By Jeffrey Snider of Alhambra
In the early trading on Friday, it looked as if “reflation” might break down entirely. The flurry of information seemed to be uniformly bad, from Syria to payrolls there wasn’t much for optimism to remain relevant. All of a sudden, however, it all reversed so that trading in the latter part of the day was as if related to an entirely differently world.
Such trading reversals are not unheard of, and usually they are a sign that a trend or established intermediate direction might be ready to go back the other way. Whether buying or selling, an intraday capitulation can be a signal of a temporary end.
Though that is how it worked out in the raw data streams of eurodollars, bond yields, and most especially the Japanese yen, there was something different about it all that to my view suggested not a meaningful intraday reversal but instead an artificial intrusion (subscription required).
Thus, if “reflation” breaks down more completely, it would be China that might experience the most in the backlash from it. Not to depart into the realm of conspiracy, but who might have had motive to intervene in “dollars” on Friday? It might have been the market all on its own deciding to toggle risk despite all the breakdowns being presented at that moment, or maybe it was the hint of “somebody” trying to keep alive at least the balance that has persisted since December because if nothing else volatility is everyone’s enemy (except bond bulls and eurodollar longs).
It turned out to be (so far) just a one-day reprieve, as yesterday trading slid back against “reflation” before today’s session put the exclamation point on it. Eurodollar futures are up across the board, including more contracts toward the front end. Most of the buying attention is still focused on 2019-2022, the very maturities that define best longer run expectations. Since mid-March, significant flattening all over again.
The latest curve, despite an additional “rate hike” in between, has submerged below the last flat point on February 8. The current price of the June 2020’s is today only slightly less than the intraday high on Friday, again suggesting the breakdown of “reflation” and therefore whatever little topside probability was included in it.