Global Macro Update

Submitted by Nic Lenoir of ICAP

Big sell-off yesterday in Treasuries had a lot of people puzzled about whether this is the start of more or just a one off. At the start of the year my call was for higher rates, but stressing that we would not move massively higher an instead just test the high end of the range in yield (low end of the range in futures). Here are the key levels to watch as we approach:

First on the daily triangle chart for the 10Y future, we show that we are potentially in a triangle formation and are approaching the support which I see at 115-24 here. The reason why the triangle formation is seductive because as highlighted for other markets, AUDCAD is in a massive triangle consolidation, and so is the Shanghai composite (more on this lower). Hence a similar configuration in rates does make some sense. Should we break below this level, the two key levels below are 114-30 and 114-13. As  can be seen on the daily chart, they correspond to the 2 necklines of 2 huge head and shoulders. These support levels are the key boundaries I indicated in my annual letter at the start of 2010. I personally do not think we will bypass them to the downside, but beare if we do, it would open the flood gates. Given how equities perform under higher yields and the pile of debt accumulated, I think yields rising in itself would bring back some risk aversion that would defeat the yields move up. Think of it as a dog biting its tail.The other consideration is that if we are indeed in a triangle formation, then the next leg is in theory up as this is a continuation pattern within the trend. Therefore I think shorts who have accumulated money on the downside should be careful as we move close to this cluster o supports, the next 20 bps will be hard to get through.

On the Shanghai composite brought up earlier, it is important to note we posted a bearish 50/200 dma cross and that crossing level held the market as resistance on the upside. Keep a close eye on the resistance at 3,071 and the support at 2,973. Triangle support and bearish cross resistance define a very narrow range and the break-out of that range will be a key indicator of market direction (probably will end up as the same result for the break out of the AUDCAD triangle).

Finally looking at Gold, the market bounced o yesterday's support zone. As can be seen on the hourly we made a low right on the C=A extension from the recent tops at 1,145. We are looking for constructive price action here to go challenge the neck-line of the inverted H&S on the 180-minute chart. A break of this neck-line, currently at 1,138 would lead to a move towards new high, all extremely interconnected to what happens in China and rates.

Good luck trading,

Nic

Comments

[Blithering ORSA]

The only reason anyone still owns T-Bills is that everything else sux worse.  This is just reason and logic asserting itself after a long hiatus.  Get used to it. 

[Spitzer]

no, everything else does not suck worse. If you think everything else sucks worse then you are one shitty investor.

[Jim in MN]

GE is still the bellwether.  Still less than 50% of the high.  Really not much 'there' there.  I doubt they can run the risk gauntlet and ever re-touch that mark.

Not that I care; I have just gotten sick of people misspelling 'bellwether' and 'gauntlet' recently.  So I used them in a sentence! 

http://en.wikipedia.org/wiki/Running_the_gauntlet

[TooBearish]

Shanghai has no bearing on US equity echo bubble part V

Love the commentary though, GC to 1060 for a buy

[jkruffin]

I will just keep buying my I-bonds each month thank you very much!  LOL

With the trouble brewing globally and the next market crash imminent, I will take 3.36% instead of a crappy treasury note.  No sense in buying a T-Note anytime soon.

Even look at Pimco Total Return, the NAV has been going up on up market days and bonds getting hit, and going down on down market days and bonds level.  This tells me Bill Gross has gotten totally out of US Treasuries as much as practical and using derivatives to keep PTR with gains.  If Bill Gross doesn't want US Treasuries, then why should anyone else??

[mark456]

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