Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

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  • Markets cautious ahead of Fed hike and trade escalation
  • Investors rotate into longer-dated Treasurys at a crucial technical point
  • Yen strengthens: a warning to investors?

  • China shares jump on expanded global access via MSCI and FTSE

  • Japan’s Nikkei 225 set for 27-year high

Key Events

Futures on the S&P 500, Dow and NASDAQ 100 were hovering in positive territory this morning, while European shares seesawed after ongoing trade tensions spurred a selloff in the automotive sector.

Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

STOXX 600 Daily Chart

The pan-European STOXX 600 opened 0.12 percent higher but then fell 0.07 percent as of the time of writing, dragged lower by car manufacturers. Technically, the higher open hit a brick wall of sales orders above the 200 DMA, pushing prices down to the 50 DMA, where traders supported the price.

The price is meandering within a cluster of major moving averages (MAs)—which have met with the downtrend line since July 31—for the fourth consecutive day. Converging supply and demand pressures create this vortex of technical milestones. A move above 385.00 would suggest that the bulls took control, while a close below 382 would confirm the downtrend.

Earlier, during the Asian session, Chinese stocks outperformed, after global index provider MSCI announced it is considering quadrupling the weighing of large caps from the Asian country in its global benchmark. Meanwhile, the FTSE Russell is already expected to include Chinese shares in its benchmark this week. This gave traders some respite from worries over the country’s trade dispute with the US, allowing them to focus on the prospect that the broadened global access to Chinese equities stands to elevate foreign demand, which in turn is poised to prop up prices.

The Shanghai Composite climbed 0.92 percent to the highest level since August 1, potentially bottoming out, after closing for a third day above the 50 DMA. The 50 high-profile firms listed on the China A50 posted even healthier gains, jumping 1.33 percent, to cross over the 100 DMA. Hong Kong’s Hang Seng also enjoyed a 1.15 percent boost.

Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

Nikkei 225 Monthly Chart

The upbeat sentiment spread to other regional markets, with Japan’s TOPIX erasing virtually all the day’s losses to end just 0.04 percent below its highest point in almost eight months. The Nikkei 225 ticked up 0.36 percent to its highest close since January 23, less than 0.5 percent from the highest level since November 1991.

Global Financial Affairs

US benchmarks were mixed yesterday, as a 2.08 percent jump in Amazon (NASDAQ:AMZN) shares pulled the NASDAQ higher, while the prospect of increased interest rates pushed utilities stocks lower. Conversely, the ongoing US-China trade spat weighed on industrial shares, while drillers rallied with crude.

The S&P 500 dropped 0.13 to a combined three-day retreat of 0.52 percent, which follows last Thursday’s record close. Utilities were by far the biggest losers, as the highly anticipated Fed rate hike made bond proxies less enticing.

The Dow Jones Industrial Average underperformed the other major US averages, slipping 0.26 percent lower—or 0.94 percent lower for the week. Comments by US President Donald Trump that the country’s trade deficit with China “is just not acceptable” heightened fears of further escalation of diplomatic tensions, which is seen as a key headwind for multinational businesses.

The NASDAQ Composite inched 0.18 percent higher, for a two-day climb of 0.26 percent.

Jeffries’ analyst Brent Thill wrote in a note that Amazon stock could hit $3,000 in two years, propelling the e-retail giant to a near $1.5 trillion market capitalization.

Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

UST 10-Year Daily Chart

Meanwhile, yields on 10-year Treasurys are falling, as investors rotate into longer-dated bonds, with further inflows expected this month as investors seek protection from the numerous risks currently weighing on growth assets, including the US-China trade war and rising interest rates.

Technically, falling yields follow yesterday’s bearish shooting star, which found resistance from mid-May’s peak of 3.128. Should this trend gather steam, it could potentially complete a massive double top reversal.

Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

USD/JPY Daily Chart

Interestingly enough, a similar pattern is developing in the dollar versus the Japanese yen, with the the former returning to its typical risk status and the latter to its safe-haven status. Note that the Dollar Index is flat today, as other currencies and drivers are pressuring it.

Opening Bell: Investors Rotate Into Long U.S. Bonds, Yen, Raising Red Flag

WTI Daily Chart

Oil rebounded from an early slump, as the interventionist rhetoric voiced by Trump at a U.N. summit yesterday poured cold water on forecasts for $100 a barrel. Technically, yesterday’s bearish shooting star confirmed the May resistance, increasing the potential for a massive H&S top, whose neckline is at $65.

Should there be a breaking point to investor confidence, prompted by world leaders’ calculated negotiation tactics, it my be the catalyst for a breakdown in oil as well as equities and the USD.

Up Ahead

  • The FOMC monetary policy decision, due today, will be followed by a press conference with Chairman Jerome Powell.

  • On Thursday, US durable goods orders, GDP data and jobless claims are due.

Market Moves

All prices correct at time of writing

Stocks

  • Futures on the S&P 500 gained 0.2 percent.

  • The STOXX 600 was little changed.

  • The UK’s FTSE 100 slid 0.2 percent.

  • Germany’s DAX fell 0.1 percent.

  • The MSCI Asia Pacific Index climbed 0.2 percent.

  • The MSCI Emerging Market Index rose 0.3 percent.

Currencies

  • The Dollar Index fell 0.06 percent for a third day, to a combined loss of 0.1 percent.

  • The euro was unchanged at $1.1767.

  • The British Pound slipped 0.1 percent lower to $1.3177.

  • The Japanese yen climbed 0.1 percent to 112.83 per dollar, the first advance in a week and the biggest advance in more than a week.

Bonds

  • The yield on 10-year Treasuries fell one basis point to 3.09 percent, the largest drop in two weeks.

  • Germany’s 10-year yield dropped one basis point to 0.54 percent.

  • Britain’s 10-year yield lost one basis point to 1.62 percent.

  • The spread of Italy’s 10-year bonds over Germany’s gave up five basis points to 2.36 percentage points, the smallest premium in more than a week.

Commodities

  • West Texas Intermediate crude edged less than 0.05 percent higher to $72.30 a barrel, the highest level in almost four years.

  • Gold eased 0.1 percent to $1,200.02 an ounce.

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