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Bond Rates Surge As Cryptos Meet Resistance Again

Published 02/02/2018, 09:31 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Market Summary (7.33am)

A bit of tooing and froing on global markets once again as forex traders missed the memo that those selling US long bonds seem to have got about the strength of the economic outlook. I’ve tried to explain that in the body of this morning’s note. But suffice to say even as the 10’s hit a new high for this run at 2.78% the US dollar is trading at 1.25 against the euro.

Stocks have just noticed the bond selling as well and the Dow and S&P are struggling to stay in the black. Indeed the S&P 500 is up just 0.06% at 2825 while the Dow is now down 0.17% at 26,102. The Nasdaq 100 has lost 0.3%.

Europe’s stock markets hated the euro’s surge with the Dax off 1.4% and the CAC down 0.5%. In London Brexit and the government’s handling of it is a real mess with the FT reporting the EU is already working on sanctions to restrict UK economic and trade flexibility after Brexit. That and a Pound half a percent higher knocked the FTSE down 0.6%.

Here at home after closing close to 100 points off the previous days lows yesterday the ASX 200 looks set for a small fall at the open based on the fact that SPI traders have knocked 13 points off prices overnight. Commodities are supportive however so we’ll see.

Back to forex markets more broadly and the Aussie and yen stand out as the big losers among a night of almost universal dollar selling once more. The Aussie is well off its lows trading at 0.8034 but it has lost ground against the kiwi and Canadian dollar, as well as the other (non-yen) majors. It shouldn’t fall too far though.

To commodities now and oil is higher after a survey of compliance to OPEC’s production cuts showed solidarity among the cartel and reinforced the notion of the nations involved willingness to keep prices firm even as the US hits 10 million bpd. WTI is up 1.5% as a result to $65.72 while Brent is up 1% to $69.60. Gold is back at $1346 and copper sits at $3.21 a pound.

On the day today it is all about US non-farm payrolls. The market is expecting 180,000 jobs but there will also be a lot of focus on what wages do as well. Here at home we have PPI data out with the EU also releasing PPI data.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • US 10-year bonds are again the big story for me. At 2.7840 they are starting to take on (Bitcoin) or euro like momentum at the moment. The move in the 10-year has also pushed the 2-10 curve back above 61 points. This is the breakout I’ve talked about for a while now and the rising narrative seems to be that the 10’s can get back toward 3%. Why the US dollar can’t get a lift from this I try to explain below. But when you also see the Atlanta Fed’s latest guesstimate on growth at 5.4% annualised for Q1 it’s easy to understand why the heck bond rates are rising. We are nearing levels we can say with confidence the secular bull market in bonds has ended. That will have implications for many markets, especially credit. And eventually stocks.
  • One reason the US dollar isn’t gaining though is that this is a global bond market selloff. That’s something you can see in this chart of US, German, and UK-10 year govies.

Chart
Source: Investing.com

  • US politics is I think a big weight on the US dollar. So news breaking this morning around 6am that FBI Director Wray may resign over this memo that the White House wants to publish and which the FBI explicitly last night said it has concerns about is another focal point for folks who want to ignore the undeniable strength of the US economy. It was writ large again in the data overnight. But the euro is still stronger this morning around a full cent off its lows.
  • So, speaking of US data. The Atlanta Fed has raised its Q1 GDP guesstimate it generates through its GDPNow model to 5.4% NOT A TYPO from the 4.2% it was estimating on January 29. It did that because “the forecast of real consumer spending growth increased from 3.1 percent to 4.0 percent after this morning's Manufacturing ISM Report On Business from the Institute for Supply Management, while the forecast of real private fixed-investment growth increased from 5.2 percent to 9.2 percent after the ISM report and this morning's construction spending release from the U.S. Census Bureau. The model's estimate of the dynamic factor for January—normalized to have mean 0 and standard deviation 1 and used to forecast the yet-to-be released monthly GDP source data—increased from 0.42 to 1.37 after the ISM report”. It’s a model. It’s not perfect as we saw recently with the Q4 US GDP data. But the US economy does look strong. For your guide, and as a way to judge how the market will react – yes even forex traders – if the Atlanta Fed is even just mostly right the top 10 and bottom 10 forecasts for Q1’s annual growth rate is in the range of 2-3%.
  • The problem for the US dollar though is that global growth is synchronised and strong. Yesterday’s Asian PMI’s were reasonable. South Korea bounced back above the 50 line to 50.7 for its manufacturing PMI, the Caixin Chinese print was an as expected 51.5 and Japan shot the lights out with a 54.8 print. Then last night Italian, French, German and thus EU manufacturing PMI’s were all still very solid. At 59.6 the EU version did dip from 60.6. But it’s printing 59.6 for goodness sake.
  • You can see the conundrum can’t you? And why ECB voices keep calling for an end to QE. Last night Ewald Nowotny said the ECB is in a situation where it should end the asset purchase program. And who can argue. That, and reports that other members of the governing council want more clarity about when rates will rise has helped the Euro and is driving rate expectations a year or two out higher. Regardless of the absolute strength of the USA it’s the comparative repricing, still, of EU growth and ECB interest rate expectations which is supporting the Euro. My sense is there is a reckoning coming at some point for those who think the ECB can or will act aggressively without a real lift in inflation. But that is for another day and the reality is it is the hawks who make the loudest noises outside the ECB meeting cycle even if its clear Mario Draghi and the Doves have the whip hand at the Board Table.
  • Crypto’s are under pressure again after India became the latest government to say it will clamp down on the sector. The government said it “does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or (crucially for me) as part of the payment system”. You’d have to have expected this after PM Modi just a year or so risked recession in India when he did away with large denomination Rupee notes.
  • Anyway the impact is that Bitcoin has broken down and through the trendline support and is sitting on a cluster of Fibo support in the $8500/$9000 region. If that breaks we’ll likely see BTC/USD with a 6 handle on it. Here’s the chart:

Chart

Australia

  • Don’t you just love support zones. Whether they hold or bust they convey a lot of information about the market and the psyche underlying the price action. What we’ve seen this week – with the help of strong US markets for certain – is a very strong reversal off precisely the kind of levels I identified as critical. 5,990 on the ASX 200 physical and 5,935 in the SPI 200. And with yesterday’s solid 52 point rise in the physical market closed a little under 100 points of the previous day’s lows. With gold, copper, oil, and iron ore all higher, along with a steeper yield curve we might see the physical market crack 6,100 today.
  • On the SPI itself, it’s off its highs for the past 24 hours by close to 20 points here at 6,026 an it would need to take out that high to kick on. So I’ll be watching 6,100/05 in the physical and 6,045/50 on the SPI as the key levels to test and perhaps break today. Here’s the SPI chart:

Chart

  • The Aussie dollar has lost ground against the US dollar and on the crosses over the past 24 hours. At 0.8036 it’s more than half a cent off its lows for the night around 0.7988. So it’s not a terrible performance in that sense. But AUD/NZD is down 0.62%, while the Aussie has lost 0.95% against the euro and 0.78% against the pound. The Aussie troubles stem both from the mildly weaker than expected CPI but also from a large cabal of traders and investors who see it at lofty levels at or above 80 cents given their outlook for the economy.
  • My sense though is the Aussie has every reason to be up at these levels with solid and synchronised global growth, a weak US dollar, and strong commodity prices. Interest rate differentials are the only reeal drag on the Aussie. That’s something the RBA could remedy next week in either the governor’s statement Tuesday or Friday’s SoMP provide they acknowledge both the local and global economic strength.
  • But technically it has broken down and out of the uptrend from 75 cents. A pullback toward 79 cents, perhaps the 7893 level which represents the 38.2% retracement level of this move is possible. Equally8 though the Kiwi could be our guide. It to had a couple of days of underperformance before shooting higher once more. Anyway, here’s the Aussie chart:

Chart

Forex

  • I’ve written a lot about forex above, so I’ll just pop a chart in here this morning. Let’s take a look at long term EUR/USD on a weekly basis. The chart speaks for itself. Euro has strong momentum at present – probably too strong to be sustainable. But equally possibly strong enough to get it to both the Fibonacci projection of the recent move and the trendline you can see. They converge in the 1.2700/50 region which is where I’ll be targeting Euro if it takes out recent highs. Then finally we might have the pessimistic crescendo we need for the US dollar to find a base.

Chart

Have a great day's trading.

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