After the big gap-up on Monday on news of the CNY floating, the market hit its 50DMA and has done nothing but selloff since then, with four consecutive red days. As I stated in previous posts, the right shoulder of the big 8-month-long pattern in the equity indices seems to be in-the-making and 1130 may be the lower high defining the new downtrend. Still watching the 1040 neckline level as the big sell-off trigger.
The 10yr note yield that I’ve been mentioning as a risk indicator did indeed breakdown out of its triangle pattern and is now bouncing off of support at 310bps. This provides credence for a short-term bounce in risk, and indeed we hedged out short book today with a nice high-beta chart (view trades here), but our intermediate-/long-term prospects remain bearish. Watch the TNX 310bps level breakdown to indicate risk aversion and to lead the 1040 level breakdown in the S&P (credit leads equity).
ICI reported yesterday that another $1.8B was withdrawn from long equity mutual funds last week, bringing the YTD outflows to $29B. Meanwhile, Dean Baker and Meredith Whitney have both expressed bearish outlooks for housing in the US recently, as May new home sales plunged a record 32.7% vs. -18.7% consensus and 14.7% in April. The housing double-dip has officially arrived.
Meanwhile in Europe, the situation continues to regress, as Greek 5yr CDS broke a new high to 1075bps. Portugal’s 5yr bond auction came at a 4.657% yield, a full 957bps higher than last May’s 5yr auction, while its ECB bank borrowing doubled MoM to €35.8B in May. Portugal is the new Spain, which is the new Greece, which is the new Lehman. Portuguese Emergency Stability Fund qualification is imminent.
Lots of talk of Chinese liquidity drying up. Zero Hedge has been all over this, reporting the 30day repo surging to 425bps, a fresh record. This, combined with the Aussie super-tax and Australia’s PM resigning, could break down the China-Australia-US economic complex and lead to a collapse in the Australian & Chinese property bubbles, drive the USD higher, collapse the copper bubble, and lead to further liquidity crunches throughout the world at the interbank level.