Price Action

Overview of market positioning and technical indicators on the eve of the FOMC meeting.  

While fundamentals remain, for now, as useful as useful as having the only phone in the world; we demur to BofAML's technical analysis team for their short-term trading focus across various asset classes. In light of the only thing that matters, the Fed balance sheet (as Hugh Hendry so eloquently explained), BAML warns "beware the bear trap" in stocks...

After the fireworks following yesterday's weak 10yr auction, tensions were high going into today's 30yr bond auction.

Despite misses on stocks and gold, Citi FX Technicals' excellent "12 Charts of Christmas" performed well in 2013 directionally across FX, bonds, and commodities. This year, Tom Fitzpatrick and his team unveil 2014's most important charts - establishing a starting point for their outlook in the year ahead. From a slowing housing market to expectations of a strong USD; and from a "roll-over" in Consumer Confidence to strength in gold, they see the "repair process" continuing albeit at a slow pace but worry that the stock markets are looking more and more like 2000.

It has been another session of overnight weakness, in which, to quote Deutsche Bank, "something has changed" as ES algos no longer track every tick of the EURJPY (or other JPY pair variants). Usually in such transition periods where the robots are not sure how to trade risk based on highly leveraged inputs, things go bump in the night, and they did just that with the E-Mini trading just off its overnight lows, despite a notable rise in the EURJPY from yesterday's close. Keep a close eye on the now traditional pre-market ramp in the EURJPY - if unaccompanied by an increase in the E-mini, it may be time to quietly exit stage left.

Everywhere you look these days, central planning just can't stop reaping failure after failure. First it was Japan's Q3 GDP rising just 1.1%, well below the 1.9% in the previous quarter and the 1.6% expected, while the Japanese current account posted its first decline since of €128 billion (on expectations of a JPY149 billion increase) since January. What's worse, according to Asahi, Abe's approval rating tumbled to 46% in the current week, down from the low 60s as soon as early 2013, while a former BOJ member and current head of Japan rates and currency research, Tohru Sasaki, said that the high flying days of the USDJPY (and plunging of the JPY respectively) is over, and the USDJPY is likely to slide back to 100 because the BOJ would not be able to expand monetary easing by enough to repeat this year's "success." He definitely uses that last word rather loosely.

While the perma bears may find comfort in the dollar's decline, its weakness has not been very broad, but really limited to the euro, sterling and currencies that move in their orbit.  Still further dollar declines look likely near-term.  

• HSBC 165K
• Goldman Sachs 175K
• Bank of America 175K
• JP Morgan 180K
• Citigroup 180K
• Deutsche Bank 185K
• UBS 190K
• Barclays 200K

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.

It has been a relatively quiet overnight session, if with a downward bias in the EURJPY which means futures are just modestly in the red. The action however is merely deferred, with a slew of macroeconomic reports on the horizon, chief of which is the ECB rate decision, which consensus has as unchanged at 0.25%, although Draghi's subsequent conference is expected to lead to EUR weakness, even if briefly, since the central bank is widely expected to downgrade both growth and inflation forecasts. DB adds that the recent rise in eonia — which may reflect concerns about the treatment of LTROs in the end-December AQR and be encouraging the accelerated 3Y LTRO repayments — may warrant a temporary liquidity easing: a special short-term tender; temporarily easing minimum reserve requirements; or — technically possible, if politically controversial — temporarily suspending the SMP sterilization process. Concurrent with the draghi conference, we also get the second revision of Q3 GDP, which consensus now expects to rise to 3.1%, as well as this week's initial jobless claims random number generator. Later in the day the Factory Orders update is expected to show a -1.0% decline, while Fed speakers Lockhart and Fisher round off the day.

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.

Something snapped overnight, moments after the EURJPY breached 140.00 for the first time since October 2008 - starting then, the dramatic weakening that the JPY had been undergoing for days ended as if by magic, and the so critical for the E-Mini EURJPY tumbled nearly 100 pips and was trading just over 139.2 at last check, in turn dragging futures materially lower with it. Considering various TV commentators described yesterday's 0.27% decline as a "sharp selloff" we can only imagine the sirens that must be going off across the land as the now generic and unsurprising overnight carry currency meltup is missing. Still, while it is easy to proclaim that today will follow yesterday's trend, and stocks will "selloff sharply", we remind readers that today is yet another infamous double POMO today when the NY Fed will monetize up to a total of $5 billion once at 11am and once at 2 pm.

There are a couple of disturbing points that came out of her take on bubbles and the rationale behind not tapering a mere 10 or 15 Billion dollars given the monthly commitment of 85 Billion in Fed Purchases every month.  

Overview of the near-term outlook for the major currencies.  

As the S&P 500 continues to make higher highs, Citi's FX Technicals group attempts to identify important levels to watch. As they have highlighted before, while they respect the price action and the fact that the markets are making higher highs, there is an underlying degree of skepticism surrounding the sustainability of this uptrend from a more medium term perspective. Important levels/targets on the S&P 500 converge between 1,806 and 1,833. A convincing rally through this range (weekly close above) may open the way for a test of the 1,990 area (coincidentally the Fed balance-sheet-implied levels for end-2014); however, at this stage they are watching closely over the coming weeks as we approach the New Year.