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Technical Update: Credit Market Messages Getting Old?

  • Written by Syndicated Publisher 370 Comments370 Comments Comments
    December 14, 2011

    This is a credit event that equity will be forced to acknowledge. The message may be getting old but following it today would have served you well. The ES (SPX futures) wanted to rip higher all day and they tried hard. The currencies though were flat all morning and not supporting the ES exuberance.

    It was literally a war between both asset classes. The fact that the ES was rallying without the currencies was a sign that it was a very weak attempt at a rally with a high probability of failure. As the day progressed the mid cap and Russell futures also reversed leaving ES alone to try and bid up the entire capital markets. Then a record setting 10 year auction put in a rather larger reversal across the treasury curve.

    In the end the victory has to go to the currencies. The EUR looks very weak while the USD very strong. Gold continues to selloff  as further proof of the reality that the USD is simply in high demand. The entire move by the central banks has now been reversed. They have failed to quench the thirst for USD.


    Huge moves in the EUR (chart below) and the USD. The EUR closed below the 2005 trend line while the USD took out prior highs with relative ease.

    Treasury Yield

    Huge reversal in treasury yields today. The 10 year closed at 1.96% 10 basis points off the intraday highs while the 30 year put in a similar intraday reversal closing at 3.00%. The 10 year auction today saw a huge jump in the bid to cover at 3.53 ($3.53 in bids submitted for every $1 auctioned).

    Clearly the demand for the safety of the UST is growing.


    The Demand For USD

    Gold was down another 2% today and took out the uptrend line that has supported price throughout 2011. It is now down 7.4% over the past three trading days. The demand for USD is high right now and soon the entire equity market will be under selling pressure as a result.

    Bottom Line

    Don’t let the ES rally the last five minutes of the trading day confuse you. The mid cap and Russell accelerated their selloff into the close and are now showing the SPX futures are about 1.2% rich today alone.

    The move in the currencies was rather breathtaking. They simply kept moving to now lows / highs taking out stops along the way. Remember the currencies is what will connect the credit event to the equity market.

    A vast majority will not understand this trade. They will refuse to acknowledge credit and will simply say the bears have it wrong yet again. The same people who missed the August selloff. Stay focused on this trade, understand what it is about and what is driving it.

    The trade is playing out and the currencies are confirming. Equities once again will be the last to “get the memo.”

    Images: Flickr (licence attribution)

    About the Author

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