Wednesday, May 27, 2009

Catalyst for a Stock Market Break

Often it takes a catalyst to move a market out of a trading range. Following the recent Twitter post, note how we moved sharply lower in the ES futures (bottom chart) as yields backed up in 10-year Treasuries.

This represents an important paradigm shift. When we had the recent market weakness, Treasuries were viewed as a safe haven and saw buying when stocks sold off. Now falling Treasuries and rising interest rates are viewed as a potential threat to economic recovery, weighing on stocks.


James said...

If this proves to be true then this is the biggest development of the year. The Fed has a balance sheet that is exploding, treasuries should be viewed as toxic

S Benard said...

The treasury auction was a catastrophe today, and interest rates are rising rapidly as a result. Here are some Bloomberg breaking news headlines:

Treasuries Fall on Concern Record Government Sales Will Overwhelm Demand

Mortgage Bond Yields Soar, Jeopardizing Fed's Bid to Revive Housing Market

Problem US Banks Rise to 15-Year High As FDIC's Insurance Fund Erodes

North Korea Threatens Military Strike, Abandons 1953 Armistice

Apparently, the sheer volume of debt is overwhelming the market's capacity to absorb it, and this is sending the treasury markets into a tailspin today, with stocks following in sympathy. Many commodities are following suit also. However, if this is the sign of a new trend, then commodities are likely to rebound swiftly with fresh buying as worry of inflation builds sentiment for "hard" assets.

Interesting day in the financial markets! This one makes me shudder!