Rate Moves Dominate the Volatility in Trading Markets

01/25/2018 6:00 am EST

Focus: MARKETS

Robert Savage

Partner & CEO, CCTrack Solutions

The focus was on the call of the bear market for U.S. bonds, the fear that China/U.S. relations are leading to an end of the U.S. bond-buying there and the shift up in rate hike expectations around the world, writes Bob Savage, CEO of Track Research over the weekend.

In surfing, a shore break is hard to enjoy as the waves break close to the beach, thanks to the steepness of the beach to the ocean. You can only enjoy them when there is sand and no rocks or other obstacles in the way.

This may be the right analogy to consider when trying to trade markets this week as rate moves dominated the volatility in markets sparking moves in forex and in commodities but not equities.

Surfing asset class reactions to rates breaking on the curves matter to everyone, but how those curves look under the surface matters just as much as the velocity of the moves.

The focus recently was on the call of the bear market for U.S. bonds, the fear that China/U.S. relations are leading to an end of the U.S. bond-buying there and the shift up in rate hike expectations around the world in a catch-up to the U.S. with the Bank of Canada being next in line, but the ECB minutes leading the shift from easy money to harder currency as the euro (EUR/USD) rallies and the dollar falls.

The USD had a bad week and much of it started with fears that the Chinese are ready to skip buying U.S. assets in 2018.

The chart of CNY to US bonds from Morgan Stanley highlights the counter-cyclical reasoning.

From an investor perspective, many see the Bill Gross call for a bond bear market as obvious but overdone, as the expectation is for 3% 10Y bond yields, not 4-5% and that the timing of such a move will be gradual like that of the FOMC rate hikes.

Further, many see U.S. bonds are still holding some value given the tame rates of PPI/CPI in comparison to the rest of the world. Rate breakouts have to be seen in the context of the overall yield curve to have meaning beyond the technical picture.

So far it’s a busy long weekend for U.S. news with a false alarm for a missile attack in Hawaii starting panic, more U.S. flu talk and focus as 2018 season appears as bad as 2009 swine flu, with more headlines about DACA, immigration issues and the budget deals needed to avoid a Friday government shutdown.

Peru gets hit with a 7.3 earthquake. Czech first round goes to President Zeman (the pro-Russia leader) with 38.6% while Drahos gets 26.6% - but 4 of the 6 losers now support him ( and they got 32.5% of the vote).

The SPD seems to be looking for tweaks to the Merkel deal ahead of the party vote on it.

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