`Vulnerable' Stocks and Record U.S. Debt Sales Dominate the Week
(Bloomberg) -- A holiday-shortened trading week in the U.S. and much of Europe will see traders contend with more than just the end of the first-quarter.
There’s a potential record supply of U.S. Treasury bills and notes coming to auction against a backdrop of higher funding costs. That could exacerbate the usual quarter-end funding pressures that traditionally see big banks and other large investors close out their trades and shift into shorter-term securities.
In equities, U.S. stocks will reopen on Monday at a key level of support following the biggest weekly decline since 2016. And the trade tensions that drove the global selloff are still simmering away, with some evidence that they’re beginning to feed into currencies.
Here’s what to watch out for in a busy week.
A Big Test for Bonds
This week’s planned $294 billion of U.S. debt sales -- the largest slate of supply ever -- point to “a volatile near-term path for the Treasury market,” according to Bank of Montreal. The auctions begin with Monday’s $30 billion two-year note sale, which will be the biggest since 2014.
Fixated on Libor
The auction could be decisive for short-term funding costs, which have been rising in recent weeks, with the Libor-OIS spread increasing to its widest in more than eight years. The reception to the sale will be watched for clues on whether that rise will continue and potentially feed into other markets.
Some argue the move is a structural phenomenon rather than a sign of credit-market upheaval. Morgan Stanley analysts are fairly sanguine on the outlook beyond this week, writing that “pressure on front-end funding should ease somewhat after quarter-end, as bill issuance slows.”
After a rocky week, the S&P 500 Index closed right at its 200-day moving average on Friday -- the same level that provided a lower support during February’s selloff. Whether stocks can stay above that level will be an important test for equities this week, according to Matt Maley at Miller Tabak + Co. LLC.
A rebound in U.S. equity futures Monday offered some hope of stabilization, with shares in Europe and Asia also rising. But the S&P 500 finished last week at 2,588, its lowest in six weeks. Below 2,610, the market is “in a very vulnerable situation,” JPMorgan Chase & Co. analyst Jason Hunter wrote in an email. He doesn’t recommend adding long S&P 500 exposure “until we see a clear reversal pattern” the mid 2,500s.
For all the noise about protectionism as the world’s two largest economies clash over international commerce, the asset class that directly influences the terms of trade between nations wasn’t sounding any alarms. As the tensions linger on, that could be changing.
The JPMorgan Global FX Volatility Index was set for the biggest gain in a week on Monday, as investors tried to figure out exactly what shape U.S. trade policies will ultimately take. The measure was fairly subdued last week, barely budging even as other asset classes were thrust into whipsaw trading after President Donald Trump ordered tariffs on Chinese goods and China retaliated.
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