Key Global Macro Pivots

By Nic Lenoir of ICAP

Following our alert last Friday, we have reached some key support levels in US Fixed Income. Keep in mind the sell-off on Friday and Monday was driven by leveraged fast money accounts, and not real money flow. Therefore, the auctions this week will be key. From these levels, 10 year yields can move up maybe 10 to 15 bps more, but that is as far as we would see them going for now. A close below 114-16 in the future would clearly lead us to revise this outlook, but for now we have a bullish outlook. Everybody knows the supply argument, but nobody ever worries about demand. Following the same principle, Japan rates have failed to blow out higher for 20 years now... Not saying it cannot happen in the US, but higher rates would probably panic equities and in turn bring back a bid in fixed income. Baby boomers are going to be more and more conservative with their portfolio allocation from now on as they age and stop working, and every bump in equity and pick up in yield gives them a reason they don't already need to try and protect their capital from equity markets which have not done them any favors the past decade. A simple change of 5% of their portfolio allocation would be enough to absorb a lot more supply than we have coming. Worth keeping in mind. Without trading on such a big picture argument, the supports here will hold we believe.



Holding here for US Treasuries will also be facilitated if equities come under pressure. And talking about which, we are getting awfully close to the lower bollinger band on Vix. This is the single best technical indicator to pick out direction on the S&P. Should we gap lower and post a bullish below the bollinger in Vix, we would recommand getting short equities aggressively (I have highlighted the last 5 occurences on the chart... self explanatory).

Interestingly as we are close to key levels in equities and bonds, we find very interesting resistance in Copper and Gold. Copper is testing the former trend channel support now resistance (Copper can be sold against the 2Y Chile/US yield spread against which it is overvalued, despite correcting 20bps on the rate spread today!). Meanwhile Gold which we recommended buying at 1,080/1,090 is now on the neckline resistance of a potential inverted H&S at 1,135/1,136. We would advise to take profit on tactical positions, and keep a trailing stop below 1,114 on the core longs here.



Good luck trading,

Nic