very active overnight highlighted by MOFCOM statement after NY arrived (Tuesday)

Market has traded better to risk on since mid-session in the US yesterday, continuing that theme throughout the evening but really catching a bid on the MOFCOM (Ministry of Commerce, China) comments at 7:47 AM ET: “US Trade dispute should be solved via talks.” Market is taking this as invitation to back off tariff escalation and return to negotiation. Volume was good throughout the night but is even better in the last since 7:45 AM ET. As of 8:45 AM ET, Treasuries are 5-8 bps higher in a bear flattening while US equity index futures are up almost .75% ahead of the cash open.

Asian session opened to better selling of US front end, continuing the theme begun last week, with Japanese real money accounts selling 2s, central bank selling 2s and 5s, and RV accounts selling US 3s to buy Aussie 3s leading ahead of RBA cutting rates 25 bps to 1.25%, fully having been priced into market. After Tokyo lunch, theme in Treasuries was selling of US 10s and 30s to buy JGB 10s and 30s on behalf of Japanese real money accounts, while selling pressure in front end continued on cross-currency trades against AGB 3s. Macro accounts were bid-side buyers of 7s and 10s, while Asian bank took the opportunity to add 5s outright and to receive in USD 5y swaps. Locally, despite a softish JGB 10y auction, JGBs rallied 1.2 bps on the switch out of Treasuries, while Aussie 10s rallied a modest .9 bps as the RBA cut was fully priced in and there was minor disappointment that RBA was not more dovish in their statement after the meeting. Asian equities were mixed with NIKKEI basically flat, while China gave back its gains from Monday, closing 1% lower, while the rest of the Asian bourses seemingly marked time.

The European open saw CTA buying in gilts and Treasuries as US equity futures ran into early European selling; that bid for fixed income faded a bit as bunds dragged everything down under concession-building ahead of sovereign supply dump across Europe. Even soft Eurozone CPI (+1.2% y/y and +.8% y/y for core), widely expected after the individual countries were all soft releases last week, and a drop in UK Construction PMI (48.6 vs 50.5 last, whoops) did little to stem the backup in fixed income. Austria issued sloppy 5y and 10y; German 11y linker was okay at best; and, UK 5y gilt met with decent demand. After the issuance, fixed income bounced until the MOFCOM comments shortly after NY arrived. The theme overnight was put buying and rolling in USD futures overnight with almost 85% of a very active session being in ED puts; hedge funds have been very active in adjusting and adding to conditional downside since last week, with volume today simply huge. The other theme all night was continued pounding in the front end of cash Treasury curve. Central banks sold more 3s throughout the London morning, with Asian central banks adding more spread product (so tired of writing that, but it will be relevant on the next great squeeze), while RV accounts have paid in USD 5y swaps against EUR 5y swaps, and outright in USD 7y swaps. The early NY trade saw bank receiving in USD 10y swaps, but flows turned all to selling vol and fixed income as eminis took out their highs on the comments from MOFCOM. Gilts saw early RV buying of front end against 5y, but 5y gilt has outperformed since the auction, with some macro buying that has been overwhelmed slightly by the pressure from the backup in Treasuries. After being under pressure early, good buying against Treasuries and short covering after European and German supply (hedge funds and RV) has helped EZ rates outperform slightly. European equities are at their highs of the session, better by 1.5% for DAX but far less than that in rest of European bourses.

Today’s calendar includes factory orders and durable goods, both to be released at 10 AM ET. More importantly, Chairman Powell will speak at the Chicago Fed Conference around 9:55 AM ET; his topic will be policy strategy at the Fed, and will obviously allow him to direct thinking ahead of this month’s FOMC meeting. Brainard will speak at the same conference on a panel at 3:45 PM ET. Obviously, it’s all about Powell and trade tensions today.

Well, guess we were a bit aggressive in saying top out yesterday morning; the afternoon was a painful affair for shorts or anyone getting short. True to form, market made new high for the move in the afternoon, and then rolled over (for now!) overnight. Need to do some work on downside though to get any confirmation. Still like the idea that the market has completed something on the upside here and should back up, but today will be key. In order to put any belief in this “completion idea” to mean anything, we have to get through this value gap in TYU down to 126-21 (i.e., 2.15% in cash 10s). So here we go: for choice today in TYU, call the range at 127-02+ to 126-21 (high overnight was 127-11+ after high yesterday of 127-15). If we can stay below 127-00 and settle below 126-27 (3 PM ET), we likely will fill that value gap in the afternoon. As for rest of levels, support comes in at at the aforementioned 126-27 and 126-21 levels, along with 126-18, 126-13, 126-10+, 126-06. Resistance comes in at 127-02+, 127-05/05+, 127- 12, 127-19, 127-22+. Tough to be aggressive selling vol here given it’s smack down already this AM, but can try to sell some on any breaks the above support levels.

Be careful out there….