Global Macro Morning Update
From Nic Lenoir
First off let's follow up on 10s/30s in the US. The market saw almost to the tick the topside of the channel resistance and is flattening quite a bit this morning (see attached chart). Given how steep the curve is and over-extended the move has been, I expect a correction of at least 20bps if not more here. I have been recommending conditional flatteners in TYZ0/USZ0 and I stick to the strategy. It isn't late to get on board, levels are still relatively attractive and one can enter the trade premium/delta neutral. I have added the Japan 10s-30s chart as well to put things in perspective, both with respect to how boring a stealth depression can be, and to give an idea where we stand in terms of steepness historically. Interestingly if one charts 10s/30s in Japan on the same chart with the Nikkei, one can realize that with the exception of 2005 when 10s30s flattened as the Nikkei rallied with markets believing Japan was about to embark on a hiking cycle, 10s30s and Nikkei have traded in synch for the past decade. Flattening has traditionally been bull-flattening associated with Nikkei weakness and conversely (see NKY Vs 10-3- chart). The other exception? Right now! The Nikkei is 5,000 points cheap to the curve!! Or is it the curve which is 50bps rich to the Nikkei? Obviously as one can see on the SPX Vs NKY chart the Nikkei is where it is because of USDJPY as the strong Yen hurts Asian exporters. So based on that either the Yen should be 40% weaker, or more likely the SPX is 35% overvalued and the curve too steep due to excessive liquidity expansion in the system which is not reflecting underlying economic activity. Something certainly has to give, and for those who do not favor outright positioning in either the curve of equities, it seems like trading the curve against equities in Japan is starting to appear like a good relative value opportunity.
Regarding equities, it appears my worries about the Dax having one last leg up materialized. I have added the 2-minute and 10-minute chart showing the wave structure. It is hard to give a specific target as wave 5s can be truncated or extended (for equities usually the former, especially in a bear market rally). There is no divergence of note on the 30-minute chart yet, so as such I would wait a bit more before expressing outright short positions. Receiving a bit over 1 tick for the November mini S&P 1,205/1,220 call 1x2 is a good way to position for a final extension in low volatility and velocity of the rally.
Good luck trading,