Commodity currencies hit fresh lows on broad USD bid

Treasury yields near the highs of the day

Treasury yields near the highs of the day
US equities are bouncing but other markets aren’t buying it.
The commodity currencies are at the lows of the day, with USD/CAD breaking 1.27 and AUD/USD nearing 0.7700.
The moves come as a broad USD bid develops. US 5-year yields are now up 0.2 bps on the day at 0.82% and just off the session high of 0.83%.
AUD/USD is now down nearly 2% in an emphatic rejection of 80-cents.

European equity close: UK stocks tumble in a rough day everywhere

Closing changes for the main European bourses:

Closing changes for the main European bourses:
  • UK FTSE 100 -2.8%
  • German DAX -0.9%
  • French CAC -1.6%
  • Spain IBEX -1.3%
  • Italy MIB -0.8%
On the week:
  • UK FTSE 100 -2.0
  • German DAX -1.5%
  • French CAC -1.1%
  • Spain IBEX +1.0%
  • Italy MIB -1.2%

I like the valuation of UK stocks but that chart looks like a messy head-and-shoulders and that uptrend from the Nov low looks vulnerable.

Bond market retracement improves the market mood

The market gets a handle on what happened yesterday

The market gets a handle on what happened yesterday
US 10-year yields are down 6 bps today after yesterday’s washout. The curve is flattening again but only modestly and that’s giving broader sentiment a lift. US equity futures are now higher after falling by 1% overnight and commodity currency buyers are dipping their toes in.
I wrote about the role of convexity hedging yesterday and that’s getting a wider airing today and helping the market get comfortable with what happened.

The forced sellers are investors in the $7 trillion mortgage-backed bond market. Their problem is that when Treasury yields — which strongly influence home-loan rates — suddenly rise sharply, many Americans lose interest in refinancing their old mortgages. A reduced stream of refinancings means mortgage-bond investors are left waiting for longer to collect payments on their investments. The longer the wait, the more financial pain they feel as they watch market rates climb higher without being able to take advantage of them.

Their answer: unload the Treasury bonds they hold with long maturities or adjust derivatives positions — a phenomenon known as convexity hedging — to compensate for the unexpected jump in duration on their mortgage portfolios. The extra selling just as the market is already weakening has a history of exacerbating upward moves in Treasury yields — including during major “convexity events” in 1994 and 2003.

On top of that, the soft auction and strong (inadvertent) dealer takedown led to some dumping of Treasuries in the belly.

The whole move looks a bit like a washout but it’s a delicate situation. There will be more convexity hedging and the market will have to swallow that, perhaps with foreign flows balancing it. If the bond market starts to tilt again, it will take everything with it.

The jitters are returning ahead of North American trading

US futures turn lower, dollar stays more bid as commodity currencies sink

S&P 500 futures have turned lower, down by 0.5%, while Nasdaq futures have also pared its earlier advance (following a turnaround) to be down 0.7%.

The jitters are still evident in the market as we await Wall Street to enter the fray.
In the major currencies space, the dollar is soaring against the commodity currencies with USD/CAD rising from 1.2600 earlier to 1.2685. Meanwhile, AUD/USD has dropped by over 1.5% from 0.7800 to 0.7730.
It is up to Wall Street to have their say now, as it looks like Asia and Europe aren’t able to settle on a firm narrative and what to make of yesterday’s tornado.
Update (1230 GMT): US futures back to flat levels again now. It’s gut check time.

BOJ purchases ETFs for the first time this month amid market rout

The BOJ last bought ETFs on 28 January and held off buying more until today

The Japanese central bank bought ¥5 million worth of ETFs today amid the 4% drop in the Nikkei, showing some signs that they may be more flexible with ETF purchases.

That said, they still hold a commitment to buy roughly ¥6 trillion worth of ETFs at an annual average pace so that is something to consider unless communicated otherwise. I mean, what better timing to buy more when the market is down. *wink* *wink*

Germany’s Spahn: 4.5% of German population have received a first vaccination dose

Comments by German health minister, Jens Spahn

  • More than 2% have received a second dose
As much as the rollout is encouraging, it could still be better. There were reports yesterday stating that Germany still has over 1 million vaccine doses in storage and have only administered roughly 15% of the AstraZeneca vaccine on hand.
That continues to keep vaccine sentiment in the euro area rather iffy as compared with the likes of the UK and US for the moment.

It is gut check time for the market

The equities selloff intensifies in Asian trading

  • Nikkei -3.7%
  • Hang Seng -3.1%
  • Shanghai Composite -2.1%
  • S&P 500 futures -0.5%
  • Nasdaq futures -1.0%
  • Dow futures -0.5%
  • Russell 2000 futures -1.6%
Asian equities are having their worst session since 23 March last year as the selloff continues. US futures are also slumping heavily as the drop yesterday extends further. The big question is, how much more pain can investors stomach in this latest episode?
The stunning rout in the bond market yesterday led to a selloff in risk but despite calmer tones today, it isn’t yet convincing dip buyers to step in.
It is still early in the day of course but all things considered, there might be more downside in store ahead of the weekend as this may be part of a healthier correction/flush in the equities space in the bigger picture of things.
Looking at the charts, we are seeing some key levels being called into question.
Nikkei 26-02

Nikkei 225 falls by 4% on the day to end February trading

The Nikkei closes down 4% to its lowest levels since 8 February

Nikkei 26-02
That said, on the month itself, the Nikkei still posted a gain of 4.7% despite a rough final week. Asian equities are slammed across the board, feeding off the negative mood from Wall Street overnight and as the jitters continue today.
The Hang Seng is down 2.8% while the Shanghai Composite is down 1.6%.
For some context, the daily drop in the Nikkei today is the biggest since April last year.
Elsewhere, US futures are looking rather poor as well. S&P 500 futures are down 0.5%, Nasdaq futures down 1.0%, Dow futures down 0.6%, and Russell 2000 futures down 1.7%.

Bond rout …. turning into a dip-buying opportunity in Asia trade

US Treasury prices are rising from their sell-off lows, as are Aussie bonds.

Regional equities are not taking too much notice and are deep in the red but currencies are staging a bounce against the USD. S&P500 index futures (overnight globex trade have bounced, they did so soon after the 15% wage hike (no to that) news crossed)
EUR/USD is now barely net changed for the session, AUD, NZD, GBP, CAD are all off their lows.
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