2016/10/27 Quick Update: Govvies on the Move
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Quick Update: Thursday, October 27, 2016
Govvies on the Move
We are just back from our brief holiday during the early-mid part of this week, and the volatile movement has shifted into the govvies. On the other hand the equities remain as subdued as the past couple of weeks in spite of an upside flourish at the top of this week. This is interesting once again in the wake of the somewhat improved international economic data that is behind the yields moving up again (i.e. also government bonds coming under pressure.) After a brief December S&P 500 future push above the 2,141.50 interim congestion on Monday, lapsing back below the 2,136 Tolerance of that area on Tuesday’s Close was a clear indication that it is still more comfortable in the 2,141-2,120 range it had maintained since the October 11th pre-FOMC minutes failure into that area. And that still explains a lot about how the US equities can be under pressure in the face of improved data.
For more on the importance of the economic data relative to whether the Fed will actually hike in December see the Thursday October 13th evening Commentary: Fear of Fed…with a twist post. For the more extensive Evolutionary Trend View, see Market Observations in the lower section of last Friday morning’s Draghi a Bit Soggy post (that were updated after last Friday’s US Close.) In spite of the recent price movements, the levels and overall trend psychologies remain quite the same. That is even true for now pressurized govvies, where we articulated the key lower supports toward which they now seem headed. For your ease of access we will revisit those below.
And the one other area which had been in a very strong and even volatile trend at times is foreign exchange. Yet even though the US Dollar Index had rallied strongly, as noted previous that was substantially on the back of the weakness of the heavily weighted euro. The push back above the mid .9600 area opened the door to the test of the early February .9860 significant weekly channel DOWN Break it achieved on weak European data. Now that this has reversed, it remains a very important area that also relates closely to whether EUR/US can generally hold its 1.0850-00 support this side of 1.0500-1.0450.
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ While there has been some pressure on the other developed currencies against the greenback, the weak data has also boosted the emerging currencies. That is in the context of any sustained weak economic data possibly dissuading the Fed from a December rate hike, where higher US rates remain one of the key problems for the emerging currencies and economies. As such, the further late month data is going to be very critical after the recently improved European figures. This morning’s disappointing US Durable Goods Orders (and subsets) are the precursor to Friday’s expectations for a rebound to 2.50% in the first look at US Q3 GDP after a very lackluster first half (around 1.00%.)
▪ And as far as the govvies, it looks very bad ion the surface. However, the recent weakness must be considered in the context of the sharp yield falls in the wake of the late June UK Brexit vote. That inspired not just UK Gilt strength, but also strength in all govvies based upon the expectation this was a generally depressive economic influence. However, in the event it was neither a disaster for the UK (see our June 30th Advantage FTSE post for more) nor a crisis for the rest of the global economy.
And the better-than expected performance of the UK for all of the reasons we began to note back in late June came home to roost again this week. Monday’s CBI Business Optimism improved quite a bit, and after a vacuum on Tuesday-Wednesday this morning’s UK Q3 Advance GDP came in better than expected along with the CBI Total Distributive Trades Reported Sales Index. As such, it is easy to figure why Gilts are under pressure.
Yet that broader context is instructive once again. Back above 130.00-129.50 area once again, December Gilt future was already back up into the 131.00 resistance as recently as late September prior to the current selloff below the low end of the 130.00-129.50 area that has also seen the mid-low 128.00 area fail on the way to also slipping below 127.00 area.
That was critical in the short-term. Yet it must be acknowledged that the more major area through which the Gilt exploded in the wake of the LEAVE vote is not until all the way down in the low-124.00 area. And in the event, its sharp selloff into the early part of last week only sagged into the interim contract support in the 125.50-.00 range the market is retesting at present. If it fails, look for that test of the major pre-Brexit low-124.00 area support (overrun resistance.)
Of note, it curiously did not explode through that area in the immediate wake of the Brexit vote into Friday June 24th, when it Closed the week at 124.11. However, at the top if the following week it gapped higher, leaving a low of 125.02 on the way to finishing the week at 128.82. As such, the ‘Brexit Gap’ is that 125.02-124.11 range. This reinforces the importance of the low end of the 125.50-.00 range. Even more so it means there is extra support from the bottom of that gap on any initial retest of the major congestion (January 2015 and February 2016 previous all-time futures highs) around the 124.00 area.
▪ Stronger recent US economic data has manifested itself in the December T-note future dropping back below interim 131-00/130-24 support and just this morning below the more prominent 130-00/129-24 support on a new low for the selloff since the June-July highs. This now looks worse than the temporary slippage below the low end 130-00/129-24 two weeks ago prior to stabilizing in that range for the weekly Close, While previous weak data left it recovering back above it, the current weakness speaks of a test of the test next minor interim support in the 129-00 area or the more major support in the 128-16/-00 area.
▪ While the previous rally in the December Bund future had it back up from a test of the mid-low 164.00 area weekly continuation support, that failed in late September for all of the same reasons noted for the other govvies. Yet, it was only temporarily below the next lower 163.50-.00 contract and weekly continuation support from back in September prior to last week’s rebound.
As noted last week Wednesday that 163.50-.00 support remained fairly critical, and dropping below it now points to lower levels. The next lower contract support below was not until the low 162.00 area, with the more major support into the 161.50 and 160.50 areas the discounted December contract had pushed up from in the wake of the UK LEAVE vote. The low end of those two was also the key resistance (now support) at the key 160.69 April 2015 lead contract high and subsequent March 2016 expiration rollover lead contract 160.81 selloff low.
▪ That’s it for now on this Quick Update. Please refer to the last Friday’s Commentary: Draghi a Bit Soggy post for a more extensive review of the psychology, and the post-Friday US Close Market Observations update in the lower section of that post for the still relevant Evolutionary Trend View.
Thanks for your interest.
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