US 10-Year Bonds Above 3%

Originally published by AxiTrader

Market Summary (6.09am Thursday, April 26)

Who’s afraid of 3% then?

Not US stocks, at least not today when the 10-year Treasury rate is sitting at 3.02% while the S&P 500 is up around 0.2% at 2,639.

And that’s the point folks. Yes 3% 10’s and 2.5% 2 year rates are changing the valuation metrics. But it seems it’s the nature of this earnings season which is the key here. Earnings are strong but guidance is less strong. Caterpillar's (NYSE:CAT) comment Tuesday night that Q1 might have been the high water mark is what is troubling traders.

That and a still negative technical outlook of course.

Elsewhere in stocks the Dow is up 0.25% at 24,083 and the Nasdaq is down 0.1%. Europe had a poor night, as was Asia’s day yesterday, with the DAX down 1%, the CAC off 0.57%, and the FTSE down 0.62%. Yesterday the Nikkei, Shanghai Composite, and Hang Seng all closed lower.

SPI traders have marked prices down just a few points from Tuesday’s highs. Yesterday morning’s weakness (after the S&P 500 dipped 1.3% Tuesday) has given way to a recovery overnight in the London and New York sessions. It’s a balance between the US move last night, earnings announcements subsequent, and the performance of global miners across many bourses overnight might provide a drag on the physical market today when trade gets under way. For the moment though June SPI futures are up 41 points.

To currencies now and the US dollar is breaking higher at 91.20 in US Dollar Index terms. But it’s still yet to decisively break the bottom of the recent range against the euro at 1.2150 (1.2160 as I write) but the single currency has lost another 0.6% overnight. Likewise the Greenback has gained half a percent against the yen with USD/JPY at 109.32 while the Aussie has lost a similar amount at 0.7565 – it’s a shot duck and heading substantially lower it seems. 0.7475/80 remains my next target. Below that it is 0.7333 and perhaps even 0.7142.

Speaking of shot birds the kiwi and the Loonie are weaker as well with the New Zealand dollar remaining under intense pressure down another 0.7% to 0.7065. USD/CAD is up just 0.1% at 1.2844.

On commodity markets despite the US dollar strength, some sense that maybe President Trump won’t automatically repudiate the Iran sanctions deal, and a build on US inventories crude is still higher. WTI is up 0.35% at $67.94 while the price of Brent has risen just 0.11% to $73.94. It’s a bull market, but prices are looking a little toppy.

Gold is down again and sits at $1322, Ali lost more ground as the pressure eased on Rusal, and copper is just a little lower at $3.13 a pound.

On the day today we get export and import prices in Australia as well as South Korean GDP and tonight the Gfk consumer confidence is released in Germany.

But the big one is the ECB decision or more correctly the statement from the ECB and Mario Draghi’s press conference subsequent. Durable goods in the US will also be interesting.

Oh, and the really big news folks, HUGE in fact, is that for the first time since 2015 Collingwood is in the top 8. We have a big game against Richmond Sunday to see how we are really travelling in 2018. But gee whiz it looks like it might be a good year for the Pies.

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

International

• Earnings season has been mostly solid. But while a lot has been said and written recently about stock market weakness recently it seems the real culprit at the moment is forward guidance. Indeed the outsized reaction on Tuesday night to Caterpillar (NYSE:CAT) executives saying on a conference call that Q1 “will be the high watermark for the year” crystallised many fears – so yesterday morning the Dow was down 1.7% and the S&P 1.3% lower. And it’s not because of 3% yields rather, Bloomberg reports, “Everybody knew coming into earnings season that profits would be strong, but to justify the lofty price-to-earnings levels that stocks were trading at early in the year, companies would need to be equally bullish in their outlooks. But that is not happening. Based on the companies that have reported so far, earnings-per-share rose by 17.8 percent from a year earlier, above early-season targets of 16.5 percent. But, strategists at Bloomberg Intelligence note, estimates for the next four quarters have declined”. Yes indeed, that will do it.

• Of course another reason stocks are struggling is the technical. While the S&P 500 has not taken out the February low and thus hasn’t entered a full-blown bear market yet the most recent rally had a lower high which is keeping the focus on a retest toward those Feb lows. As you can see in this chart below of the cash CFD the SPX is wedging itself into some sort of resolution. Perhaps it might surprise and break higher? Increasingly though folks think lower levels beckons with US consumers net negative on stocks for the first time in the Trump presidency the conference board reported Tuesday night. The contrarian in me says that will eventually be a green flag for the bulls. Not yet though.

Chart

• But it makes sense that with short and long rates in the US rising that rates are indeed a factor in the stocks market’s performance. For example look at the S&P 500 dividend yield versus the 10 year bond rate – via the WSJ’s Daily Shot blog (you can get a snapshot of the blogs favourite tweets @soberlook)

Chart

• I can’t leave the international section without talking about the ECB tonight. It’s clear that with a board that large Mario Draghi has a job as difficult as a cat herder. He also clearly has two distinct camps. On the one side you have the Germanic inflation hawks who seems to favour that QE ends as soon as possible. And who can blame them. Surely the time for such measures is past. On the other hand we have the doves always fretting that something might go awry and that patience and maybe a QE extension may be necessary. Last night we even had an ECB official saying that maybe the bank might need to bail out non-banks…GOODNESS.

• Anyway, we’ll hear from Mario Draghi tonight. He’s a pragmatic dove, and he’s also chairman of this unruly board which is the ECB and its vast array of voters from the central banks of the nations of its constituents. So I expect him to take a cautious middle ground, not too negative on growth, concerned about the impact of possible trade tensions, patient about the outlook for inflation, and inclined to stick to the current timetable to end QE. But I also expect him to highlight it will be a very long time before the ECB hikes rates.

Australia

• The Australian dollar continues to slide and my target remains for a move into the 0.7475 region. As I’ve mapped out above the risks are actually rising that if the US dollar breaks wide open we are actually trading in the 73’s in the next week or so and may eventually trade down into the 71’s. Time and the US dollar will tell.

• The SPI was down yesterday and is up today. The rally in the SPI overnight of 41 points seems a little excessive to me quite frankly. Yesterday morning the SPI was down around 30 points or so with the S&P off 1.3% and even though the S&P rose just 0.2% it seems that traders got a little excited about it bouncing off the 200 day moving average again and, perhaps the post-market earnings which have S&P futures up another 0.33% at present. So I guess that trumps the weakness in the miners last night. Anyway, here’s the char. A break of Tuesday’s high and the SPI and ASX are off to the races.

Chart

• CPI the other day really showed what’s up with Australian inflation. The high vis, non-discretionary stuff. To me that really looks like a failure of markets when the discretionary stuff is falling but the regulated and government influenced stuff isn’t. That’s for another day though. The key here is the behavioural impact. Folks thing and act, like inflation is ru9nning higher than it actually is because utilities, health and the like keep rising and they keep seeing those rises reported. Throw in falling house prices, lower wages growth, and a credit crunch from APRA regulations (which is actually the right thing to do long term) and we have households still feeling the pinch. Tax cuts next month from the federal treasurer might help. But even though there are signs overall and underlying inflation is rising the RBA is on hold for some time.

Forex

• The US dollar is breaking out and if the ECB is even slightly dovish tonight – or perhaps not hawkish – the euro could break wide open and with that the big surge in the US dollar will have truly begun. In DXY terms the 91.70 level is the 50% Fibo of the recent downtrend and above this it’s 92.53 as the 61.8% retracement of that downtrend. Above that, it’s 95.20.

Chart

• Now of course there are still many who say this US dollar rally is a mirage and that no one will buy US bonds because the hedging costs are so high. But in my experience managers of foreign currency bond funds are in fact managing the currency as much as the bond. Perhaps it’s just an Aussie dollar thing as an off-index bet for these bond managers but my sense was they were actually managing foreign bonod currency funds when I used to travel the world talking to them all the time. So if the US dollar is infact breaking out. Buying a few Treasuries may actually be a good bet. And as myself, and countless others, have pointed out the market is very long of Euro’s and very short of the US dollar as a result. So a range break could be a big one in terms of flipping out some euro longs. We’ll see.

• Here’s the weekly euro chart again with my 1.17ish target…just a a fibo. The dailies suggest a break of 1.2140 opens 1.2040 then 1.1920.

Chart

Commodities

• Just quickly on oil. I had a sell order in WTI at $67.05 last night for WTI and the low of the night was just a few cents or so above that level. The sell order was based on my system, which gave a signal, on the basis of the parameters that it has in it. Given all of the potential negatives the rally is actually quite impressive. But the market does look a little toppish.

Chart

Have a great day's trading.