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MACRO MORNING NOTE FEBRUARY 12, 2017

SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland

What you need to know via FT: 

  • European bourses bounce higher after last week’s sharp sell-off
  • Financial and technology stocks in demand as Stoxx 600 rises 1%
  • Wall Street futures point to sharp opening gains in the
  • US US 10-year Treasury yield touches 2.9% ahead of inflation data
  • WTI crude climbs but remains short of $60 mark
  • Gold rises 0.4%

Leading Quote: 

“Investors are breathing a sigh of relief after the torrid times last week,” says Rebecca O’Keeffe, head of investment at Interactive Investor.

“Buying the dip has been a very difficult call in recent days, with every attempt at engagement punished in subsequent market moves, so investors will be hoping that this is a genuine buying opportunity. The key event of the week is US consumer price data on Wednesday, with investors anxious to determine whether the inflation fears that have helped to drive recent market moves have been overdone or if these concerns are justified.”

Asia and European stock markets have experienced a modest bounce as computers attempt to buy the dip from last week’s liquidity gap, but sustainability into the upside is questionable, considering government bond yields are continuing to advance. US Treasuries 10yr yield prints 2.891 this morning, ahead of inflation data Wednesday. Nevertheless, higher bond yields have been the culprit of stock market declines, as it forced low vol strategies to unwind.

“The strategies that worked in a low volatility period will have difficulties in a higher rate regime,” said Alastair Williamson. 

Overnight summary from CNBC: 

  • Asian markets closed mostly higher on Monday after U.S. stock indexes rebounded in the last session.
  • Heavy declines were seen in Asian markets last week, with the Nikkei 225 down 11.4 percent from its 52-week high below its 52-week high as of Friday.
  • Oil prices rose after declining for the sixth straight session in the previous session.
  • The dollar was softer against a basket of currencies, paring some of the gains made last week.

Traders are waiting for US inflation figures, expected on Wednesday, for the next hints at stock market direction. Economists surveys are expected the US consumer price index (CPI) to advance for the fifth-straight month. This would further lead to bond market selling and push to UST10Y close to 3% and continue the unwinding of low vol strategies.

Over in Asia, regionals stock markets closed higher with a significant advance in oil. South Korea’s KOSPI moved up +.91% to 2,38, with technology doing the heavy lifting.

In Australia, the ASX200 -.30% to close at -5,820 as earnings season was well underway. Energy stocks declined despite the positive move in Brent.

As a whole, Chinese stocks traded up in a holiday-shortened week. Hong Kong’s Hang Seng Index advanced +.52%. In mainland China, the Shanghai composite advanced +.76% to 3,153, and the Shenzhen exploded higher +2.65% to 1,723. Despite the positive sentiment in the broad stock market, financial and industrial related financial service companies were mostly lower. Japan was on public holiday.

Rob Carnell, chief economist and Asia Pacific head of research at ING, said in a Monday note that what was happening in stock and bond markets “will be delivering pain to some,” but would not be a meltdown.

On the commodity front, WTI advanced +2.17% to 60.33 at 5:45 am est.,  as computers attempt to buy the dip following last weeks -12% tumble. Copper is higher +1.13% at 3,077, amid a rout in commodities which pushed the metal down -7.19% in February to the low three handle. Industrial metals in the past three months have stalled and are developing a bearish evening star. Precious metals are compression and have not broken out of 2016’s highs.

The strategies which worked for four decades could be running into trouble… 

UST yields are moving higher not because of growth and inflation, but the simple idea of massive treasury supply about the hit the open market. From Fed rolling off the balance sheet to Trump wanting to sell trillion plus in debt this year. The trade deficit continues to deepen and Fed debt/GDP skyrockets.

President Trump is over-hyping the economy

Record outflows last week from risk parity deleveraging and low vol strategies breakdown

SPX500 3box reversal (percentage)

TLT risks <50sma (monthly)

SPX500 (monthly) Wm%R breaks overbought range..

New regime in UST10Y

Stocks at generational highs?