Market Outlook: Stocks resume decline in face of bond market intimidation, oil soft ahead of Opec+

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US 10-yr yields have moved aggressively lower, hitting a fresh record low at 0.8%. The US 30-yr also shipped a few more points to an all-time low 1.4% and is now where the 2-yr was on 24 January. The speed of the decline has been brutally swift, albeit relatively orderly in its progress. U.K. gilt yields have also hit an all-time low. This is where I state yields move inversely to prices. 

There could be further to run lower for yields, but the more investors rush to bonds to greater the risk of a snap back causing even more damage. That would be when we real intimidation. The more crowded it gets the less appealing it is, and it won’t take much from these levels – a much more limited in duration economic impact in the US than people fear, or a vaccine, to see the long end come roaring back up. Exposure to interest rate risk is huge, albeit this is one-way traffic right now. 

Asian markets slump as US equity registers loss

Today, risk assets are offered across the board, havens bid. Asian equity markets slumped as the sell-off rolled over from the US session, with all major indices declining over 3% after Wall Street endured another wild ride. Bonds are ruling this one - the complete capitulation in yields is forcing equities lower again. The FTSE 100 is lower by 1.7% on the open on Friday to trade under 6,600, with the Dax sub 11,700.

The Dow Jones yesterday shipped 969 points to fit into a pattern of wild swings in US equity indices this week. The market has flipped from buy the dip to sell the rallies. 

This week on the Dow Jones

The S&P 500 is trading very nicely within Fib levels, finding support around the 2980 level, the 38.2% Fib retracement. This is indicating what’s driving this is not individual stocks being bought and sold but ‘the market’, i.e. the bond market and algos. SPX also kept below its 200-day line yesterday. If we see weakness again today and weekend warriors ditching their holdings then the 2855 level is key. A rally is unlikely to make much headway above 3138.

Still – the Dow’s up for the week, albeit futures indicate losses on the open on Friday. The usual question is do you want to hold risk over the weekend? If the Dow ends up on the week, you could say that the aggressive monetary stimulus and a range of fiscal support announced in recent days has helped to provide a floor, if not stability.

Equally we’ve just not seen a major escalation in cases close to trading hubs...I note HSBC has sent staff home from Canary Wharf and broker Marex Spectron has reported a case among its staff. It could be coming to the City in bigger numbers soon.  

USD is being crushed by the moves in bonds. The dollar index declined heading into today’s NFP data as the US 10 year yield hit a new all-time low of a whisker above 0.80%.  

On the NFPs, the monthly US labour market snapshot, these are pretty meaningless against the expected coronavirus slowdown. Nonfarms have been of diminishing importance of late anyway. Time to banish the NFP fetish. Still expected to see 175k on payrolls and +0.3% on wages, with unemployment 3.6% unchanged.

Sticking with bonds and its correlation with gold, which has found fresh bid this week as yields tumbled. US real rates out to the 10yr continue to plumb new lows in negative territory.  The past spike high at $1690 is next in sight with price action currently around $1672/oz. Support at $1662.

Real yields driving gold prices: Gold (inverse) vs US 10yr TIPS (Treasury Inflation-Indexed Security)

Russia's ultimatum

WTI declined under $46 as the weakness resumed ahead of today’s Opec+ meeting. Opec is pushing 1.5m bpd of additional cuts through to the end of 2020, but needs Russia to sign it off today. The split is 1m from Opec and 500k from allies. Russia will come on board, it will just extract its price for doing so. If they don’t it risks a complete breakdown of the Opec+ alliance that’s sought to prop up crude prices for over three years. But whatever happens, Opec and friends cannot do anything about global demand and a certain surplus in the coming months. They also have zero power over increasing production rates outside their orbit, such as in the US, Norway and Brazil. 

Pound makes gains on the dollar

In FX, sterling has made gains vs a weaker buck. Brexit trade talks have been a bit of a sideshow to the bond market carnage. There are many divergences, very serious divergences" among the UK and the EU after the first round of talks on the future relationship, EU chief negotiator Michel Barnier warned Thursday. He’ll be holding a presser later today.  

GBPUSD has made steady gains all week and it now ready to take on 1.30 again. The pair has crossed the important 61.8% Fib level at 1.28840, but 100-day and 50-day moving averages rest at 1.2990/1.30 so could encounter resistance here. 

The euro has hit a seven-month high vs the embattled dollar. It’s all about interest rate differentials and the carry you wind. The speed at which US rates are moving lower is forcing up the single currency as bunds simply aren’t capable of that kind of acceleration.  

EURUSD broke through 1.12 and having cleared the neckline resistance can start to eye the June swing high above 1.14 again.  

USDJPY has been squeezed lower on the yen’s haven status to take a 105 handle. We are starting to get into the territory where the BoJ won’t like this at all we could see some intervention of sorts as we approach 104, which is possible as long as US 10s keep moving lower. A test of the 104 handle today is eminently possible, albeit we starting to look at touch oversold on the 14-day RSI and the bulls will desperately trying to a floor in here at 105.

Neil Wilson is chief markets analyst at Markets.com