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News & Views: Monday, October 13

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What you need to know for today's trading day.

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This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

Mark Carney says bankers' behaviour needs to change (BBC)

China Steel Exports Hit Record High in September (WSJ)

Draghi-Weidmann Fight Intensifies as ECB Debates Action (Bloomberg)

Privately, Saudis tell oil market: get used to lower prices (Reuters)

Fischer Says Fed May Slow Tightening If World Growth Disappoints (Bloomberg)

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The main question for investors today, and for the rest of the week, is whether or not the S&P 500 (SPX) can hold its 200 day moving average. Over the last three years, the SPX has traded below its 200dma for a grand total of seven trading days, and has set all sorts of records on days without trading below its long-term moving average. If the index were to trade below the 200dma for an extended period of time, professionals will begin to question if the time is up for the trend. On Friday after the close, the SPX futures contract traded well below the associated cash level (1905) on 2x the average volume for the period between 4:00pm ET and 4:15pm ET. Additionally, the future continued to trade much lower when it opened overnight it traded down another 13 points, but has since rallied back since the opening of the London session (Japan is closed).

US bonds markets are closed today. Futures markets are open, however. The 10yr Treasury future (TYZ4) is trading up 6/14's, or the equivalent of about a 7bps drop in the 10yr yield.

That strength is due to comments from Fed Vice Chairman Stanley Fischer (dove, voter) over the weekend. In a speech on Saturday, Fischer stated that if global growth continues to disappoint that it would delay the initial tightening of QE. Implicitly, this states that the US central bank is becoming more sensitive to the dollar strength's effect on the economy. He also stated that the tightening would only start once the expansion is well underway, something that Fed policymakers have repeated for the past few years. Lastly, probably just to throw a bone to those who are still stuck on the idea, he said that the "considerable time" phrase in the FOMC statement that indicates the Fed will keep rates low, could be between two months to a year.

The front end of the Eurodollar futures curve is experiencing the most acute reaction as the market reprices less rate hikes and smaller risk premiums in later months. The greens and red packs are both down as much as 11bps. Since the Fed meeting almost four weeks ago, the December 2016 (EDZ6) contract has risen (yield fallen) by 41.5bps, a clear rejection of the central bank's economic forecasts.

Brent crude oil is showing the largest negative risk-adjusted return in commodities this morning with WTi showing similar weakness. A Reuters article this weekend and further chatter from energy sources indicates that Saudi Arabia and OPEC will not be pressured into drastically cutting production in response to falling prices and are preparing for lower output prices due to US shale production. Additionally, Iraq announced this morning it would sell its crude to Asia for $3.15 less than the prices from neighboring Oman and Dubai, the largest discount since January 2009.

The Taiwan TAIEX is showing the largest negative risk-adjusted return across all assets overnight, dropping an absolute 2.84%. Remember that tech and semiconductor stocks make up 46% of this index and the NASDAQ fell 2.5% on Friday in the US. The negative comments by Microchip Tech (MCHP) management on Friday evening that reflected a slowdown in Chinese sales is also having a huge drag on performance.

Lastly, iron ore futures are showing the largest positive risk-adjusted return in commodities overnight. China's September trade balance showed a record volume of steel exports (8.52mm tons) during the month. Perhaps we are seeing SOME level of steel demand after the 35% drop this year, partly due to the unwinding of synthetic commodity loans, even though most of the industry is preparing for a level of iron ore no higher than $80.

Overnight Data:
- China trade surplus(Sep) narrows to $30.94B vs 41.10B expected, prior $49.84B
-- Exports YoY up 15.3% vs 12.0% exp, prior 9.4%
-- Imports YoY up 7.0% vs -2.0% exp, prior -2.4%

Twitter: @MichaelSedacca

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Position in Eurodollar futures.

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