Sept 22. Selling pressure in treasuries reverses as commodities plunge

–Friday was a huge day in terms of market action.  Early in the morning yields pushed to new highs and tested resistance, only to reject those levels and end the day significantly lower.  For example, early Friday morning the 5 yr note traded 187.5, just surpassing the high of 2013 (185) and then collapsed below 182.  Ten yr made a high of 265, a big resistance level as there were highs in early June of 264.5 and 265.5, but sank to 258.5 by the end of the day, -4.0 bps.  Five, ten and bond treasury futures made new lows early, had outside days and closed higher, a strong signal that selling pressure has been shut down. 30 yr bond contract made both its low and high for the week on Friday, and closed at the top of the range.  EDZ15/EDZ16, the peak one-year euro$ calendar spread, made an early high of 115.5 but closed unchanged at 113.5 as new selling came in; both contracts saw open interest rise about 17k.  Red/gold euro$ pack spread closed at a new low just under 190 bps.
–Commodities were crushed.  Corn, wheat and beans made new multi-year lows as the dollar firmed.  Silver plunged, with the ETF down 4% to a four year low.  Gold/silver ratio broke out to a new high of 68 (using December contracts), a level not seen since 2010.  EEM (the Emerging Market ETF) closed at 43.46, poised to test three month lows and key support at 43.  The divergence between large caps and small caps is growing (see chart comparing DJIA and Russell on www.chartpoint.com from Friday).  Nasdaq had an outside day and closed lower.  Smaller cap stocks have terrible price action.  In spite of that fact, total equity market cap to GDP remains near record highs.  And from the last week’s flow of funds report (citing from prudentbear.com) “Household Net Worth increased $7.679 TN over the past year to a record $81.493 TN (551% of GDP!). For reference, Household Net Worth ended 2007 at a then record $67.832 TN. Amazingly, Household Net Worth has now inflated $24.295 TN, or 42.5%, since the end of 2008.”
–The G20 is warning that risks to the global economy have increased in recent months.  From the communique:   “We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility,” …“We welcome the stronger economic conditions in some key economies, although growth in the global economy is uneven.”
–In the US, as monetary policy has blown up financial asset prices and business borrowing has been growing smartly (though mostly for stock buybacks), the Fed is trying to hand the torch of credit and economic growth back to the private sector.  But there’s a lot of concern about Financial Stability as the transition occurs, and some market indicators are are flashing warning lights.

Posted on September 21, 2014 at 4:50 pm by alexmanzara · Permalink
In: Eurodollar Options

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