Former trader and current man who still holds out some hope that one day you’ll realize you’re looking at things all wrong, Richard Breslow, has delivered his last missive of the week, although if the last line is to be believed, he’s going to be keeping an eye on things right up through the close on Wall Street.
Friday’s piece is interesting as Richard starts out by noting that the only folks who are likely to feel vindicated this week based on backward-looking positioning data are the bond bulls.
As we and everyone else on the planet noted on Thursday, August saw the biggest decline in 10Y yields since Brexit and that’s entirely consistent with how the CFTC data showed folks were positioned as of last Tuesday. Recall this:
(Deutsche, CFTC)
Positioning in TY and US are (again, as of last week) hovering in extreme long territory with their 5-year standard deviations at 2.1 and 2.2 respectively.
Of course this reflects possibly excessive pessimism about the outlook for U.S. fiscal policy and a palpable sense of angst about the incoming inflation data.
But crowded trades can be a contrarian indicator and as Goldman wrote on Thursday, we may have reached peak pessimism in terms of how rates are looking at Trump, his agenda, and the extent to which legislative gridlock leaves Janet Yellen hamstrung.
With that as the setup, here is Breslow’s latest for your consideration…
Via Bloomberg
With all due respect to the weekly CFTC data, I think it’s safe to say that if you’re looking to tease out what the marginal trading positions are, it’s pretty much a fool’s errand. The ups and downs since last Friday have been dizzying. And I suspect have left very few feeling satisfied or more sure of what is going on. Except in one market–the bonds.
- Over the recent trading sessions, people have seen what was described as a rabidly bearish equity market rise 2% from Tuesday’s low, going into Friday morning. Has anyone changed their mind on up or down? Most likely not. Leading to lots of muttering, but not much P/L unless you ended up doing nothing, which was hard to do what with all the chattering. And it’s not just a U.S. phenomenon. Stock markets around the world have resumed their formidable runs
- Trading geopolitical events, or just straightforward politics, for that matter, is hard. Traders long ago decided to largely ignore these events. They’re behaving like economists and assuming away that which doesn’t work in their models. But it always takes a day or three for them to remember that decision
- The dollar has been leaping back and forth as well. Its behavior has more resembled a scene from Trading Places than a well-reasoned venue for expressing investment theses. The reaction to the ECB push-back story made sense. It was a reminder to everyone that they were getting carried away. The response to the Mnuchin comments was silly. The ECB might look at the currency and alter its monetary policy plans accordingly. A real possibility. What’s the U.S. administration going to do, scrap tax reform if the dollar index gets back above resistance? And the move after Nowotny’s headlines today is a prime example of how jittery the algorithms are after such a hectic back and forth
- And then there’s sovereign yields. I’m not sure I’ve talked to anyone this week who doesn’t remain or has thrown in the towel and become bullish. Treasuries below 2% all of a sudden is a base-case scenario. But I have to say, the breadth of the consensus makes we wonder. Not because inflation is coming, nor the speed of rate hikes likely to disappoint. But rather the concern that tapering will be a lot more problematic than we’ve been promised. Especially in Europe. And that there hasn’t been a lot of mileage gained by taking trades with so much company
- Even though it’s a long weekend and the rational thing to do is re-assess next week, I can’t help but be really interested in seeing and thinking about how things end up at the end of the day. After all, isn’t it always the next week where all will be revealed?
Well, Elliott Wave International has the 10yr US completing a 2nd wave yesterday and beginning a 3rd wave down now (falling price, rising yield). Our timing model has next week of Sept 4 as a turning point. So pay attention and good luck.
Is it really that hard to predict the price will fall since we have a handful of trading days until the fed starts unloading treasuries? Since the length of Elliott waves are variable and you’re always unsure of the “target” being up or down (there is always a minor wave in the opposite direction) of course it’s going to look like you are predicting things. Why doesn’t the whole world get rich paying avi gilburt $99 a month with his small print caveat to never use more than 3% of your cash at a time? Confirmation bias galore.
Excellent points although I was just providing an example of some widely known analysts who have not acquiesced to the treasury bulls. Also, I do not interpret the 10yr note COT as bullish in an historical context, rather fairly neutral.
….”the road goes on forever, and the party never ends.”
The Highwaymen, almost gone, but not forgotten.