US 10y swap yields look like they are bouncing off the bottom of the 2.0-2.5% range that has broadly prevailed since 3Q 2014. I think that absent a shock of some kind, this range will probably remain until the Fed actually hikes. Breaks above or below that range should probably be faded. There was an article floating around this week about the Fed doing QE4… kind of gives you an idea of how far opinion has swung since mid year, when a Sept hike seemed certain to the market.
Corporate bond yields have actually been stable since late June, and appears to be consolidating around here. (Barclay’s US Credit Yield to worst measure below)
The S&P looks like it has made a classic W shaped bottom. ~2050 is the next resistance level as well as the 50 week moving average, which has been a strong pivot level in the past. I think we’ll see that level around month end, but how it does afterwards will depend on the broader backdrop.
Oil prices are bouncing strongly off the ~44 area. We are about halfway to the next level of resistance at ~54:
EUR continues to be in a rising wedge formation. This doesn’t mean that it will necessarily break the 1.145 level – there was a similar chart from mid 2013 to mid 2014. But perhaps we won’t see a resolution until late this year or early next year.
To conclude, it looks like risk assets are likely to continue to find sponsorship through the end of the month. After that, the picture gets murkier. It’s hard to see oil prices rallying to new highs this year given the supply backdrop. It seems like rig counts need to keep falling to keep oil prices supported. (see chart at the bottom) The EM rebalancing is still getting sorted out and we are at least several quarters away from completion on average. On the other hand, the oil rally may be enough to keep the ECB and BoJ from additional easing, and may be enough for the Fed to tilt a bit more hawkish. Corporate earnings growth remains uninspiring, which is in turn likely to limit investor enthusiasm in risk unless there is more policy action.
I think the picture will eventually resolve to higher risk prices, but it may come later than many expect. Base effects on inflation and revenue growth will drop out in 1Q next year, and historically Fed hikes have been accretive for earnings growth. Credit markets have largely already priced in a Fed lift off, so the net effect of an eventual hike is likely to be a tightening in credit spreads along with a stronger dollar.