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Messages From the Currency and Bond Markets Continue to Warrant a More Conservative Stance


There are some minor signs of hope in the resiliency of the high yield bond markets and the potential change (which hasn't happened yet) in the franc / krona indicator.



Treasury yields remain depressed as the "risk off" trade remains en vogue.

Since our last check-in on Treasury yields, there has literally been not change technically to the chart of the yield of the 10-year US Treasury note. We've seen a drift lower in yields over the last couple of weeks, but the short-term uptrend (which could also be looked at as the lower edge of a pennant formation) is still intact. Additionally, from a wave count perspective, only a break of 1.599% on the downside would cause me to have to re-jigger the wave counts shown on the chart. For now, my call for an eventual move up to over 2% remains in place.

The implications for risk assets of all of that are that Treasury yields seem to be reflecting the action in the equity / risk markets rather than leading them (for now). So, I'm not seeing anything here that would give the edge to either the risk bulls or bears just yet. All that would change if I saw a breakdown below support levels for the TNX, however.

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Emerging markets bonds have broken support – score one for the bears.

The iShares Morgan Stanley Emerging Markets Bond ETF (NYSEARCA:EMB) finally convincingly broke below its 14-day moving average line a few days ago. That line has been a good gauge for the short-term bullishness or bearishness of the EMB, which in turn is a favorite of mine for taking the temperature of the global risk markets. A breakdown here certainly doesn't help the risk bulls' case although I would never trade on this indicator alone. However, when paired with the bearish messages coming from the EURUSD and the AUDUSD, we have to take the breakdown more seriously.

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