James Carville, Bill Clinton’s political advisor, once said that he wanted to reincarnate as a bond market because “you can intimidate everyone”. He was not wrong. The bond market is frightening raccoons from air ducts like crazy right now. Investors looking for shelter and betting on aggressive political cuts have led the hottest bond rally in years, if ever.
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US 10-year yields fell sharply, reaching a new record at 0.8%. The US 30yr also shipped a few more points to a historic low of 1.4% and is now where the 2yr was on January 24. The speed of decline has been brutally rapid, although relatively orderly in its progression. Gilding yields in the UK have also reached historic lows. This is where I declare that yields move inversely with prices.
There could be more declines for yields, but more investors are rushing into bonds to increase the risk of backsliding causing further damage. It would be when we really bully. The more crowded it is, the less attractive it will be, and it won’t take much of these levels – a far more limited economic impact in the United States than people fear, or a vaccine, to see the long term come back roaring. The exposure to interest rate risk is enormous, although it is currently one-way traffic.
Today, risky assets are available everywhere, auction havens. Asian stock markets collapsed as liquidation continued after the US session, with all major indices falling more than 3% after Wall Street suffered yet another mad race. Bonds dominate the latter – the complete capitulation of rates again forces stocks to fall. The FTSE 100 is down 1.7% at the opening Friday to trade under 6,600, with a Dax of 11,700.
The Dow Jones shipped 969 points yesterday to join a pattern of wild swings in the US stock indexes this week. The market went from buying the drop to selling the rallies.
This week on the Dow Jones:
Thursday – 969
Wednesday +1 173
Tuesday – 786
Monday +1 294
The S&P 500 is trading very well in Fib levels, finding support around the 2980 level, the 38.2% Fib retracement. This indicates that it is not buying and selling individual stocks, but “the market”, that is, the bond market and algae. SPX also fell short of its 200-day line yesterday. If we see weakness again today and weekend warriors give up their holdings, level 2855 is key. A rally shouldn’t make much progress above 3138.
Still – the Dow’s is up for the week, although futures indicate losses at the opening on Friday. The usual question is: do you want to take risks during the weekend? If the Dow is on the week, you could say that the aggressive monetary stimulus and a range of budget support announced in recent days have helped provide a floor, if not stability.
Likewise, we just haven’t seen a major escalation in cases near shopping malls … I note that HSBC has fired staff from Canary Wharf and broker Marex Spectron has reported one case among its staff. He could soon arrive in town in greater numbers.
The USD is overwhelmed by bond movements. The dollar index fell in today’s NFP data as the 10-year US yield reached a new historic low above 0.80%.
On NFPs, the monthly snapshot of the American job market, these are fairly meaningless against the expected slowdown in coronaviruses. Non-farm operations have lost importance recently anyway. It’s time to banish the NFP fetish. We still expect to see 175,000 employees and + 0.3% on wages, with unemployment of 3.6% unchanged.
Stay on bonds and its correlation to gold, which found a new offer this week as yields plummeted. US 10-year real rates continue to show new lows in negative territory. The previous peak at $ 1690 is coming, with price action currently around $ 1672 / oz. Support at $ 1662.
Real yields influence gold prices: gold (inverse) vs US 10yr TIPS (Treasury Inflation-Indexed Security)
WTI fell less than $ 46, as the weakness resumed before today’s OPEC + meeting. OPEC is pushing 1.5 million b / d of further reductions until the end of 2020, but needs Russia to sign it today. The division is 1 m from OPEC and 500 km from the allies. Russia will go aboard, it will simply extract the price. If they do not, this risks a complete rupture of the OPEC + alliance which sought to support crude prices for more than 3 years. But whatever happens, OPEC and its friends can not cope with global demand and a certain surplus in the months to come. They also have no power over increasing production rates outside their orbit, such as in the United States, Norway and Brazil.
In foreign currencies, the British pound made gains against a weaker dollar. The Brexit trade negotiations were a bit of a secondary part of the bond market carnage. There are many differences, very serious differences “between the UK and the EU after the first round of negotiations on future relations, EU chief negotiator Michel Barnier warned on Thursday. later in the day.
GBPUSD has made steady gains all week and is now ready to resume 1.30. The pair has crossed the important 61.8% Fib level at 1.28840, but the 100-day and 50-day moving averages are at 1.2990 / 1.30 and may therefore encounter resistance here.
The euro hit a seven-month high against the besieged dollar. It all depends on interest rate differentials and portability. The speed at which American rates fall makes the single currency increase because bunds are simply not capable of this type of acceleration.
EURUSD has crossed 1.12 and after clearing the neckline resistance it can start looking at the June swing above 1.14 again.
The USDJPY has been tightened on yen paradise status to take a 105. We are starting to enter the territory where the BoJ will not like it at all, we could see some kind of intervention as we approach 104 , which is possible as long as the 10 US continues to descend. A test of the 104 handle today is eminently possible, even if we start looking at the oversold touch on the 14-day RSI and the bulls will desperately try to hit a floor here at 105.
Neil Wilson is Chief Market Analyst at Markets.com
