Where to start? Or “where to end” may be more like it. Since trade tensions exploded late last week, it has been a neck-straining whip of a ride. Today is no different, however there have been a few moments today that indicate the headlines and moves are increasingly stressing markets on the margins and draining even more liquidity (see TRYJPY overnight). After a wild ride during the Asian session, with London closed, markets have reversed some of Friday’s risk off trade. Futures volume is huge (TY about to blow through 1MM contracts); as of the Chicago pit open, Treasuries are .5 to 2 bps firmer, in a slight steepener, while equity index futures are .5% higher ahead of the cash open.

Flows in Asia were mixed although when the dust settled, levered accounts were the more active segment, axed to better selling the higher Treasuries levels. Before that, there was aggressive Japanese bank buying of 5s and 7s, along with some FVU contracts, while levered accounts covered shorts in 2s and central banks bought 3s. Asian banks were actually better payers in the belly, mostly paying in USD 5y swaps. The initial move on the curve last night was a steepener as accounts stopped out Fed “on hold” bets, having to reverse the Jackson Hole-inspired moves of last week. Once the market repriced, we traded sideways until a crash in the Turkish Lira, with talk being huge Japanese unwinds behind the move, causing Treasuries to richen another 2 bps into the European open, before trading halted in cash. JGBs traded up 4 bps on the session to new all-time highs (-28.5% in JGB 10s), while Aussie and Kiwi rates rallied 8.5 bps. Asian stocks ended the session down between 1.5% and 2.5%, with NIKKEI off 2.2%.

The Summer Banking holiday in the UK kept a lid on activity to start the European session, but fear not: a Trump tweet storm just before 3 AM ET got us moving, even with cash closed. The big tweet was that China had called US trade negotiators “last night” and wants to come back to the negotiating table. Risk reversed on a dime, pressure on commodity currencies lessened, Treasury futures cheapened back to unchanged on the session (cash closed remember). Treasury volume was much lighter in Europe, with better levered interest to sell TY and US contracts, some RV interest in 5s30s flatteners (FV/US) was evident after the market repriced post-Trump comments. When US walked in, banks became better payers in USD 10y swaps, with some interest in USD 2s10s swap flatteners. Bunds saw CTA buying on the open as that contract opened above last week’s highs, while interest eventually turned to better efforts to pay swaps in EUR 10s both outright and on the curve against EUR 2y sector. Volume was mediocre at best with London out. The theme for Europe is choppy and uninspired, as accounts understand how perilous all this fighting is leaving our ability to have any real price discovery.

Stepping off the soap box, today’s calendar has already passed, with Durable Goods a mixed release (softer headline, big revision higher to last month). No one will care when Dallas Fed prints at 10:30 AM ET. After Jackson Hole, there are no Fed speakers or events on the calendar for the day. We will have end of the month supply starting tomorrow and what looks like a .12 year extension for Treasuries, but a HUGE rebalance is expected out of fixed income and into equities (you all know my view on that silly thing that everyone knows and the market prices well in advance, but my bitterness is showing through again here).

So, for today, just have to say, tell me the tweet and I’ll tell you the levels…. But there goes the bitter again…. So for choice today in TYU, let’s call the range FOR THE REST OF TODAY at 130-07+ to 130-21. HOWEVER, that presupposes a market left to trade without outside influence. On the downside, will point out that 130-25 is the overnight low and a big support level. Are we about to get a risk off tweet?? Below there, 130-21, then 130-14+, 130-09+, 130-05+, 129-27+. On the upside, if we take out 131-07+, we are going back to the highs overnight (and for the move) at 131-19+. Don’t get me wrong, that level is coming out, it’s just that it does not have to be today, and the reality is it would be better for the market in general if that were the case! Above 131-19+, watch 131-30 and 132-00+, 132-05 (1.375% equivalent cash 10s). End of the day, play at your own risk right now. In general, don’t be short, don’t sell vol unless you have something on the other side, and look at conditional bull call structures anytime gamma backs up. 27 simple words in that sentence, which can spell the difference between surviving and disaster thanks to the silliness of our world these days.

Best wishes and good luck out there,
mjc