Tag: 10-Year Treasury Yields

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Gold lifted by rising Treasuries and falling Dollar

10-Year Treasury yields are testing LT support at 2.00% after falling 120 basis points (bps) since late last year.

10-Year Treasury Yield

Rising global uncertainty has caused a massive outflow from equity funds into bonds.

The Dollar Index penetrated its rising trendline, warning of a correction to test 95.

Dollar Index

Demand for Gold is boosted by lower bond yields and a lower Dollar. Spot Gold breakout above resistance at $1350 would signal a fresh advance, offering a medium-term target of $1500/ounce (short-term: $1400).

Spot Gold in USD

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Gold at a watershed

Silver found short-term support at $14.50/ounce but declining Trend Index peaks indicate selling pressure and a test of primary support at $14 is likely.

Spot Silver in USD

Gold, by contrast, has found strong support at $1280/ounce, refusing to give way despite concerted selling. Breach of 1280 would signal a test of primary support at 1180 but recovery above 1300 becomes increasingly likely the longer that support holds.

Spot Gold in USD

A rising Dollar would weaken demand for Gold but the Dollar Index has met strong resistance between 97 and 98. Follow-through above 98 would signal a fresh advance but a fall below 97 would be bullish for Gold.

Dollar Index

10-Year Treasury yields have also broken support at 2.4% offering a short-term target of 2.2%. Falling Treasury yields have a depressing effect on the Dollar and boost demand for Gold (by lowering the opportunity cost).

10-Year Treasury Yield

Gold is therefore at a watershed. Breach of strong support for Gold at $1280 would be a strong bear signal but respect would be a bullish sign, suggesting another advance. Probability is still favor of the bearish scenario but the bull case is strengthening.

 

 

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The eye of the storm

“On Wednesday, the US Department of Commerce added Huawei – and 70 other companies – to its “Entity List.” …. Huawei cannot buy parts or components from US companies without the explicit approval of the US government.” (Trivium China)

We are sliding towards a fully-fledged trade war. Following straight after the imposition of tariffs by both the US and China, US action against Huawei will be taken as a direct attack on Chinese industry.

The CCP is already stoking nationalist sentiment to bolster public support.

“Last night and today, CCTV replaced regularly scheduled programming with two films about the Chinese army fighting the US in the Korean War.” (Trivium China)

Market response is so far muted. On the daily chart, the S&P 500 correction is modest. Expect another test of 2800. Breach would offer a target of 2600.

S&P 500

The Nasdaq 100 retreated below its new support level at 7700 but Money Flow remains strong.

Nasdaq 100

China’s Shanghai Composite found support at 2900.

Shanghai Composite Index

Japan’s Nikkei 225 is ranging between 20000 and 24000. Expect another test of primary support at 20000.

Nikkei 225

India’s Nifty is testing support at 11000. Respect would confirm the primary up-trend.

Nifty Index

In Europe, The DJ Euro Stoxx 600 is undergoing a correction that is likely to test support at 365. But Trend Index above zero continues to signal buying support.

DJ Euro Stoxx 600

The Footsie found support at 7200, with Trend Index again signaling buying support.

FTSE 100

10-Year Treasury yields are testing support at 2.40%. One of the few clear signs that markets are growing increasingly risk averse, as demand for bonds drives down yields.

10-Year Treasury Yields

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Gold retreats as the Dollar strengthens

China’s Yuan fell sharply against the Dollar on imposition of tariffs by the US. Expect a test of primary support.

Chinese Yuan/US Dollar

The Dollar index strengthened. Follow-through above 98 would signal a fresh advance. The long-term target is 100.

Dollar Index

10-Year Treasury yields are testing support at 2.40%. Breach would offer a target of 2.20%. Rate hikes are a distant memory.

10-Year Treasury Yield

Gold continues to test medium-term support at $1280/ounce. The tall shadow on this week’s candle warns of selling pressure; as does the Trend Index peak at zero. Breach of support would signal a test of primary support.

Spot Gold in USD

Silver continues to fall, heading for a test of primary support at $14. Declining Trend Index peaks indicate selling pressure.

Spot Silver in USD

Gold is likely to follow.

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S&P 500: Beware the buyback blackout

We are now entering the blackout period when US corporates normally refrain from buying back stock, in the four to six-week period prior to their next earnings release. There is no outright ban on buybacks during that period but discretionary repurchases are restricted.

Zerohedge illustrates the extent to which stock buybacks are currently driving the market:

S&P 500 buybacks

Buybacks dwarf the $18 billion year-to-date inflow from ETF investors into US equities. The blackout period is likely to cause weakness.

10-Year Treasury yields also breached support at 2.60%, warning of a further decline in long-term interest rates. A sign of increased risk aversion.

10-Year Treasury Yields

Volatility on the S&P 500 has declined close to 1% but an upsurge in the next few weeks would warn of elevated risk. Breach of 2600 would indicate another test of primary support at 2350/2400.

S&P 500 & Twiggs Volatility

We extend our sympathies to the victims of the shooting in Christchurch and their families. Our hope is that this atrocity will draw people together in support of each other rather than divide them.

It has often been said that power corrupts. But it is perhaps equally important to realize that weakness, too, corrupts. Power corrupts the few, while weakness corrupts the many. Hatred, malice, rudeness, intolerance, and suspicion are the faults of weakness. The resentment of the weak does not spring from any injustice done to them but from their sense of inadequacy and impotence….
~ Eric Hoffer

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S&P 500 optimism fades

10-Year Treasury yields are testing support at 2.60%. Breach of support would warn of a further decline in long-term interest rates. Declining yields reflect the outflow of funds from stocks and into safer fixed-interest investments.

10-Year Treasury Yields

Volatility on the S&P 500 has fallen close to 1% but a correction from here would be likely to form a trough above the 1% level, warning of elevated risk. Breach of 2600 would indicate another test of primary support at 2350/2400.

S&P 500 & Twiggs Volatility

Average hourly wages, total private, grew at 3.4% over the last 12 months, while production & non-supervisory wages grew at 3.48%. This keeps pressure on the Fed to raise interest rates as underlying inflationary pressures grow. The dampening effect of the trade dispute with China may have bought the Fed more time but a spike above 3.5% would be difficult to ignore.

Average Hourly Wages Growth

Impact of the trade dispute is more clearly visible on the chart below, with growth in total hours worked retreating below 1.5%. Slowing growth in hours worked warns that real GDP growth for Q1 2019 is likely to disappoint.

Real GDP and Hours Worked

China Trade Talks

US-China trade talks have made little in the way of real progress.

BEIJING—The U.S. and China have yet to set a date for a summit to resolve their trade dispute, the U.S. ambassador to China said Friday, as neither side feels an agreement is imminent. (Wall St Journal)

There is opposition to concessions on both sides:

China has a secret program to support the microchip and software industries. That’s according to Wang Jiangping, Vice Minister of Industry and Information Technology. Wang was speaking to CPPCC delegates at the Two sessions on Thursday, but the comments leaked to reporters (FX678):

“Last year, the Ministry of Industry and Information Technology planned the ‘Zhengxin Zhuhun’ project under the leadership of the Party Central Committee and the State Council.”
“The state will give strong policy and funding support, because industries such as microchips and software need to be iteratively developed.”

Wang said the ministry had kept the policy under wraps. That’s presumably because of the recent international backlash to the Made in China 2025 program…..Wang’s comments have already disappeared from the Chinese internet.

Get smart: Given Xi’s self-reliance push in key technologies, nobody really thought China would give up its industrial policies for these sectors. (Trivium China)

Whoever leaked Wang’s comments was not trying to make trade negotiations any easier. Impact of the trade dispute is starting to emerge in both economies but resolution and enforcement of a trade agreement is a long and tenuous path.

Hope is an expensive commodity. It makes better sense to be prepared.

~ Thucydides (460 – 400 B.C.)

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GDP up but ETF flows bearish

Real US GDP grew a healthy 3.1% in Q4 2018. Rising hours worked point to further gains in the new year.

Real GDP and Hours Worked

10-Year Treasury yields rallied slightly but only breakout above 2.80% would hint at a reversal in the down-trend, while breach of 2.60% would warn of further weakness. Inflows into Treasuries normally coincide with outflows from stocks, indicating a bearish outlook.

10-Year Treasury Yield

According to etf.com, US equities have seen $21.2 billion of ETF outflows YTD, while fixed income recorded $16.5 billion of inflows. The market remains risk-averse.

The S&P 500 continues to test resistance at 2800. Bearish divergence on 13-week Momentum (below) often precedes a market top. Another lower peak would reinforce the signal.

S&P 500 & Twiggs Momentum

A correction in March is likely, possibly on conclusion of US trade talks with China. Breach of 2600 would signal another test of primary support at 2350/2400.

“President Donald Trump said on Monday that he may soon sign a deal with Chinese leader Xi Jinping to end the countries’ trade war, if the two sides can bridge remaining differences.

But the lead U.S. negotiator said on Wednesday it was too early to predict the outcome. U.S. issues with China are ‘too serious’ to be resolved with promises from Beijing to purchase more U.S. goods and any agreement must include a way to ensure commitments are met, U.S. Trade Representative Robert Lighthizer said.” (Reuters)

We are in a bear market that is likely to continue for the foreseeable future. The strength of the next correction will confirm or refute this.

Right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.

~ Thucydides (460 – 400 B.C.)

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More signs of risk avoidance

Bloomberg: “U.S. stocks slid as investors grew anxious that the Trump administration won’t reach a trade deal with China before a March deadline for escalating the war. Treasuries surged.

The post-Christmas rally that added 16 percent to the S&P 500 came under increasing pressure amid reports the two trading partners remained far apart on a deal and that the nations’ presidents won’t meet before higher tariffs are slated to take effect on Chinese goods next month.”

S&P 500 volatility remains high. If the rally runs out of steam, a large Twiggs Volatility (21-day) trough above 1.0% would signal a bear market. Retreat below 2600 would reinforce the signal.

S&P 500

Crude prices retreated below resistance at $54/$55 per barrel, on fears of falling global (mainly Chinese) demand. Another test of primary support at $42/barrel is likely.

Light Crude

10-Year Treasury yields retreated to 2.65%. A Trend Index peak below zero warns of buying pressure from investors (yields fall when prices rise) who are looking for safety.

10-Year Treasury Yield

My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

The secret of happiness is freedom and the secret of freedom is courage.

~ Thucydides (460 – 400 B.C.)

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Treasury yields confirm bond bear market

10-Year Treasury yields respected their new support level at 3.00%, confirming a primary advance.

10-year Treasury Yield

Breakout above 3.00% also completes a double-bottom reversal, signaling the end of a three-decade-long secular bull market in bonds.

LT 10-year Treasury Yield

The yield differential between 10-year and 3-month Treasuries is declining but a flat yield curve does not warn of a recession. Only if the yield differential crosses below zero, with short-term yields rising faster than long-term, will there be a recession warning.

Real returns on long-term bonds — the gap between the green and blue lines below — remain near record lows.

1981 to 2018: 10-Year Treasury Yields and GDP Implicit Price Deflator

Only if the gap widens (real returns rise significantly) are we likely to see downward pressure on stock valuations, with falling price-earnings multiples.

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East to West: Bonds & tariffs hurt developing markets and crude prices

10-Year Treasury yields are consolidating in a triangle below long-term resistance at 3.00 percent. Breakout above 3.00 would signal a primary advance, ending the decades-long bull market in bonds. This would have a heavy impact on developing economies, including China, with a stronger Dollar forcing higher interest rates.

10-year Treasury Yields

A Trend Index trough above zero would signal buying pressure and a likely upward breakout.

Crude oil prices, as a consequence of higher interest rates and the threat of trade tariffs, are starting to form a top. Bearish divergence on the Trend Index warns of selling pressure. Breach of support at $65/barrel would signal reversal to a primary down-trend.

Nymex Light Crude

Commodity prices are leading, breach of support at 85.50 already having signaled a primary down-trend.

DJ-UBS Commodity Index

China’s Shanghai Composite Index is in a primary down-trend. Trend Index peaks below zero warn of selling pressure. Breach of support at 2700 is likely. The long-term target is the 2014 low at 2000.

Shanghai Composite Index

Germany’s DAX is headed for a test of primary support at 11,800. Descending peaks on the Trend Index warn of secondary selling pressure. Breach of primary support is uncertain but would offer a target of 10,500.

DAX

The Footsie also shows secondary selling pressure on the Trend Index, warning of a test of primary support at 6900/7000.

FTSE 100

In stark contrast, North American tech stocks have made huge gains in the last four months, but are now retracing to test support. Breach of the rising trendline and support at 7400 would warn of a correction; a test of the long-term rising trendline at 7000 the likely target.

Nasdaq 100

The S&P 500 has also made new highs. Penetration of the rising trendline would warn of a correction to the LT trendline at 2800.

S&P 500

North America leads the global recovery, developing markets including China are falling, while Europe is sandwiched in the middle, with potential loss of trade from East and West if a trade war erupts.

From the AFR today:

President Donald Trump said he’s ready to impose tariffs on an additional $US267 billion in Chinese goods on short notice, on top of a proposed $US200 billion that his administration is putting the final touches on.

“….I will say this: the world trading system is broken.” Trump is “dead serious” in his determination to push China to reform its trade policies, [White House economic adviser Larry Kudlow] added.

Can’t say he didn’t warn us.

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