Thursday, April 16, 2015

DAX Stumble Trips Treasury Bears



European equities are lower with the DAX stumbling 1.5% and breaking a bullish trend line dating from early January and accounting for a 22% ytd advance.  Heightened concerns of a Greek debt default following a rebuff by IMF of an “informal approach” by Greece in requesting a delay in bailout payment, as reported by  the Financial Times, may have prompted selling in European equities.  German Bund yields fall further and now register high (positive) single digits.  While Asian/Pacific equities advanced smartly, U.S. equity indexes are taking clue from Europe (ESM5 8 lower). 

Treasury and Eurodollar futures are higher following a second session that saw intra-sessions gains relinquished.  The Eurodollar futures yield curve is slightly flatter in early trade following a light volume session on Wednesday.  Treasury 5-30 yield curve steepened by 2 bps yesterday to 122.

I have argued that Eurodollar and Treasury prices were due a further retreat from the April 3 highs.  The last two sessions have shown somewhat indecisive trade with mild gains.  Economic data over the last two sessions has not met expectations for stronger showings.  The retail sales, though higher, did not recover enough to promote projections of renewed consumer spending trends.  The NY Empire Mfg number had an unexpected negative sign extending manufacturing’s weak look beyond Q1 and Industrial Production and Capacity Utilization were both softer than expected. 

The economy is likely moving back to trend growth or beyond as has been consistent with variations in growth path over the last years - the 2-3 quarters on and 1-2 quarters off.  Until some sign of this improvement are seen in the data, the risk grows that bearish minded traders will not remain patient with their positions.  A sharp decline in equities today could prompt a short covering bid to Treasuries and Eurodollars. 

Stronger Treasuries and Eurodollars is not my base case.  European equates have had a very strong run.  The pull-back in the dollar index (recovery in the Euro) may be weighing on those gains.  When given annualized gains of 66%, as has been the case for DAX, it makes sense to take some chips off the table.  Maybe this is all that is going on.   

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