Traders Nervous Ahead of Fed Meeting
Today’s Spotlight Market
Bullish equity traders received a surprise ahead of today?s Fed announcement, as the People?s Bank of China provided 500 billion yuan of liquidity to the country?s largest banks. This monetary stimulus signals that Chinese leaders are prepared to take steps to spur economic growth, which is viewed as supportive for both equities and commodities.
Fundamentals
Treasury futures have been in a downward correction mode since the beginning of September, as traders close out long positions ahead of the Federal Reserve?s October Federal Open Market Committee (FOMC) meeting that ends this morning. The benchmark 10-year Note yields rose as high as 2.62% this month on concerns that the Fed may bring forward the timing of its first interest rate hike. While market participants anticipate the Fed may begin to raise rates early in the summer of 2015, traders will be keenly focusing on any changes in the language of the policy statement to be released following this month?s FOMC meeting to gauge if the Fed is leaning towards hiking rates sooner than most traders expect.
However, if we look at recent economic data for not only the U.S. but globally as well, there appear to be few signs that economic growth is strong enough for the Fed to ?rush? into a move towards higher rates in the near-term. Inflation data has been tame, especially with energy prices starting to decline, and growth prospects in both Europe and China are showing signs of slowing. In addition, we cannot discount the ?attractiveness? of U.S. Treasuries as ?flight to safety? assets, especially for non- U.S. investors who see 10-year Note yields at 2.50% attractive compared to what is available in German or Japanese sovereign debt. Any further uptick in U.S. Treasury yields, especially in the middle and back end of the yield curve, could find eager buyers from outside the U.S. and result in a flattening of the yield curve from current levels, which is something that the Fed would not find ideal.
Technical Notes – View Today’s Chart
Looking at the weekly continuation chart for Treasury Bond futures, we note that while the near-term trend has turned neutral to slightly bearish for prices, the longer-term trends are still favoring the bull camp. Drawing trendlines from the major lows back in 1981 and 1984, we notice that the first major support level is not found until just under 125-00. This support area is still over 11 points below current price levels, and it would be difficult to become very bearish on Bond prices until this support level fails to hold. Near-term traders will note that prices are now below both the 20- and 200-week moving averages, and the 14-week RSI has fallen below 50, with a current reading of 48.32. Near-term support is seen at 134-11, with near-term resistance found at 141-30.
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