Thursday Macros
Risk Off Starts Overnight as MS/Citi Go Negative on Equities... Treas Hold 1.38
It was a bit of a ride for both risk and treasuries in the overnight session, with big moves from 2 am to 4 am... Now both are reversing direction as NY comes in... It started with Andrew Sheets of MS cutting US stocks to underweight and global equities to equal weight... Then it was followed by a note from Citi that extremely bullish positioning means corrections can be amplified... That sent S+P futures down to 4497 by 4:19 am... That loss has been reversed as S+P are about flat now at 4518... Meanwhile in treasury space, Japanese accounts came into to buy as 10 years hit 1.38 in NY time and again near that level around 2 am.. 10 years are now at 1.35... Meaning that 1.38 has held for now...
We continue to view equities and rates as noise as long as the US corporate new issue market is strong... And boy is it strong...setting records yesterday after the labor day holiday. 21 borrowers issued yesterday a total of 34.375 billion. It was the busiest day ever in terms of deal count and the 7th best day ever in volume... Despite the huge issuance, transactions maintained constructive technicals... On average orderbooks were 2.6 oversubscribed, offerings moved 23 basis from IPT, and new issue concessions landed at 2.5 basis... As we look at CDX, both IG and HY, both are a little wider but still near recent tights. As long as these metrics hold, while MS and Citi could be right, September is the month for corrections, but we still do not see it in the near term.
Rates... 10 year reached 1.38 yesterday and held... That is important... We have seen significant CTA selling in the last week... According to one report we read this morning CTA's sold 86 billion in TY futures over the last week and 124 billion of RX (Euro Bunds), with another potential 54 billion of TY to be sold at 132-05 (about where we are)... But we read a BB report this morning saying the 10 year faces technical hurdles in the 1.38-1.44 . Resistance from 38.2% Fibonacci retracement , an Ichimouku (had to look it up) cloud barrier, and the 100 day simple moving average... So it will take some push to break through the next level... And with Manchin talking about a 1.5 trillion stimulus, rather than 3.5 trillion, we are not sure if and when we break these levels...more and more Fixed income strategists are wavering whether we hit 1% or 2% first...
Bullard is out this morning in an FT interview still calling for tapering now... But he has moved his end of life tapering from the first quarter to the first half of the year... The Fed has lost their window, rightly or wrongly... There does not seem to be momentum to get the 10 million job openings we expect to see today filled... There are many reasons... Supply chain issues are keeping some factories operating at lower levels.... Stores and restaurants are limiting hours and closing certain days of the week... Some here have closed for the season, more due to help... Our colleague was interviewed on BB yesterday where he said his fear is that these job openings could go away without ever being filled... Technology could fill some, but if car companies can't produce cars due to lack of chips, or restaurants continue to cull the number of employees they need, many jobs may not get filled, even with the Federal employment benefits ending... This is not our fear today, but something we have in the back of our mind...
Expect another good issuance day for the IG and HY corporate space...rates should be hovering around the 200 day moving average with a 1.32-1.38 range... Beige book is out, but that won't move the markets... 10 year auction today, will probably go ok... Demand seems to be there...
