Euro slips below 1.36 while Gold breaks down and here’s what the bond rally means

May 29, 2014

Bonds, Bonds, Bonds, Bonds, Bonds.

What exactly is the bond market trying to tell us about global markets and the economy or are bond traders not signalling anything other than the fact that they got caught looking for a sell off when instead there is a massive short squeeze underway.

So yes before we get to Euro and Gold lets talk about bonds and the  seemingly unexplainable rally in US bonds.

To me though having dealt with big fund managers for more than two decades my sense is that the reality is more than likely that this short squeeze is being accompanied by an asset allocation shift into bond s. My hypothesis on this would be that investors, big ones anyway, know the underlying structure of the stock market is deteriorating.

10 year Treasuries down at their lowest level of 2014 at 2.44%. There are all sorts of explanations including a reference to Chinese property, the Titanic and an iceberg.

Danger Will Robinson!

So we saw that at the close the Dow was down 43 points or 0.25% at 16,633 after a choppy days trade. The Nasdaq fell 0.28% to 4,225 and the S&P 500 was down just two points to 1,910 after a high on the day of 1910. Data wise it was quiet but both MBA mortgage applications (-1.2%) and the redbook index (0.7%) were lower than expected.

Competing themes in Europe drove the markets with some disappointing data out of Germany on the unemployment front with a rise of 24,000 against estimates of a 15,000 fall. EU wide data on consumer and business confidence was flat to expectations. In the end the big bourses in London, Frankfurt and Paris were choppy but didn’t move much day on day with the FTSE up 0.09% at 6,851, the DAX fell 0.02% to 9,939 and the CAC rose 0.05% to 4,532. Italian stocks however rose 0.85% while Spanish stocks rose 0.4%.

Euro slipped below 1.36 finally although it wasn’t the German data that was the catalyst but more likely overall USD strength and a bit of sterling weakness weighing on the single currency.

Euro is starting to accelerate now and I sold some yesterday around 1.3630. It’s now firmly below the 200 day moving average, the weeklies look ugly and while US GDP tonight is a huge hurdle and potential catalyst for a reversal I am now focused on a test under 1.35 – January 2014 lows.

Turning back to locla trade overnight and we see that resource stocks were lower in London, which has seen the ASX SPI 200 June contract fall 13 points to 5524 bid. On the bond boards the 3 year bond future rose 3 points to 97.22 (2.78%) on the 10′s there was a very solid rally of 6 points to 96.355 (3.645%)

Sterling came under heavy pressure and finally crashed through the 7 month uptrend. GBPUSD sits at 1.6710. USD is down a touch at 101.82 and the Aussie dollar is doing okay at 0.9232.

On commodity markets gold is under intense pressure falling to $1,258.

Hard not to target a move to this years lows now.

Silver is down at $19.08 but copper rallied another point to $3.20 lb. On the ags corn and soybeans rose half a percent reversing yesterday’s plunge but wheat was down another 0.35%. On oil markets traders seem to have taken a queue from the bond rally and sold off Jun Nymex crude by 1.34% to, a still high, $103.08.

On the data front Japanese retail is out and then locally the HIA new home sales and the very important private new capital expenditure are to be released. Tonight Germany is out but the big number is the second read of US GDP with the market expecting the initial estimate of just 0.1% growth in Q1 to be downgraded to -0.2%.

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