Bonds Hit Value Area
Red Auroras from Geomagnetic Storm
Yes we know the equity markets are on a tear, but we are going to start out highlighting the US Govt 5Y Note. The futures markets have found support at the 20+ year value area as noted here in this chart:
Before every bond dip buyer gets excited, know that the fundamentals behind the higher rate environment still exist, nothing really has changed. Yes super core inflation is trending lower, yes rates have risen 500+bp, but the FRB is still not sure it can safely say we are out of the inflationary environment and rates are sufficient enough to satisfy our job of stamping inflation out.
The reality is the US Govt continues to spend money and adding over $2.9 Trillion dollars in just over 10 months or an average of $290Bn per month to our debt pile. If we extrapolate that out the US Debt pile will hit $40 Trillion by Q3 2025. Many understand that as this number grows larger and larger, it will start to increase at a much more rapid pace, the real hyperinflation. So yes US bonds and notes have hit an important value area, but by no means are we in for a rapid reversion, this is going to take some time and require some fiscal austerity to play out.
As far as this week goes we have new issues being auctioned off, in total $330 Billion with new 3s, 10s and 30s where we should see the 30s coupon around 4.75% and the 10s 4.625% which would be 62.5bp and 75bp higher than the August issues. We suspect the US Govt will continue funding more of its debt in the front end of the curve and defer issuing excess longer end date until the next drop in Fed Funds post recession, which may cause the curve to remain flatter in the very front end.
Alright as far as equity index futures go, they had a stellar week:
Russel 2000 +122.60 points or 7.5%
Nasdaq +913.50 or 6.4%
SP500 +208.25 or 5.0%
Dow +1633 or 5.0%
When we look at the Russell2k futures market we can see that the support came at the top of the old range and the breakout point post covid. We like the bull theme as long as 1720/25 area maintains, if it gives way then a recycle back lower is possible:
The SP500 futures negated 5 weeks of selling in 1 week and asset managers may be playing catch up here. We will not rule out a 10% higher move from here given two things, one asset managers are not really in full participation mode and may be playing catch up and the FRB seemed to have given the green light post meeting:
When we look at the Nasdaq futures, we can see that these descending wedges can be big catalysts both up and down, early 2022 breakdown and mid 2023 breakout to the upside. We want our readers to pay attention to our longer term trend line, which for the next year tops out between 16600/17000 area so any move up to those areas should be met with selling. If we get a sharp move higher into the 16400/16600 area we before year end, we would suspect sellers to emerge heavy there. For now last weeks move seemed both forced and catch up players and that is not to be messed with right now:
Ok that is it for the technical aspects. We know the Non Farm Payroll negative print is coming and we would suspect it to hit in the next quarter ushering in the recession with open arms. Those expecting rate cuts, we won’t see them for quite awhile and when you look at that last Nasdaq chart, if 500 basis points in increased leverage and funding costs = a Nasdaq that is unchanged from the start of the FRB hiking cycle, rest assure the FRB will be in no hurry to cut rates any time soon. In fact we would suspect all the rate cuts to be continually priced further along the time line than what they are now as the FRB has zero reason to even contemplate easing at this point in time.
Alright onto the trackers, starting with Friday’s settlement sheet for those keeping track. The UltraBond and the Bond had a great week adding over 5 and 4 full points respectively or +5.06% and +4.16%, Crude lost -5.9% on the week:
As far as our Futures Daily Model Tracker ended the week on a very positive note, no additions or subtractions to the sentiment but are getting close to longs in the TN, YM, QR and J6:
Finally the MEGA8s, where our options hedge ate up the nice gain in the overall basket, but still way ahead since we have been keeping up this tracker. We don’t suspect the option hedge to do that week in week out and rather the hedge should have been taken off at a 3x loss max, but overall the basket was + $8160 on the week while the option lost -$7200 so even with the hedge the net was still positive:
When we look at the MEGA8s total return vs the Hedged the difference is nearly +14% so overall its doing its job in highlighting a dynamic hedge vs static long only equity investment, which is the real goal of this tracker.
Alright, as far as this week, obviously geopolitical concerns are daily given the amount of hardware the US has in the Med. US bond auctions are also a concern for yields given the $330bn in supply coming and as far as data not much on tap, but a slew of FRB speakers so tape bombs are probably.
Finally we leave you with some spectacular aurora from the recent geomagnetic storms last night. We continue to observe an increase in red hue aurora and this should be an eye opening concern for scientists out there. Red aurora indicate higher concentrations of solar wind, this was a Kp7 geomagnetic storm, so pretty powerful and the low energy electrons interact with the Oxygen at higher altitudes producing this beautiful display shown below, here is a link to the photographer cited below and his timelapse film of yesterday’s aurora, Red Aurora Timelapse
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