As mentioned in this weekend' diary titled Diary- Week 43: The 51st State (link in title) a major driver of Friday's moves was the US Employment data that saw:
Equities fall sharply- SOX index -5.18%/ KBW bank Index -4.32%/ Russell 2000 -3.52%/ NASDAQ Comp -2.43%/S&P -1.84%
Yields fall sharply- US 2-year yield down 27 bps/ US 5-year yield down 21 bp's/ US-10 year yield down 19 bp's (albeit stopping at pivotal support at 3.78%)/ US 30-year yield down 16 bp's
US Index down 1.16% and USDJPY down 1.9%
WTI down 2.84%
However, in the final stages of the day concerns about an imminent Iranian response/escalation resurfaced likely softening the risk dynamics further
As we sit right now going into the Asia open that has not materialised opening up an increasing likelihood that any response, when it comes, will again be measured/staged to avoid escalation.
Does that change the overall picture here? Not at all. However, it increases the possibility of some counter trend moves as markets open.
Es1 did manage to hold good support at 5,333 and I would not be at all surprised if we bounce further towards 5,433. Below 5,333 at some stage would open up a danger of renewed losses towards 5,205.
The big question as noted in recent pieces is whether we can get a relief rally like we did for all of August 2000 after the S&P fell 7% starting 17 July 2000 compared to the 6.8% just seen. That August 2000 rally was actually 8% until the Fed disappointed and did not deliver a rate cut.
That is a "work in progress" but at least a short-term rally as we open tonight looks very possible.
A strong rally on the Nikkei is likely a challenge as the futures fell a further 3.12% on Friday although a portion of that fall could well be clawed back- maybe even an outside chance of Nikkei printing close to flat on the day at some point.
The US 10-year yield held very good support at 3.78% on Friday. I think that gives way in the not too distant future and takes us down towards 3.25% but in the very near-term after markets open tonight, I would not be surprised to see a pullback towards 3.85% and a 2-year yield possibly back to 3.95%
USDJPY has held some decent support around 146.50 and is the most oversold it has been on a daily chart since April 2021. Do not be surprised if some recovery on the Nikkei (relative to the Friday's futures fall) and a bounce in US Yields sees it get a decent bounce -possibly back towards 148.50
WTI already had a decent bounce on Friday low to high of about 1.70% on the back of Geopolitical concerns. Absent an escalation as we go through the opening day of the new week I expect we can rapidly see it go down and test pivotal support at $72.48. Below there, if seen, would open up the danger of a further downside acceleration.
All of these developments, even if seen, should be looked at in the context of the broader picture. In that respect the Bond market and ultimately the Fed are key.
While I would like to think we will get a quick sign that the Fed is recalibrating its view of the World, they will not do that just yet and will likely just trot out a narrative of "This is just one number"(which it is not) and "needing to see more" (which they do not)
That almost certainly means that this will not all be one way traffic but does likely mean that the stresses will re-emerge. As before I expect the first signals of that will likely come from the bond market and the yield curve. Watch the US 10-year yield at 3.78% in that respect