US DEBT REVIEW AND OUTLOOK
US TREASURIES traded in a choppy session on Tuesday. Fixed income securities rebounded from early losses on stronger than expected results US 3 year auction results and a mid-session stall in equity gains. Treasuries turned lower again to close near their lows of the session as the US dollar fell to its 2009 lows, eroding the appeal of lower yielding fixed income securities such as Treasuries, particularly for foreign investors that have to repatriate interest back into their domestic currencies.
Early Treasury weakness was attributed to a increase in equity bullish sentiment stemming from expectations of pickups in merger and acquisitions activity, fueled by reports of a proposed takeover of European beverage maker Cadbury by Kraft Foods. Weakness in the US dollar also helped to fuel gains in equities as energy and material stocks gained on a nearly 5% jump in crude oil ahead of OPEC's meeting and gold moved above the psychologically significant $1000.00 level.
Those with long positions in Treasuries received a brief reprieve after a better than expected result from a near record $38 billion of US 3 year notes. The Bid to Cover was exceptionally strong at 3.02, with the majority of the notes being purchased at the low end of the yield spread (1.487 %). Underlying sentiment in Treasuries suggests that the long end of the yield curve may come under pressure as credit markets are expected to maintain their trend of freeing up even in the wake of increased defaults in corporate debt markets. For reasons such as this, high demand in the US 2 and 3 year note auction fails to shock the markets much anymore. Traders are expected to have a close eye on the results of the US 10 and 30 year auctions. The results of these auctions should offer more of a clue of sentiment regarding the ability of fiscal and monetary committees to manage government debt supply concerns in the long term.
Technically, December US 30 year futures broke through levels of near term support on September 4th. The contract appears to be entering a second stage which could test the bottom end of its recent range trading. Continued downward momentum should find support at 118-07, with a break of this level setting up a test of 117-08. Resistance in contract sets up at 119-22.
US EQUITY REVIEW AND OUTLOOK
US EQUITIES gained on the strength of heightened expectations regarding economic recovery, pickups in merger and acquisition activity, and a rally in commodity prices. (Crude Oil rallied nearly 5 % and Gold traded above $1000.00).
US equities took their initial cues from gains Asian and European indices. Better than expected readings on Australian consumer confidence and the announcement by Kraft foods of a proposed buyout of European beverage maker Cadbury rallied global stock indices and allowed for the US to play catch up in the early session. Energy and material stocks led stocks higher as the fall of the US dollar to its lowest levels of 2009 boosted commodity prices. Aloca and Chevron rallied nearly 3 percent, while economic bellwether General Electric jumped nearly 5.0% after a buy recommendation was placed on the stock by JP Morgan Chase. Metals and mining stocks rallied after gold reached its highest levels since March 2008 and copper advanced nearly 2.8 percent on investors betting on global recovery boosting commodity prices.
Despite the apparent euphoric reports regarding the state of global outlook, gains in the US equity markets appear to remain cautious. Trading ranges in the major equity indices remained tight during Tuesday's session. Expectations remain high by main traders of potential corrections between now and October, as the equity markets attempt to reestablish guidelines of normalcy. This includes speculation regarding strong selloffs in September and October leading into an end of year rally. As mentioned in previous reports, look for the overhang of uncertainty with regards to the US healthcare reform to keep breakouts, particularly to the upside of the market, in check.
Technically, September S&P futures failed to breakout above initial resistance level of 1028.00. Market should test downside of range at 1018.75, with a break of support at 1010.50 suggesting downward momentum should build to a possible test of 991.00. Target on the downside below here are 982.00 and 968.00. A hold above the 1028.00 level should set up test at 1032.20 and 1036.60 representing high end of trading range. 1042.60 in Sept S&P remains as upside breakout indicator.
|US DEBT FUTURES||OPEN||HIGH||LOW||CLOSE||CHANGE|
|US Z9 (US 30 YRS)||120-10||120-23||119-25||119-29||-14/32nds|
|SP U9 (S&P 500)||1025.00||1025.70||1019.20||1025.10||+11.20|