Risk Assets Likely to Further Correct Before Another Move Higher Commences
Currencies failed to break through technical levels this time around and bond yields are telling us that there's more to go in this short-term correction in risk assets.
Of course, there's no rule saying that either the 38.2% retracement level for the EURUSD or the 50% retracement level for the DXY have to hold up. If these technical levels are broken, it will almost certainly spell another leg higher for stocks, crude oil, gold, and other risk assets.
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Treasury yields signaling a bit more short-term weakness followed by another rally in risk assets.
The daily chart of the yield on the 10-year US Treasury Note ($TNX.X) is shown below. As I have been suggesting over the last couple of weeks, a downside correction in rates is underway. This correction (wave b) is occurring after the sharp wave "a" higher that occurred during July and August. My call is for this correction lower to continue to around the 1.49% level and then for another move higher in rates (wave c) to commence. My upside target for wave c will be the 23.6% retracement (of wave iii) level at 1.949%. That level also will correspond almost perfectly with the 100% Fibonacci price projection level for wave c of the "abc" formation that seems to be playing out.
So, what will these moves likely mean for equities? The remainder of the move lower in rates to the wave b target should mean some more short-term weakness for stocks and other risk assets. However, the move from 1.49% to 1.949% in the 10-year Treasury Note Yield (should it occur as I'm laying out here), would almost certainly coincide with a nice move higher in risk asset prices.
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So, we're seeing the potential for some short-term weakness in the EURUSD, strength in the DXY and lower bond yields. That much is clear. What is a bit more in doubt is what will happen after bond yields bottom out. I'm thinking we see a move higher in yields as the EURUSD, stocks, and certain risk commodities rally. That should be coupled with the DXY moving lower. Where I'm not as certain is whether the rally in stocks and the EURUSD will bring about new short-term highs or just a test of resistance again. One thing seems likely, if not completely certain, stocks will have a tough time making new highs if the EURSUD doesn't make it through that 38.2% retracement line resistance at 1.25932.
Before I wrap up, here's a check up on the key European sovereign debt yields:
Not much should be read into the moves in the European sovereign yields over the last week. What happens from today forward is really where the rubber should meet the road in terms of news flow and meaningful movements in the fixed income and equity markets "over there."
That's it for now. Have a great week!
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