Major Milestones Loom Everywhere for Global Markets in Flux
(Bloomberg) -- With all the focus on the 10-year Treasury yield, it’s easy to overlook the tumult that may await global investors across other asset classes.
The U.S. government’s decade-long borrowing costs crossed the 3 percent threshold for the first time in four years on Tuesday. That’s not just any round number, but one that marked the highs of its double-top formation back in 2013 and 2014.
That matters, according to Matt Maley, an equity strategist at Miller Tabak & Co., because the last time yields broke through a double-top, earlier this year, the February correction in equities ensued. “A potential break above the 3 percent level has a lot of investors walking on eggshells,” he said.
But 3 percent is hardly the only pivotal point for financial market participants. Across the landscape, there’s a plethora of assets nearing round-number milestones and technically significant levels, any breach of which could signify a sea-change.
As long-term Treasury yields edge higher and threaten to unmoor from historically low levels, a normalization has been underway in a more exotic locale: U.S. derivative markets.
The gap between swap rates and Treasury yields of the same maturity is positive for most all maturities now as President Donald Trump’s focus on easing the regulatory burden on banks, and signals of the same from the Federal Reserve, have boosted the relative appeal of Treasuries. The 30-year spread, at about negative 12 basis points, is the only tenor still below zero. Prior to the financial crisis, swap rates (which are tied to Libor, and so contain credit risk) were always above government debt yields -- making the spread positive.
The greenback’s resurgence prompted the U.S. Dollar Index to poke its head above the 100-day moving average this week for the first time in 2018. It’s less than 2 percent away from reclaiming its 200-day moving average of around 92, a pivotal technical level, as rising real yields offer support for the beleaguered currency.
The dollar is on a tear versus the Japanese yen, in the midst of its best five-session gain since September. The move puts the pair close to 110, a level that would be a source of comfort for large Japanese manufacturers.
The Philadelphia Semiconductor Index fell in the four sessions through Monday, bringing its losses over that time period to about 7 percent. Chip stocks can’t seem to catch a break, getting whacked by weak earnings, trade skirmishes and growth concerns. The gauge is now approaching its 200-day moving average, which is about 1,244.
Meanwhile, Apple Inc. kicked off the week by closing below its 200-day moving average -- something it never did in 2017. The company is set to report earnings May 1.
Australian equities are also approaching a round-number threshold, with the S&P/ASX 200 Index a little more than a percent shy of 6,000, a level it was unable to breach when tested in March.
The EuroStoxx 50 Index just posted its first close above its 200-day moving average since Feb. 1. The rally in energy prices has given companies such Total SA and Eni SpA a key role in propelling the gauge higher this month.
It’s a different story for foreign exchange in the developing world. The MSCI Emerging Markets Currency Index fell below its 100-day moving average of 1,702.47, seen as a harbinger for more losses.
“It’s a signal that the robust bullish trend that has been in place since the end of 2016 is under threat,” said Piotr Matys, an emerging-markets currency strategist at Rabobank in London.
According to Matys, the next number to watch is the previous monthly low of around 1,698: A close below that could trigger a bigger correction in emerging-market currencies. A potential catalyst for a bearish breakout would be a further increase in the U.S. 10-year yield above 3 percent, he said.
Brent and West Texas Intermediate crude prices are right around $75 and $70 dollars a barrel, respectively. These milestones would be fresh three-year highs for the gauges, with rebuilt stockpiles of petrodollars poised to provide a meaningful bid for financial assets.
Amid a raw-material rally that’s expected to fuel headline inflation, there’s one commodity going against the grain: The Bloomberg Grains Subindex has breached its 200 day moving average to the downside.
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