Investors in European and U.S. assets appear to have left the typical seasonal playbook on the shelf.
Season’s bleating
The dollar looks stuck on the backfoot for now, after last week’s vault to new 2018 highs. Without the greenback’s underpinning, 10-Year Treasury rates continue to look off colour. Under these circumstances, the lack of an equity market bounce points to more than an indication that investors are giving up on a late-2018 rally.
Note that Friday will the last main expiry for most mainstream options and futures in 2018. Afterwards, hedges and speculation via such instruments will largely cover 2019. So, stock market malaise today suggests the mood will last into early 2019.
Look for 'data dependent'
Federal Reserve announcements looming in the middle of the week add another dimension. Clearly the market does not expect the FOMC to maintain a tone that’s identical to the one on view since Jerome Powell became chair. Typical pre-announcement textual analysis and intuition homes in on the idea that the Fed will build on Powell’s recent hint that rates were close to 'neutral'.
The main way this is expected to be communicated is a re-emphasis on a “data dependent” stance, to quote the chair himself. With that reminder in mind, and the Fed’s taste-test of U.S. and global economic conditions becoming softer, the message that policy will change (i.e. ‘rise’) more slowly would be telegraphed. Indeed, Fed funds markets have largely priced out any greater tightening in 2019 than 25 basis points.
Yield bounce over already?
On the other hand, the type of cheer that usually accompanies new signs of Fed ‘ease’ are largely lacking on Monday. Treasury market pointers seem to concur. Indeed, after benchmark rates largely ignored the dollar’s rally last week, the chart below shows they continue to struggle for traction. They remain below what was their clearest rising trend line of the year before it was breached earlier this month.
From a technical basis it’s also notable that the yield is barely respecting the notion of reversion. Despite the RSI (orange histograms) plunging to its lowest since February 2016 early this month, indicating deeply oversold conditions, yields have barely bounced. In other words, action continues to favour prices rather than yields.
Global gloom overshadows Fed
In short, the Treasury market signals that it’s less than impressed with greenback optics than the currency market. It’s worth noting that the dollar’s new 2018 high amounted to an improvement of just 0.02 of a point above the Dollar Index’s prior peak in November.
Treasury investors may have concluded that was hardly worth leaving ‘safety’ for. All told, for now at least, the message from the U.S. Treasury and the bond markets is that global economy takes precedence in sentiment. Potential benefits for risk taking from easier policy are being shrugged off.
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