S&P Falls As Treasury Yields Hit New Highs

The ES dropped on down to 2706.25 Tuesday night’s Globex session, and then rallied up to 2718.75. After that, it sold off down to 2706.50 at 3:15 AM, and traded 2718.25 on the 8:30 CT open. By 8:49 the S&P 500 futures had traded all the way up to 2731.50. After a pullback down 2724.00, the ES then rallied all the way up to 2737.50. The next move was down to 2728.50, and then down to 2726.50, before shooting back up to 2734.50. After another small pullback, the ES traded up to 2743.50, pulled back to 2735.50, and then shot up to new highs at 2747.00.

The MiM came alive at 1:00 PM CT, and opened up showing $800 million to buy, but the ES did not react in kind, and sold off down to 2714.50. After the low the, ES rallied and dropped a few time and, then rallied up to the 2728 level. There was a reversal back down to 2710.75 as the MiM dropped to $80 million to buy.

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Going into 3:00, the ES puked all the way down to 2695.50, rallied back up to 2701.50, and traded back down to a new low at 2603.75 at 3:09. The benchmark futures settled at 2698.75, down -16.25 handles, or -0.60%, and down -54.50 handles from the high of the day.

There were two things working on behalf of the rally yesterday. The first was the lack of volume in the first part of the day. At 12:20 CT there were only 650,000 ES traded. The other part was that the QCHA was rising all morning, meaning there were stocks being bought under the surface.

What was working against the ES was WMT, AMD, RAD, BAC, GE all being down early, and the selloff in the notes and bonds. In the end, despite the big early rally, the ES’s overall tone went from a big short squeeze to an ugly reversal as the fed minutes hit the tape. Did it catch people off guard? We think it did. Were we surprised by the reversal? Not really, we suspected that after the 6 day rally, and the February options short squeeze, that there had to be some type of reversal. The big question is, is this a small bump in the road, or is it going to be a big bump?

Market update – the 2pmET Fed release caused some confusing afternoon trading patterns. Initially the minutes were deemed “dovish” and assets responded accordingly with mild DXY pressure and an SPX spike. However, that price action proved ephemeral as TSYs came for sale, the DXY spiked, and the SPX came for sale.

Treasuries were probably the most “honest” asset class and it drove stocks and FX – the TSY weakness caused curve steepening w/2yr yields up relatively small (up ~1.6bp) while 10 and 30yr yields climbed more, by ~5.7bp and ~7.2bp, respectively (this would suggest a dovish set of minutes with TSYs displaying nervousness about the Fed being behind the curve on inflation; if the minutes were very “hawkish” one would expect a spike in 2yr yields and curve flattening). As TSY yields rose it spurred mild de-risking and that caused unwinding in DXY shorts (which would explain the USD rally and SPX weakness). In reality the minutes weren’t nearly as important as they are being made out to be.

The recent inflation numbers (wages on 2/2 and the CPI on 2/14) occurred after the 1/30-31 meeting and thus these minutes are pretty stale. Much more important will be the semi-annual Fed monetary report (Fri 2/23 at 11amET) and Powell’s testimony (2/28 and 3/1) but even these events are probably not going to be terribly disruptive (this presumes the Powell-led Fed reaction function isn’t dramatically dissimilar to the Yellen-led one). If the Feb inflation numbers overshoot expectations that would create some headaches but that won’t be known for a few more weeks (Feb wages 3/9, CPI 3/13, and PCE 3/29). At this point, most don’t think the “dots” move from three to four on 3/21.

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Written By: MrTopStep