tensions on the boil with China and equities paying the price…. (Wednesday)

Clear risk off trade as tensions with China escalate after Chinese government announces tariffs on 106 US goods overnight. While much of the tax can be dealt with, the levy on soybeans and corn is very interesting and may prove politically astute given the impact on Trump’s core base. Then again…. I digress. Since China’s announcement, global equities are off between 1% to 1.5% while US equity futures are down roughly 2% and the greenback tracks lower. Treasuries are 1.5 to 2 bps better in yield, led by the belly.

The Asian session was fairly quiet, with two-way flows dominating the landscape. Asian real money accounts were better buyers of 5s and 7s in Treasury space, both outright and against 2s, with Japanese real money a better seller of 7s and 10s. Central bank was small buyer of 2s, as Treasuries traded sideways for most of the Asian session. Locally, JGBs backed up marginally ahead of the BoJ buyback, the recent rally causing speculation that purchases would be tapered to allow rates to back up slightly; when the purchase amounts were little changed, JGBs rallied led by the belly as banks lifted JGB 10s and 20s. Aussie bank bills rinsed again, another 4 bps higher in yield, making 10 bps in the last 4 trading sessions. Similar to US markets, the idea that the upward pressure on bills would ease after the end of the quarter looks to be a little overly-optimistic. Asian stocks closed their session little changed, with NIKKEI gaining .15%; Asian bourses that were still open after the Chinese announcement were knocked lower on their close, as evidenced by Hang Seng being down 2.2%; look for a repricing tonight for the rest of the Asian bourses unless someone tones down the rhetoric today.

The European open was a tame affair, highlighted by concession building ahead of official supply in both bobls and gilts. RV accounts were better buyers of US 5s against bobls ahead of the auction, while macro account lifted US 10s, Asian real money lifted 10y gilts and US 10s. The block seller of 10s and bunds was back again overnight with a block of 3434 TYM (261K in DV01) sold at 120-29 (3:14 AM ET) and a block of 2773 RXM (542K) sold at 159.31 (3:25 AM ET). That jives with the six block trade sales that we have seen since yesterday in those two sectors, not uncommon for that group at the start of the Japanese new year. The gilt auction went fine, with good demand for the issue amid average pricing, while the 5y bobl struggled a bit to find bidders. Either way, it didn’t matter by that time, as the China announcement was out and fixed income was the recipient of better safe haven buying. The trade since NY arrived has been muted, more fixated on devising plans than trading, while US stock futures have steadied but European equities are holding just off their lows ahead of the US open.

Today’s calendar includes ADP at 8:15 AM ET, Markit PMI at 9:45 AM, followed by ISM, factory orders and durable goods revisions all at 10 AM ET. Bullard speaks at 9:45 AM ET on the economy and monetary policy while Mester speaks at 11 AM ET on diversity in economics.

Since end of last week, Treasuries have struggled a bit, being dragged higher on weakness in equities but falling easily during quiet periods or on equity strength. Nutshell, Treasuries trade heavy and tired. That should continue until conditions change: get a better structural short, find a bad short vol position to squeeze, end the selling program out of Japan, etc… So for now, relative sogginess for Treasuries remains the call. With that in mind, for choice today call the range in TYM at 121-11 to 120-30 for the rest of the day (TY has a low of 120-27+ from overnight). As for levels in TYM, resistance comes in at 121-05 (overnight high), 121-07, the aforementioned 121-11, 121-14, 121-24, 121-29; support comes in at 120-31/30 level, 120-28, 120-24, 120-19/19+, 120-16, 120-10, 120-01. If we quiet down a bit today, would look for a spot to buy some gamma. While not normally considered a wise idea to buy gamma now ahead of NFP on Friday, there are too many moving parts right now and think some conditional protection makes sense. Question is how to avoid overpaying for some 2m expiries on 5s and 30s, both of which should provide value.

Good luck this hump day….