Ugly Half Year Close...Risk Off... Flows Benefiting Treas... Bull Steepening
So much for the prognosticators calling for flows from bonds to equities... Flows are overwhelming equity markets... S+P futures, which started with minor losses in Asia, accelerated as Europe opened, down about 1.5%.. Now down 56 points... European equities are approaching down 3% to end the quarter/half year end... For the S+P, this is the biggest decline since 1970, for the Nasdaq, the worst since 2002 ( tech crisis)...we are on trend to wipe out 8.5 trillion of equity from S+P index for the first half of the year... Clearly the Fed is winning the reverse wealth effect...
What is the catalyst for the move Tuesday and again this morning?... For this morning there is no discernible catalyst that we can figure... Outflows of equity risk are happening, limited liquidity to stop it, the bear sentiment remains... We said that equities would run into trouble around 4000-4100 S+P, we were right...although we thought the catalyst would more likely be the CPI number on July 13... We have PCI deflator today... 6.4% is the expectation...
Fed and Central Banks... While some may blame the moves today on Central Bank speak from Sintra yesterday, we do not see it... Powell, if anything, was not hawkish... And bond markets reacted to his less hawkish answers by rallying yesterday... With the risk off we are see bull flattening today with the 2 year now below 3%... And 10 years approaching 3%... Markets are starting to build out a Fed ease of some type next year... The number of rate hikes for the next two meetings is now below 5 (125 basis) from above 5... We continue to believe 50 is the number for July...
Rates... 2 years hit 2.875 last week, we see that as resistance today... 10 years hit 3%, we are almost there now... That should be strong resistance... But the belly of the curve is showing some strong buying...short covering and quarter end buying... Also good index buying as indices extend... Out of Europe, the short end is soaring... 2 year German notes are better by 16 basis, 5 years by 15 and 10 years by 12... Huge bull steepening rally... One thing of note is that breakevens for US 10 years continue to come down. Over the last month 10 year treasury break evens have gone from 2.80 to 2.40... From April 22, they have move 67 basis... If we are thinking this through correctly, that is positive for the inflation outlook...
While equities continue to trade poorly, the credit markets are starting to Freeze up...IG CDX is now well over 100, at 103 , new YTD wides , we see support at 110... HY CDX is out 16 to 587, the recent wide was 598 on June 16, we see 620 as near term support, but after that is goes to 712... CCC's had the worst second quarter on record, down 12.32%...spreads on CCC's TOPPED 1000 YESTERDAY...CCC's yields are now at 13.41%...LOSSES FOR THE FIRST HALF OF THE YEAR ARE 15.72%...IT IS UGLY...no new IG issues yesterday . We said Tuesday's optics were awful as bonds were only 1.4 times oversubscribed with new issue concessions at 32 basis... Banks are no longer willing to lend to buyouts at reasonable terms and buyers are struggling and finding better terms with private credit firms...we said watch when the credit market is shutting down... Symptoms are there.
Kudos to our reporter friend at the FT, who penned an article this morning where the SEC is trying to require firms that trade over 25 billion of treasuries a month to register as dealers with the SEC... Good luck with that... Watch how those "big boy" hedge funds continue their move into the futures markets.... Again cutting liquidity from the cash treasury market... We doubt it will happen
Today will be a wild day... It is all about flows and quarter end... The early read is very risk off and FTQ... Tomorrow is an early close for bonds in front of the 3 day holiday... With most of North America on vacation next week... We will be here....
