It looks as if the overall equity market tone is becoming a bit more defensive. As we noted yesterday, the 4182 area in the SP500 futures held and a break of 4100 would put the control back with the bears. Today we are seeing that initial move playout as the SP500 futures put in a low so far down at 4060. We expect this to continue as the short covering induced rally has now failed and we don’t see a real catalyst here fundamentally for equities to stay up at these levels.
As time moves forward we expect the economy to weaken, profit margins to shrink on all fronts, not only on the lack of real revenue growth, but an even more devastating debt burden that is being refinanced at decadal highs!
We will get to the technical charts but first we must note that the run up in the long end of the US bond market yesterday prior to the auction, was completely reversed post auction as the 30Y saw a slight 3.2bp tail. This sent the hedgers scrambling to sell futures and drove down the On The Run basis from a -725 to -746 quite a dramatic reversal:
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