Signals Are All Bearish From the Bond and Currency Markets
Virtually every gauge of risk appetite in the global fixed income and currency markets is telling the same story: More trouble to come for the bulls.
In today's markets, the signals started when the US Treasuries failed to confirm the "risk on" trade (rates remained very low even as the equity markets were advancing). Then, we started to see the high yield and emerging market fixed income sectors begin to break their uptrend lines. Finally, we started to see the US dollar accelerate to the upside and the "risk" currencies (the euro, the Aussie dollar and the Canadian dollar) really start to deteriorate. When you add all of that evidence up, you get quite an unambiguously bearish picture of the global markets.
Technical snapshots are important, but more important is to determine how much of the current move is left. You can get a very bearish picture with all charts looking very ugly right before a major turn in the other direction. So, as we look at the charts today, let us look at what has happened, what is happening, and what may be set to unfold in the near future.
Now to the charts:
The Yield on the 10-Year Treasury still has more to go on the downside.
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I've been harping on this for a while now, but it bears repeating – it may not be a bad idea to keep either on the sidelines or in a bearish posture toward risk assets until the yield on the 10-year Treasury Note approaches / reaches 1.5%. There's not much to add to that analysis at this point.
Bonds in the aggregate aren't quite as rewarding as simply owning Treasuries at this point.
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Some may be reticent to go long of Treasuries at this point – for one reason or another. But, as the chart of the iShares Lehman Aggregate Bond Index ETF (AGG) shows, prices of aggregate bonds are not quite as bullish as Treasuries. They're likely being weighted down by the higher yield / lower-grade components of the index. Still, though, the chart of AGG is not broken – let's call it neutral overall and relatively strong versus many other asset classes / sectors. I must note that any break and close below 110.71 would move AGG from neutral to bearish in my opinion.
Emerging market bonds broke short-term support levels and are nearing their long-term safety nets.
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The iShares Emerging Market Bond Index ETF (EMB) was highlighted here over the last few weeks for having broken support at the 14-day moving average and breaking below its uptrend line support. Since then, we've seen the EMB follow through on the downside -- to the point now that it is approaching the next, longer-term support at the 300-day moving average (which has provided some support in the recent past). So, the past and current picture for EMB has been bearish and the future outlook will depend on how the fund reacts to support at just below current levels.
High yield bonds broke support as well and have more work to do on the downside.
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The iShares High Yield Bond ETF (JNK) also broke its uptrend line recently (which I highlighted shortly after it happened). In looking at where the wave count may be (using Elliott Wave techniques), it appears that JNK may be in the (iii) of iii wave lower with the next support / target on the downside at $37.78 (from current prices at around $38.30). The "(iii) of iii" count means that while some short-term consolidations / corrections may occur, that more downside is almost certainly ahead for JNK.
Risk gauges like the Aussie dollar / Japanese yen cross are in bear mode as well.
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The Aussie / Yen currency cross (AUDJPY) has taken over (for the EURJPY) as go-to gauge for global risk appetite in the currency arena. The chart above shows the AUDJPY on a monthly basis going back to 2007.
The most bullish wave count for this chart is shown – where the AUDJPY is in the C wave of an ABC correction lower. Not only is this the most bullish wave count, but the charts shows the most bullish Fibonacci projection for the C wave (using closing levels for the A pivot and the intra-bar peak for the B pivot). That bullish Fibonacci projection for wave C comes in at 74.069 – from current levels at just above 77.
That still leaves quite a bit of room to the downside (in currency terms) in the short-term for the AUDJPY as well as for risk assets in general. So, the AUDJPY has been bearish / neutral, is currently trading very bearishly and is likely to continue to trade bearishly in the near term.
The US Dollar Index continues to trade strong – and the chart tells us that this trend isn't likely to change anytime soon.
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The US Dollar (shown above by the US Dollar Index (DXY)) has obviously been a safe harbor for global investors recently. As always, we want to try to determine whether it's a short-term phenomenon or if it's part of a longer-term trend. I have shown recently that the longer-term picture appears to be bullish for the DXY. Nothing has changed in that regard. The chart above shows that the DXY is likely in a short-term wave iii higher with a minimum upside target of 82.31 from the current level at around 82.07. If 82.31 is broken on a closing basis, the next target would be 82.93. At either of those two resistance levels, we could see the DXY flatten out / consolidate for a bit as wave iv unfolds.
As a trader, wave iv consolidations are not to be played. In this case, what that means is that I would not be shorting the US dollar in anticipation of the wave iv consolidation. The reason is that the juice (potential profit) may not be worth the squeeze (the risk you take on). With a wave v move looming after wave iv terminates, the potential reward on a short-side play on the greenback not worth the risk that wave v begins abruptly.
Overall, the ramifications of present status and future outlooks for Treasuries, riskier fixed income sectors, risk currencies and the US Dollar Index are that risk assets (stocks and commodities) are likely to remain under pressure and safety-oriented assets (Treasuries, German bunds, the US dollar and Japanese yen) are likely to remain the place to be with one's investable assets.
Before I wrap up, here's a check up on the key European sovereign debt yields:
Italian and Spanish yields are lower week / week – which fly in the face of the bearish talking heads on CNBC and Bloomberg. However, the Portuguese sovereign debt has spiked up noticeably week / week – this isn't good for the bulls. Perhaps the message being sent to us by these yields is that the European Union may elect to back-stop the Italian and Spanish governments / banks while offering up Portugal along with Greece as sacrificial lambs. Or, maybe they just won't act quickly enough to help Portugal out of their mess. There are smarter minds than mine working on this stuff over there (hopefully), but the technical messages are what they are at this point and that's all we can deal with at this point.
That's it for now! Have a great week and do what you have to do to preserve capital in this environment!
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