked in, flows have quieted, better two way interest in 5y sector: dealers buying, hedge funds selling.

As noted earlier, Hang Seng led a risk on rally through the Asian session, in hopes that Trump left enough room to negotiate a compromise with China. Hang Seng closed up 3.4%, most Chinese indices were up 2.5-3.3% led by the CSI 300, while NIKKEI and rest of Asia was generally .75% to 2% higher. Markets largely ignored stronger Chinese PMI and weaker PMI for rest of Asia. Long end supply this week in Australia and Japan led to steepening pressures for both those fixed income markets. JGB’s traded steeper, largely pivoting around the 10y sector. Aussie rates were pressured by risk bid to AUD, and steepened in concession for this week’s supply. New Zealand rate market was quieter. JGB yields were unchanged in 10y sector, .5 bps lower in 2s and 1 bp higher in 30s/40s ahead of 10y supply tomorrow and 30y supply Thursday (Weds night US time). Aussie 10s were .75 bps higher in yield while Kiwi rates closed flat.

The early risk on trade held through decent if far from spectacular PMI data in Europe, but flipped to “risk off” on a dime when Bloomberg reported at 4 AM ET that “Chinese government officials told major state-run agricultural companies to pause purchases of some American farm goods…” That was about all it took. 10s rallied from 1.2 bps higher in yield on the session to 1 bp lower in about 5 minutes. On the session, flows for European fixed income were moderate at best save those mentioned above. There was some concession selling ahead of supply in buxl and bobl, some real money receiving in EUR 10y swaps, outright buying of gilts and on spread against bunds. Better domestic buying of OATs showed up mid-morning after good RV selling earlier in day ahead of supply this week, but OATs and BTPs remain the underperformer against core with Spain 5 bps tighter to bunds. DAX is under pressure, but rest of European equities holding in better.

Today’s US calendar includes Markit Manufacturing PMI at 9:45 AM ET, followed by ISM and construction spending at 10 AM. The Fed is officially in black out period ahead of the meeting on 10 June, so all we have left for today after data is normal (smaller) Treasury buybacks and Treasury auction of 3M and 6M bills.

Well, for the second day in a row Friday, we held support levels right where we should have
and then did nothing. Market trades so tired and directionless at the moment. Commitment of Traders released over the weekend didn’t help much. Short in US and WN, but not at extremes; big short covering in belly, but that’s just noise. Oh well. For choice today in TYU, let’s call the range at 139-09 to 138-26, after an overnight range of 139-07+ to 138-26+. Seems like the downside is at risk, but there is also a turn called in eminis today, so maybe that’s why we are supposed to hold 138-26. We’ll see. Support below comes in at 138-18+, 138-14, 138-09+, 138-01+; resistance comes in at 139-03+, 139-06+, the 139-09 objective, 139-13+, 139-16, 139-25, 140-11.

Be safe and stay well out there,