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Opening Bell: Bonds, Stocks Fall In Unison As Market Structure Breaks Down

By (Pinchas Cohen/ OverviewMar 25, 2019 07:22
Opening Bell: Bonds, Stocks Fall In Unison As Market Structure Breaks Down
By (Pinchas Cohen/   |  Mar 25, 2019 07:22
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  • U.S. futures remain under pressure from Friday's selloffs
  • Asian stocks plunge, slipping below uptrend lines alongside European indices
  • Treasury drop, yields rebound after re-igniting recession fears—prematurely in our view
  • Yen weakens; Gold surges

Key Events

Global stocks, along with futures on the S&P 500, Dow and NASDAQ 100, took a hit from Friday's sharpest U.S. stock selloff since January this morning. Oddly, safe-haven Treasurys and the yen weakened.

The STOXX Europe 600 opened 0.3% lower and extended the decline to 0.68%, heading for its most substantial two-day slide since early February. Miners and retailer shares dragged the benchmark lower. Technically, the index extended Friday’s violation of its uptrend line since the Christmas-eve selloff, with the 200 DMA below 370, making the March 8 trough the next major support. The 50 DMA approaches it from below. Will it cross the 200 DMA, triggering a golden cross, or will it find a steel ceiling, signaling a trend reversal? The RSI topped out. Also, the MACD saw the shorter MA cross below the longer MA for the second time after the highest levels since December 2016. However, that was a whole different set of circumstances, and the pan-European benchmark proceeded to climb another 8% before its first correction.

In the earlier Asian session, Japan’s Nikkei 225 (-3.01%) led the selloff, opening 1.65% in the red.

Nikkei 225 Daily Chart
Nikkei 225 Daily Chart

Technically, the price confirmed the resistance of the broken uptrend line since the December bottom, falling below the 100 and 50 DMA after the 200 DMA proved its resistance for the second time since earlier in the month. The RSI completed an H&S top and the MACD’s shorter MA found resistance by the longer MA. Most importantly, the price formed a lower trough, after yesterday’s lower peak.

JPY Daily Chart
JPY Daily Chart

While the yen rebounded from an earlier low, it remained weaker overall, exacerbating market conditions for Japanese investors. Technically, the USD/JPY pair deepened a fall from an uptrend line since the December rout. The major MAs demonstrate the importance of that trend line by aligning with it. The RSI topped out in the same pattern as that of the stock index and the MACD joined it with its own sell signal.

Hong Kong’s Hang Seng ranked as the second heaviest decliner, tumbling 2.03%. China’s Shanghai Composite slid 1.97% selloff, North Korea’s KOSPI fell 1.92% and Australia’s S&P/ASX 200 gave up 1.11%.

Global Financial Affairs

UST 10-Year Daily Chart
UST 10-Year Daily Chart

The yield on 10-year Treasurys rebounded after plunging below the 3-month rate, prompting a curve inversion for the first time since 2007. This closely-watched event is considered the most reliable indicator of an upcoming recession, if it persists over time.

However, headline yields rebounded this morning, suggesting that investors are dumping both Treasurys and equities—a very worrisome sign that market structure is breaking down as perhaps investors are losing faith in financial assets altogether.

Moreover, as mentioned earlier, the yen is weakening relative to dollar, which tends to become favorite safe-haven currency when investors fear a market crash, as in 2008. It’s interesting that the USD is strengthening while Treasurys are being sold off, suggesting perhaps that foreign demand for Treasurys may have increased, while domestic investors are selling.

While we have been bearish in the medium-term—and bullish in the short-term—since early December, we are not convinced of a recession just yet. Besides economic data that warranted caution, there is another catalyst for a selloff: complacency.

VIX Daily Chart
VIX Daily Chart

The VIX reached the lowest levels since October after the exuberant post-Christmas rally. Friday’s selloff may have just been a reminder that markets are not mono-directional.

The yield inversion may reflect that while GDP may point to a slowdown, low inflation allows the Fed to go back to a more accommodative stance.

Arguably, the U.S. data that caused the selloff doesn't come in a vacuum: investors tied it up with European headwinds and with warnings from Fed Chair Jerome Powell about a global slowdown.

Taken alone, a yield inversion is not the best prognosticator for broader market moves. It predicted roughly half of the recessions on records. However, should the inversion deepen, we could see the pattern we saw in 2008, when banks' fear of a bank run lead to a credit crunch, which in turn pushed former Fed chief Ben Bernanke to start robust quantitative easing.

While we are bearish, we have no way of knowing when the market will enter a bear market—though a yield curve inversion can predict a recession one or two years ahead.

Are the current selloffs indicative of a higher outlook for recession or simply a post-Christmas rally correction within an ongoing bull market? Watch the dollar: it's embedded tightening, and if it continues to climb as we have forecast, it will add pressure on the U.S. economy.

Consider the following: GDP fell not just for two but for three consecutive quarters since Q2 2017—from 3% to 2.8%, to 2.3% to 2.2%—but the S&P 500 climbed another 18% during the same period, and added over 21% till its September record.

This explains why we have been bearish in the medium-term, and, given the maturity of the cycle, biased towards a bearish stance in the long-term as well, but it doesn't necessarily mean we are bracing for a crash.

Overall, the one safe-haven asset that is unmistakably rising is gold.

In FX news, the pound slipped lower ahead of yet another attempt by British Prime Minister Theresa May to garner support for her Brexit proposal, as the plot thickens over a delayed deadline.

The Turkish lira pared some of its Friday selloff, which followed the start of two separate investigations by Turkey’s banking regulator into JPMorgan Chase (NYSE:JPM) and other unspecified banks for stoking the currency’s plunge.

Meanwhile, oil lingered in negative territory for a third day, in line with the outlook for lower demand amid an economic slowdown.

Up Ahead

  • Apple (NASDAQ:AAPL) is expected to unveil new products including video and magazine subscriptions on Monday.
  • U.S.-China trade talks resume, with a cabinet-level American delegation due to travel to Beijing on Thursday.
  • The U.K. Parliament is schedule to vote on Brexit on Tuesday.
  • China’s Boao Forum for Asia holds its annual conference this week. Officials including Central Bank Governor Yi Gang and Finance Minister Liu Kun are scheduled to speak.
  • Fed Governor Randal Quarles will speak Friday to the Shadow Open Market Committee on “Strategic Approaches to the Fed’s Balance Sheet and Communications.”

Market Moves



  • The Dollar Index decreased less than 0.1%.
  • The euro climbed less than 0.05% to $1.1305.
  • The Japanese yen declined 0.2% to 110.10 per dollar, the largest drop in more than a week.
  • The MSCI Emerging Markets Currency Index fell 0.1% to the lowest in more than a week.
  • The Australian dollar gained 0.1 % to 0.709 per dollar.


  • The yield on 10-year Treasurys gained one basis point to 2.45 %, the biggest advance in a week.
  • Germany’s 10-year yield climbed one basis point to -0.01 %.
  • Britain’s 10-year yield gained two basis points to 1.034 %, the first advance in more than a week.
  • The spread of Italy’s 10-year bonds over Germany’s rose two basis points to 2.486 %age points to the widest in more than a week.


  • The Bloomberg Commodity Index slid 0.1 % to the lowest in more than a week.
  • Brent crude fell 0.4 % to $66.73 a barrel, the lowest in almost two weeks.
  • LME copper climbed less than 0.05 % to $6,312.50 per metric ton.
  • Gold gained 0.2 % to $1,316.53 an ounce, the highest in almost four weeks.
Opening Bell: Bonds, Stocks Fall In Unison As Market Structure Breaks Down

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Opening Bell: Bonds, Stocks Fall In Unison As Market Structure Breaks Down

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