Head and Shoulders
Treasuries are resuming their bear trend, with 10yr yields pushing above 2.839%, the Nov-21 high and BofAML's MacNeil Curry warns "Treasuries are in trouble." They continue to target a break of 3.00% in the sessions ahead. This is the September/3m range highs. However, they are most focused on 5yr yields and TYH4 (10Y March futures). Remember, Curry cautions, with the MOVE Index turning higher, Treasuries are moving into a more volatile environment. Price action in the next week or so could be explosive. Of coursem while the trend (and consensus) is your friend in this view, given the Fed's dominant position, there is always the chance of a short squeeze.
The broad-based measure of Treasury bond volatility - MOVE - has broken higher, and, as BofAML's MacNeil Curry notes, confirms a base and change in trend (to higher or more volatility). With the month of December traditionally a strong month for the MOVE Index and Treasury volatility in general, Curry warns there are two ways the volatility can move higher - either higher rates or lower equities.
An overview of the near-term US dollar outlook. Not thinking it is crashing and burning next week simply because it is not backed by gold or because the Fed is engaged in QE.
The US dollar looks vulnerable to additional losses next week. While we had correctly anticipated the greenback's losses last week, we had expected it to begin recovering ahead of the weekend. This did not materialize and, leaving aside the yen, the dollar finished the week near its lows. Generally speaking, the technical outlook for the greenback has soured and, in fact, warn of some risk accelerated losses in the period ahead.
As suggested here last week, the dollar moved higher over the past five sessions. Although it finished the week on a firm note, I suspect we may have a pullback before seeing higher levels. Here is why.
Just when the dollar's last rites were being considered, it has bounced back and looks poised to move higher in the days ahead.
BofAML's NacNeill Curry remains bullish gold. He notes the impulsive gains from the 1251 low of Oct-15 and break of the 2-month downtrend (confirmed on the break of 1330) imply the medium-term trend has turned bullish. We look for an ultimate break of the 1433 highs of Aug-28, with potential for a push to 1500/1533 long-term resistance. Curry suggests traders buy this dip at around 1310 - warning that this view is nagated with a break below 1251. For those awaiting, a break of 1375 (Sep-19 high and right shoulder off a multi-month Head and Shoulders Top) is additional confirmation of the trend turn.
BofAML's MacNeil Curry is changing his view on gold from bearish to bullish. The impulsive gains from the 1251 low of Oct-15 and break of the two-month downtrend (confirmed on the break of 1330) tells him that a medium-term base and bullish turn is unfolding. BoFAML looks for an ultimate break of the 1433 highs of Aug-28, with potential for a push to 1500/1533 long term resistance. In the next several sessions Curry suggest buying dips into 1309, cautioning that this bullish view is "wrong" if gold breaks below 1251. For those awaiting additional confirmation of a turn, Curry notes you need to see a break of 1375 (Sep-19 high & right shoulder off a multi-month Head and Shoulders Top).
While last week's relentless panic buying has been extensively commented on, it was last week's nearly 50% plunge in near-term stock vol that the major news as the world went from risk off mode to risk on. It wasn't just stocks whose volatility imploded: it was the implied near-term volatility of all asset classes that was hammered in the past three days. But while everyone is fascinated by the rapid VIX down move, it is what someone did on Friday by betting that VIX will double by February in a 24/29 VIX Call Spread, that was of note. The amount wagered: $6.7 million. Whether or not this was an outright trade, or a hedge (and if one listens to Jamie Dimon perjuring himself to Congress, any trade is a hedge, adding further to the confusion) is unknown, but it is not pocket change betting that the plunge in vol will be merely transitory.
We now appear to be close to the day of reckoning that likely determines what the coming weeks/months hold.
- Do we step back from the brink, see our politicians reach an agreement and carry on? Although to be fair, in 2011 the break below supports that led to accelerated losses in the equity markets actually took place once an agreement was reached.
- Do we break lower thereby causing the negative feedback loop/concerns that feed back into the economy, kill any possibility of tapering and sees the Fed re-establish its dovish credentials (Like 1998 and 2011)
- Do bond yields push higher after an agreement thereby increasing concerns about a negative feedback loop into the economy, housing, emerging markets, Europe (Like 2011) and ultimately the equity market?
Time will tell us the answers to the above questions, but whatever happens, Citi notes it looks like the price action in the near future is at pivotal levels that need to be watched closely.
It may seem counter-intuitive but the US dollar appreciated last week, despite the partial closure of the Federal government, the heightened risk of default and the nomination of Yellen. The dollar can move higher next week too.
Looking at the equity market and some of the background dynamics Citi's FX Technical group cannot help but be reminded of 2011. They also warn, despite the constant hope-driven rallies this week, there are also some aspects of what we saw in 1998 and similarities with 2000 that are worth noting. The bottom line, we have had the view for some time that we would see a much deeper correction in the equity market (in excess of 20%). Recent price action and developments might (just might) be suggesting that it is time to revisit that theme.
Across asset classes, BofAML warns that financial markets suggest that this week will see a continuation of the risk off theme from last week. The breakout in the VIX says that investor anxiety wiil remain elevated, particularly as the S&P500 remains on track to test 10 month trendline support at 1657. In such an environment, safe havens such as US Treasuries should benefit with a target 2.544%/2.459% resistance.
Overview of near-term dollar outlook.
The markets seem to sense that all of this. In the US we’re putting in what looks like a lower high. The market appears to be forming a Head and Shoulders pattern.