Market Makes New Highs Even as Bonds Sell Off
| PREVIOUS POSITIONS | ||||
|---|---|---|---|---|
| Market |
Long/Short |
Enter | size=2 color=000000>Exit | size=2 color=000000>P/L (per contract) |
| Dec. 99 T-bonds | Long | 114-05 | 115 | $843.75 |
| Dec. 99 S&Ps | Short | 1401 | 1409 | -$2000 |
| Dec. 99 Swiss franc | Long | .6550 | .6500 | -$625 |
CURRENT POSITIONS (AS OF 11/17/99) |
|||||
|---|---|---|---|---|---|
| Market | Date | Long/Short | Enter | Stop | size=2 color=000000>Target |
| Dec. 99 T-bonds | 11/17/99 | Long | 113-28 | 112-28 | 114-28 |
| Dec. 99 S&Ps | – | Flat | – | – | – |
| Dec. 99 Swiss franc | 11/8/99 | Short | .6478 | .6590 | – |
Note: All price levels are approximate.
T-bond futures
| With bonds having sold off some 8% for the year, the bulls figure this Fed tightening cycle has already played out |
The December T-bond [USZ9>USZ9] dropped today on follow-through from yesterday’s rate hike. The Fed raised both the Fed funds rate and the discount rate 25 basis points as well. This was widely anticipated, but the Fed also made comments about future inflation pressures. When the Fed raised yesterday, bond bulls who had expected this sold some of their longs as their prediction came to pass. They see rate increases as bullish for bonds in the intermediate term because it will slow the economy down just enough to keep inflation low in the future.
With bonds having sold off some 8% for the year, the bulls figure this Fed tightening cycle has already played out. The Consumer Price Index (CPI) report was ignored by the bulls today in light of this scenario. In the short run we agree with this view, but for the intermediate term (one to two months out) we see too many uncertainties. We took a long position at the 113 28/32 area with a profit target at the 114 28/32 area and stops in at the 112 28/32 area.
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| Figure 1. December T-bond futures (USZ9), 5-minute bar. Source: Quote.com.
|
Stock index futures
| We were amazed to see the S&Ps make new highs even as bonds sold off |
The December S&Ps [SPZ9>SPZ9] stopped us out yesterday at the open as the bulls came out in full force. We were amazed to see the market make new highs even as bonds sold off. The bulls took heart at the Fed neutral stance after they released their decision. We are on the sidelines now as we re-evaluate the market.
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| Figure 2. December S&P futures (SPZ9), 15-minute bar. Source: Quote.com.
|
Currency futures
| If the Fed raises rates again it would drive capital out of the U.S. stock market, which would be bullish for European currencies |
The December Swiss franc [SFZ9>SFZ9] rallied today after the market pondered whether the Fed will raise rates here again (and also because of weakness in the U.S. stock market).
If the Fed were raise rates again it would drive capital out of the U.S. stock market, which would be bullish for the European currencies. We think there is a possibility of this, but it is very hard to predict so far out in the future.
Note: The next trade will be done using ECU futures on the Chicago Mercantile Exchange (CME). The liquidity has increased there sufficiently to trade this contract instead of the Swiss franc futures.
Next update: Friday, November 19, 1999.
(Check “Today’s Schedule” every day on our home page to find out about additional updates.)