The pressure is on
The US dollar has extended its gains as market participants get caught wrong-footed in a rebound after multi-month lows.
The dollar looked to be breaking down yesterday and today but stabled itself and is making a move to the upside. There are two near term factors to watch:
1) The 20-year auction
The US is selling $25B in 20-year bonds at the top of the hour. Last week there was a strong 10-year sale and a very weak 30-year sale so the bond market is off balance. A higher-than-anticipted yield could boost the dollar further.
2) The FOMC minutes
The Fed is a below-the-radar risk at the moment. The strong belief in markets is that they’re creeping towards doing more for the economy but an improvement in US virus cases, decent economic data, higher inflation and the stock market at record highs might make them slow their roll. If so, the dollar could climb further
Overall, this looks like a position-squaring squeeze in a quiet mid-August market to me but you can’t take anything for granted. If it spills over into a broad risk-off move, then the dollar could have a lot of room to run.
The EUR/USD chart to me looks like a retest of the range break before a further breakout but a close over 1.19 today would add confidence.
German DAX near unchanged in up and down session
The major European stock indices are ending the session flat or higher. The German DAX was the weakest as it closes near flat for the day. Spain’s Ibex is the strongest with a gain of near 1.4%.
The provisional closes are showing:
- German DAX, unchanged
- France’s CAC, +0.3%
- UK’s FTSE 100, +0.3%
- Spain’s Ibex, +1.4%
- Italy’s FTSE MIB, +0.5%
In the European debt market, the benchmark 10 year yields are ending the session lower.
France and Spain indices move lower
The European shares are ending the session with mixed results. France and Spain indices are lower. Germany, UK, Italy are trading higher.
The provisional closes are showing:
- Germany Dax, +0.44%
- France CAC, -0.36%
- UK FTSE 100, +0.6%
- Spain’s Ibex, -0.34%
- Italy’s FTSE MIB, +0.2%
For the week, the indices closed higher:
- German DAX, +2.3%
- France’s CAC, +1.9%
- UK’s FTSE 100, +3.15%
- Spain’s Ibex, +1.8%
- Italy’s FTSE MIB, +3.1%
In the European debt market, the benchmark 10 year yields are mostly and modestly higher. The exception is the Italian 10 year which is trading down -1.5 basis points.
In other markets as European/London traders look toward the exits for the week:
- spot gold is trading at $13.50 or 0.75% $1810.70. The high price extended to $1811.11 the low has reached $1795.96
- WTI crude oil futures are trading down $0.27 or -0.66% of $40.48. The high for the August contract reached $40.90 while the low extended to $40.02. The September contract is currently trading down $0.27 or 0.66% at $40.66
In the US equity market, the major indices are trading mixed. The Dow industrial average is down on the day while the S&P and NASDAQ index are currently trading in the black
- S&P index is up 3.25 points or 0.10% at 3218.81
- NASDAQ index is up 11.5 points or 0.11% at 10,485.25
- Dow industrial average is trading down 43.12 points or -0.16% at 26691.40
In the US debt market the yields are trading near unchanged across the curve:
- 2 year 0.143, -0.2 basis points
- 5 year 0.278%, +0.3 basis points
- 10 year 0.618%, +0.1 basis point
- 30 year 1.314%, +0.6 basis points
A look at the strongest and weakest currencies at the close of the London session shows the CHF is the strongest and the GBP is the weakest. The US dollar is mostly lower.
UK FTSE outperforms
The European shares are ending the session with declines. The UK FTSE 100 the better than others on the GBPs weakness.
The provisional closes are showing:
- German DAX, -1.06%
- France’s CAC, -1.25%
- UK’s FTSE 100, -0.10%
- Spain’s Ibex, -1.02%
- Italy’s FTSE MIB, -0.7%
In the European debt debt market, the benchmark 10 year yields are ending lower across the board. Declines range from -2.7 basis points to -3.6 basis points:
In other markets as European traders look to exit:
- spot gold is trading up $6.05 or 0.34% at $1808.82. The low extended to $1790.79. The high for the day is near current levels at $1809.74
- WTI crude oil futures are trading up $0.31 or 0.77% at $40.41 for the August contract. The September contract is also higher by $0.33 or 0.82% at $40.65
In the US stock market the Dow industrial average outperforms while the NASDAQ index get whipped around and volatile trading. The current snapshot shows
- S&P index up 12.8 points or 0.41% at 3168.16
- NASDAQ index down 2.6 points or -0.02% at 10391.16
- Dow industrial average up 288 points or 1.11% at 26374
The NASDAQ index has whipped around in with the low falling -2.01%. The high extended up 0.42%. The point range is around 250 points from low to high.
The Japanification of the gilt market continues
Japan is pretty much the benchmark for low-to-no yields in the global bond market and when another country reaches that point, it sort of rings an alarm bell to investors that there isn’t much attractiveness/value in said yields anymore.
UK long-term yields fell below their Japanese counterparts at the end of last month but now we’re seeing the front-end of the curve follow suit as well.
The rally in gilts could either be suggestive that investors are fine with being more risk averse or that those buying are pretty much stuck due to regulatory constraints.
But whatever the case is, don’t expect value investors to be searching for scrumptious returns in the UK any time soon. In turn, that may be another reason to add to the list of headwinds for the pound and the UK economy in general.
Interesting day in the bond market
The Treasury will jump into 20-year sales today for the first time in 34 years.
The initial auction of $20 billion is a relatively large one and is a reminder of how much debt the US is piling on. The notes are trading at 1.230%-1.220% on the bid/ask in the when-issued market. That puts them much closer to 30-year bonds (1.44%) than 10-years (0.71%).
“An auction concession of some sort is warranted; although we anticipate the new issue will be well absorbed even if it comes at a modest discount,” writes Ian Lyngen, head of US rates strategy at BMO.
The broader bond market is reluctant to send and clear signals at the moment. 10s have been in a tight range for six weeks now and it’s tough to envision a clear break on either side because you have inflation keeping yields up and the Fed keeping them down.
10-year German bond yields rise to its highest levels in a month
Meanwhile, 10-year French and Spanish bond yields have both climbed to their highest levels since May 2019 to start the day. This comes as we also see Treasury yields rebound higher, with 10-year yields up by 10 bps to 0.82% currently.
It is tough to try and make sense with what is happening in the market because things change so quickly but I would argue that the selloff in European bonds isn’t exactly a good sign for the euro currency in general.
I would say the rise in Treasury yields represents a bit of a disconnect because the move higher there reflects more closely the slightly better risk mood today – which is also helping USD/JPY to stay underpinned, alongside gains in the dollar today that is.
Yields fall to new lows
The risk off flows continued in the US stock market and debt market.
The Dow industrial average was down over 1000 points at 1 point during the day. The S&P index fell below the 3000 level briefly before rebounding in the last hour of trading.
In the US debt market yields resumed their downward bias after yesterdays modest rebound.
The final numbers for the major indices are showing:
- S&P index -106.18 points or -3.39% at 3023.94. The low price extended to 2999.83. The high was up at 3083.04
- NASDAQ index fell -279.49 points or -3.10% at 8738.59. The low price reached 8677.387. The high price extended to 8921.078
- Dow industrial average fell minus this 969.58 points or -3.58% at 26121.28. The low price extended to 25943.33. The high price reached 26671.92
In the US debt market the 10 year yield fell to a new record low level of 0.898%. It is currently trading at 0.91%. That is still down -14.2 basis points on the day. The yield curve flattening a bit to 32.49 basis points from close to 36 basis points the close yesterday, but all maturity levels fell by over -10 basis points.
German DAX, -3.1%. France’s CAC down -3.8%
The good news for the European stock markets is that they are close for the day. Each of the major indices had sharp declines. Sometimes closing feels good. The provisional closes are showing:
- German DAX, -3.1%
- France’s CAC, -3.2%
- UK’s FTSE 100, -3.5%
- Spain’s Ibex, -3.8%
- Italy’s FTSE MIB, -2.6%
To give an idea of the year to date performance of the major indices :
- Germany, -6.65%
- France, -7.6%
- UK FTSE 100, -9.7%
- Spain’s Ibex, -5.6%
- Italy’s FTSE MIB, -2.8%
Comparing to the US market year-to-date:
- Dow industrial average, -7.6%
- S&P index, -5.63%
- NASDAQ index -2.42%
In Asia the year-to-date’s are showing:
- Japan’s Nikkei, -7.22%
- Hong Kong’s Hang Seng index, -5.01%
- Australia S&P/ASX 200 -0.39%
- China’s Shanghai index -1.93%
In other markets as London/European traders look to exit:
- gold is trading up $12.80 or 0.78% at $1653.72
- WTI crude oil futures are trading down $-2.08 or -4.25% of $46.66
In the US stock market the snapshot of the major indices currently shows:
- S&P index -69.3 points or -2.22% of 3047.44
- NASDAQ index -221.2 points or -2.46% at 8759.96
- Dow -578 points or at -2.17% at 26371
In the US debt market yields are sharply lower with the 2 year down -8.9 basis points. The 10 year is down -5.8 basis points.. The 2 – 10 yield spread has widened to 20.42 basis points from 17.24 basis points yesterday on increasing expectations that the FOMC will be forced to lower rates
In the European debt market, yields are mixed with German, France, and UK yields lower while Spain, Italy, Portugal yields are higher (flight to safety and out of the riskier countries):
In the forex market, the EUR is the strongest (and got stronger in the session). Germany did say earlier today that they would contemplate more fiscal stimulus and technicals improved. The EURUSD did run into resistance against the 1.100 level however.
The weakest currency is the CAD as oil continues to get hammered. The GBP and USD are also weaker on the day:
10-year Treasury yields are now flat on the session
The early trading in the bond market is hinting at some indecision about the risk mood. Treasury yields turned flatter about two hours ago before recovering some poise and is now back to flat levels again on the session.
As a result, USD/JPY has pared gains to 109.81 currently and we are seeing a similar story for the aussie as AUD/USD falls to a session low of 0.6743 after having traded around 0.67455-65 earlier in the day – just take note AUD/JPY is at key resistance levels as well.
European equities have pared back some of its earlier gains too but are still keeping higher in trading so far. This may yet lead to some mixed tones between stocks and bonds again but just be mindful of the market saying that “the bond market is always right”.