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More Flattening Most Likely...
By Nic Lenoir of ICAP
We end the week with a quick update on the US Treasury Market. First directionally we are pleased to have identified early the bullish channel for the 10Y US Treasury future and the bund as it allowed us to stay clear from the selling frenzy following the announce of the European bailout last weekend. We still think bunds will get sold hard at some point but right now they are trading with a solid bid in this weak risk environment and so we will keep them on our radar happily seeing even better levels to sell. After all more balance sheet dilution will at some point backire for Germany, and if the Euro currency regime is dismantled no doubt that the proud Bundesbank won't be long to on the hiking bandwagon, so either outcome should be bearish for bunds. Not to mention that owning low yields in a plummeting currency is not exactly the most attractive proposition.
Either way leaving Bund in the back of our minds for now, we have upside targets for the US 10Y Treasury future around 121-02.5 which corresponds to the topside of the bullish channel and more importantly Elliott wave standard extension (as per the 10 minute chart we are at in wave iv of 3 of C, and that would be the bearish case, if it's a III of higher order then 121-02.5 will get bypassed). If we are correct then 119-07 should hold on the downside as key support. If that's not the case then we will revise our outlook based on the price action at the time, but for now we remain in a bullish dynamic.
Where things get very interesting is looking at 1Y1Y Forward in swaps. We see that we are just around the ultime low which is also a major support. Even though the market could possibly grind higher the risk reward of being long fixed income in that sector of the curve and at these levels is not great and the carry less positive. As a result, as long as Fixed Income remains bid we feel the curve will keep flattening. We see on the 2/10s chart that we rested the broken support at 270 now resistance and the curve has resume its flattening. With that in mind people interested in shorting Fixed Income should definitely sell red eurodollars, while we will keep for now our bullish outlook and a flattening bias. After all massively accomodative monetary policy and a risk averse maket environment should be prime to fester some bull flattening.
Good luck trading and have a great weekend,
Nic
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If in your head you can solve equations with more than two variables, then you gotta love the currency and sovereign debt markets. All those teeter-totters on the ends of bigger teeter-totters. Better than drugs.
Thanks, Tyler and Nic, for the consistent effort.
And all this time I thought it was a drug... hmm
Okay before the next auction... everybody at US Treasury, the FED and the Primary Dealers...
Rub Bennie Bernank-ster's Bald Cue Ball for LUCK...
And roll... "Come on lucky seven you're a 1 in 6 chance and daddy needs some whorin' money..."
A nice balanced report.
I honestly don't give two shits whether you think this is conspiracy. The dolts who can barely get by today, because they fell for the illusion of wealth will parish. Period.
HOW EXCESSIVE GOVERNMENT KILLED ANCIENT ROME Volume 14 Number 2, Fall 1994
http://www.cato.org/pubs/journal/cjv14n2-7.html
History repeats. I believe you will understand the birth, growth, maturity, and death cycle of a copied financial model in weeks ahead.
Once the looting of the Treasury begins; oops. Forget I said that. Winks.
Retain the US foundation and all will prevail.
You only find this information in things called books.. I don't think many Americans know what such an object is. Personally, I think it's funny as hell watching the herd literally rally for the same causes that are crippling this country.
Enjoy your retirement, f*cktards.
I have to say, I really dislike Cato. They sometimes put out interesting stuff, but they are just too lazy and lack the proper killer instinct.
Now that the public sector unions are being annihilated by inflation / fraud / municipal malfeasance, it'll be much easier to return some semblance of fiscal sanity.
It's fashionable to be down on the average American, but I'm confident that they will behave honorably when they're allowed to save their money, work an honest trade, and provide for their families. I mean, sure, they're sheep, but they were raised to be that way.
10% of them are not 'allowed to work an honest trade'; 'fiscal sanity' rests on that shaky semblance of a tax base.
12% of the sheep squatting in McMansions are looking for the rental they'll shortly be moving into as they get 'strategic' with their lenders; there is no honor to be found there.
It's not a matter of if the sh*t will hit the fan, but properly guessing as to the resulting blast radius.
People will revert to their baser instincts with the proper provocation. I point out the Donner Party as an example. We don't have incisors for nothing.
Murder. Tasty, tasty murder!
The treasury has already been looted. Civilization is a fragile thing.
The Euro "slide" is great news for US consumers.
Death nail to what's left of US manufacturing.
Forget Maytag, get Miele.
Forget Ford, get Audi.
Germany is No. 1 producer of high quality items.
When "made in Germany" is as cheap as "made in China", the world will go upside down.
Germans will have the same quality work ethic as always. It's ingrained in their culture to work hard, work meticulous and to be creative and innovative.
Savings rates are highest in the world, debt levels among the lowest amongst Germans.
If Euro fails, DM2 will come. DM2 will be the preferred currency for OPEC.
End of USD.
Even if the ECB raises interest rates in the face of a forex-induced increase in demand for german goods the currency is already cheap enough to attract capital. Consequently, if they get even a 3rd (I'm being hyperbolic, that's a total guess) of the growth that China gets there could very well be enough growth to beat the debasement. Hopefully the payrates climb faster than the inflation rate, because after all, the consumer is the only way this party is ever gonna get started again.
If the Germans pull of an America and become the high-tech industrial powerhouse of the era, you're right.
End of USD. I just hope the Europeans don't get cocky and think they "managed" their way out of the crisis. In the historic sense, this would be Trichet getting bullshit lucky. If this were to happen I have an inkling China will go full communism and try to use all its excess capacity and promptly implode as the quality of the outputs of centrally directed economies fall behind capitalistic ones (even Capitalism-lite like they have in Europe) because they erode their capital base and thus their ability to leverage their production for value in a fiat currency.
In the end, indirect exchange between two countries boils down to trading your output for their output, but the legal necessity that demands you pay in a certain form of currency is what gives fiat its value and thus heavily influences your ability to buy material goods an open market. If China's currency at any point loses demand, they join the USSR.
"If the Germans pull of an America and become the high-tech industrial powerhouse of the era, you're right."
They're dead meat, and rare among the living dead, seem to know it(see Merkel's rejection of calls for the German government to do a big "stimulus"). At the rate of 1.3 children per woman Germany has been at, there will be no recognizably German Germany several decades hence, short of a crazy crazy increase in productivity and productive lifespan appearing out of labs in the next decade or so.
The March 2009 bear market rally ended last week.
http://tinyurl.com/39ptoac
http://www.zerohedge.com/forum/latest-market-outlook-1
"owning low yields in a plummeting currency is not exactly the most attractive proposition"
I wouldn't agree that Bunds will suffer. These days, who cares about real earnings as compared to nominal ones? Definitely not institutional bondholders. It's not what you have, it's what you report.
Bunds are bought for safety, not for carry. When stocks and commodities will get beaten, Bunds will hold.
Holding bunds is not good business indeed, but a reasonable insurance policy.
When you want to hedge against both Dow 0 and Dow 100000000000, there are no perfect choices.
My bullish USD warnings since 2009 on weekly and monthly charts have not changed and further USD strength and thus EURO weakness is still expected, so USD rally and EURO downtrend will continue.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1