China Hints At Less Buying Of US Treasuries

Originally published by AxiTrader

Market Summary (7.22am)

Bloomberg’s report that senior Chinese officials “have recommended slowing or halting purchases of US Treasuries” was the unexpected excitement that caught traders attention and saw the US dollar and stocks dip while US 10's rose as high as 2.597% in the aftermath.

Bonds and the US dollar are fighting back from the initial shock with 10’s now at 2.54588%,and the US dollar is at 1.1957 against the euro, which had hit a high of 1.2017 earlier. The S&P 500 and Dow had been looking better an hour ago but they are again sliding

Algo’s and knee jerks. Such is likely to be the way in markets in 2018 as many cross currents combine in the river of global capital flows.

Anyway. The Dow was sneaking back into the black earlier but is now down 0.15% at 25,231, the S&P is off 0.17% at 2746, while the Nasdaq is off 0.38% at 6651. Europe was mixed, Asia too yesterday. And of course the selling on the ASX seemed to come from the clouds and the market ended with a 39 point loss. SPI trades have now subtracted another 19 points.

On forex markets the bond selloff, which started this week with the BoJ tweak of its operational buying, reinforced the yen's surge and it is the Japanese currency that is again the biggest mover against the US dollar and on the crosses. USD/JPY is down 1.17% at 111.33. Euro is a little stronger up 0.2%, and the pound has dipped just 0.2% to 1.3519. Elsewhere the Aussie and kiwi both rose overnight to sit at 0.7844 and 0.7192 respectively with gains of 0.2% and 0.4%.

Oil is again the big story in commodity markets with the bigger than anticipated draw in EIA inventories outweighing the fall in US production and giving the bulls more fodder. So this morning we have WTI up 0.76% at 63.44 while Brent is up 0.4% to $69.09. Gold is up, back at $1318 while copper is up about 0.7% to $3.2385.

On the day today we get November retail sales at 11.30am. Japan releases its coincident and leading indicators before the release tonight of EU industrial production and of course US producer prices.

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

International

• Bond folks, bonds. Again? I hear you say. But I sense that the machinations of bonds are going to be a hot topic of conversation in markets and among traders and investors in the next few months, possibly all year. Overnight the news that China is rethinking its approach to buying US Treasuries, along with warnings of a bond bear market from Bill Gross and Jeff Gundlach were the focus.

Source: Twitter Screenshot

• That’s seen more upward pressure on longer rates across the globe with increased rates in German and other European markets, Australia’s 10's, and of course US 10 years. At 2.56% the 10’s are on the cusp of a break of this big 30-year bull market. So it’s timely that tonight we get US PPI and then Friday sees the release of US CPI for December to end the week. A break above 2.60% at the end of a week, let alone January, would signal the march higher has begun. This is a long bull run and the global economy is growing more strongly than it has in years. So if not now, when? But, it is worth noting that regardless of what Gross or Gundlach say right now it is still too early to call the end of this long bull market. It is a risk, a big one. But not yet a fact.

Source: St Louis Fed FRED Database

• And while I’m on bonds I like this article I saw on CNBC that highlights why the bond market sell-off might be different this time. And of course that gives me another chance to spruik the article I wrote during the Christmas/New Year period on the outlook for bonds and markets in 2018. Bonds and inflation - the dynamic duo to shake up markets in 2018.

• And before we leave US Treasuries, US Under Secretary for International Affairs David Malpass defended the market saying “The US Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market”.

• The pound has been stronger than I would have expected with all the uncertainty recently given all the uncertainty around Brexit. A large part of that, but not all, has been because the US dollar itself has been week. Recently the narrative has been all about the British side of the discussions which lead traders to take the hint that Britain was folding and a so-called “soft” Brexit was on the cards. So it’s interesting that Business Insider reports Phillip Hammonds, the UK Chancellor of the Exchequer, says the EU is not clear on what relationship it wants with the UK after it leaves the EU. ““Since the referendum in the UK, there has been a marked asymmetry between the enthusiasm expressed by certain third countries to pursue future trade deals with the UK … and the relative silence, in public at least, from Europe on what the EU wants our future relationship to look like. “I am saying this to you tonight, because I fear that many EU opinion-formers see this as a question only for British politicians, for British voters to resolve, before they engage with the EU27,” he will say in a speech. This is important folks. It only takes one of those EU27 to dig in and lead to a hard Brexit. So traders and investors will watch how this speech is received across the Continent.

• One of the reasons I’m so focused, along with many others, on bonds and central bank policy at the moment is that super low rates and quantitative easing have distorted prices across many markets as investors have chased returns and yield. One of those distorted markets is EM debt according to the Man group. “This has resulted in fairly indiscriminate spread compression, pushing valuations on emerging-market dollar bonds to levels that no longer make sense when considering the credit and liquidity risks, particularly for the high-yield segment of the asset class,” said Lisa Chua, a portfolio manager on the emerging-markets debt team at Man Group, told Bloomberg. A picture paints a thousand words – so here’s the chart.

Source: Bloomberg

• The Fed is still having its discussion in public. Always has always will I guess.

Australia

• The sellers came from the clouds yesterday as the S&P/ASX 200 failed for the second day in a row around the 6150. That saw the market give up it’s gains fairly swiftly as the buying evaporated and the bears took control. For a time the low I’d mentioned the previous day of 6072 for the SPI held. But as it it went so too did the physical market. So in the end the ASX200 finished the day down 39.1 points, 0.64%, at 6096 and this morning SPI traders aren’t as ebullient as they have been the past two days having subtracted 15 points from prices to sit at 6027 as I write.

• The daily candle for yesterday on this chart of the SPI speaks for itself. Ugly. Granted it is off its low as the US market recover from the worst of their falls, and may yet finish in the black by the close of New York trade. But there will have been a bit of psychological destruction done to traders minds yesterday. As I’ve written this Australian market rally needs the US and other market rallies to succeed and continue. So with Europe mixed, the US unlikely to give a strongly positive lead it is to retail sales for November today and where Asia’s bourses head as to where the market finishes.

• And while I’m on data I’d like to apologise. Reuters, and the two web based, calendars I use all had the NAB survey out yesterday. Bloomy did not, I was told by a reader, and as it transpired Bloomberg was correct. I’m still excited about the next release. I’ll just have to wait a till a little later this month.

• Lots of chat about Australian housing yesterday. ANZ says the market will swoop toward negative territory but avoid it with price growth bottoming at 1% - or at least that’s what their model says. But Morgan Stanley (NYSE:MS) sees a little more trouble brewing with the banks model suggesting “the recent decline in prices will likely continue well into 2018”. At the same time Capital Economics chief economist – and one of my favourite economists in Australia – says the “fragile” housing market is Australia’s biggest risk this year. As I highlighted yesterday and have been writing for some time, housing and consumers are the big potential headwind for the Australian economy.

• Now for retail sales at 11.30am. The Reuters poll is looking for a 0.4% rise in November after October’s 0.5% bounce back.

Forex

• The yen is the big mover and there is every chance it could go substantially further according to Twitter mate Steve Henderson who uses Elliott Wave as his guide and posted this chart overnight. I’ve added the blue arrow and the level of 104 for ease of reading.

Source: Twitter @TTCSteve

• I’m not sure how far USD/JPY may fall myself but the break back below 111.90 and then the 200 day moving average at 111.68 does certainly suggest a move toward the November low in the 110.80’s is on the cards and if that breaks then 109 is a Fibo support before the 2017 low at 107.32.

• Elsewhere on Forex markets things a re messier. The bulls won’t give up on the euro and why would they. We only seem to hear from the Hawks at the ECB which gives support to the single currency while the data out of Europe continues to print strongly. My system generated a number of sell signals this week including USD/JPY (yes after a buy signal Monday :S), euro, sterling, Aussie, Singapore dollar and many crosses. So I’ve been busy. But while the moves have been good – exceptional in the yen and yen crosses case – the outlook remains for more US dollar strength if my system/process is right (it isn’t always). That means tonight’s PPI and tomorrow night’s CPI are going to be crucial. Weaker data and the US dollar will get pole axed (or it should) stronger data and this emerging recovery in the US dollar should gain further traction. We’ll see.

• Looking at the Aussie and kiwi I find myself a little perplexed. On the one hand I get the idea that these two currencies historically benefit in a strong global growth backdrop. So the support is absolutely understandable. Indeed for the Aussie I have a reasonably positive outlook for 2018 expecting 81/82 to trade at some point. For the moment though I confess myself surprised this antipodean pair are able to withstand the recent few day’s forex maelstrom in such fine condition. For the moment anyway. Today’s retail sales will be important for the Aussie dollar.

Commodities

• US inventory data saw stronger draws than expected with a drop of 4.9 million barrels against a 3.9 million draw which had been forecast. Theoretically bigger than expected builds in gasoline and fuel stocks offset that big draw. Equally the dip in US production could have also offset the inventory build if traders were of a mind to be cautious. But this is a bull market and it was the inventory data which dominated. As a result, crude is still rising and is higher than the introduction prices above now at $63.43 for WTI up 0.95% and $69.16 for Brent.

• WTI is still looking a little toppy but the $64.13 1.382% projection of the break of the recent high sits just above prices at the moment. So this remains a resistance zone where WTI prices may stall in the immediate term. Here’s the chart – in an educational sense it is worth noting that the stochastic is still in overbought territory and has been for some time. These type of indicators are more suggestions of overbought or oversold than guarantees as the WTI price has shown recently.

Have a great day's trading.