Treasuries on the way down overnight

Market Review

Yesterday’s market movement saw equities move slightly higher throughout the session after hitting a low at noon after much of the European data had missed headline expectations; with the most notable being German retail sales posting a negative number third month running. For many analysts this is further prof that the European economy is in need of some form of ECB stimulus, and may still benefit from some form of quantitative easing. The bid tone in the S&P was surprising as it was not long after the release of Chicago PMI which posted a number lower than expectations and the lowest seen in three months, though the value was saved by a housing number not seen since June last year.

Today's Fundamental View

Treasuries have been on a downward trajectory overnight and through this morning as we finally begin to see some weakness and potentially slightly negative correlation with its European counterpart in Germany. The move was followed by a statement from Blackrock CIO which sees the treasury yield up at 2.7% at year end, up 0.2% from current levels, arguing that it will be a natural move as the economy recovers. We have long been arguing for a sell off in treasuries and although this comment argues we will only get the price down to around the low of the year at least it will be a step in the right direction. Similarly can we see a nice downward trend channel formed, and technically it just tested the high. The EURUSD was bid on the back of the poor Chicago PMI, though looking at the correlation with the S&P we found it strangely positive and allocate some of the movement to end of month and quarter two price movement. Crude oil was bearish on the session as there has not been a noteworthy output problem in the Iraq region, and it seems all parties are pumping crude and business goes ahead as usual. For this reason the risk premium has deteriorated, but we assume if there will be new fighting in the area and if ISIS looses some ground we can safely say there will be sabotage on the pipeline systems or refineries as we doubt the rebels will grant the current Iraqi government further production. We believe there will be some increased tension as the US have sent more security personal to Baghdad and other nations joins in the support of the struggling country. Today’s main data release is ISM Manufacturing PMI, which has been increasing every month but one since February, and we remain positive as other data has indicated this. The strategy this afternoon will be in line with yesterday’s view, long equities, long the USD, short treasuries and short crude oil.

Alternative View

Hawkish monetary comment speakers from the Eurozone may adversely affect our strategies.