Bonds and Stocks in Driver’s Seat

Treasury yields neared 3% and the S&P 500 fell to a 6-week low as the pre-tapering shakeout continued Monday. The Swiss franc was the top performer while the Australian dollar lagged. The Asia-Pacific calendar is light.

Newsflow was light but trading was brisk to start the week. The main focus was bonds and stocks as they continued to break out. The 10-year Treasury yield rose 6 basis points to 2.88%, a two-year high. At some point higher yields will attract money into US dollars but that is unlikely until yields stabilize. A zone of resistance in the 3%-3.15% range is a nearby target but aggressive selling on a break of 3% could mean some disorderly moves. In recent history, this has meant broad dollar selling but it could be a volatile, violent period.

The stock market is the other main worry. The S&P 500 fell for the fourth day and broke the 55-day moving average and the 38.2% retracement of the June-Aug rally. It's rare for stocks and bond yields to move in opposite directions but it speaks to the uncertainty of the taper.

One reason is the inability of the Fed to convince markets that a genuine recovery is underway. Rather than strong growth and inflation risks, there is a growing feeling that the Fed is tapering due to financial risks. Such a scenario fits with an environment of higher yields and softer stocks.

The FX market more-closely followed stocks as a risk-off trade spurred demand for JPY and CHF. The commodity currencies were also under pressure.

In Asia, markets will continue to search for a theme. The BOJ monthly report and Japanese leading index are the lone items on the calendar. They will be released at 0500 GMT but are highly unlikely to move the market.

Commitments of Traders Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR +16K vs +6K prior JPY -74K vs -80K prior GBP -46K vs -46K prior AUD -63K vs -77K prior CAD -9K vs -10K prior NZD 0K vs -2K prior CHF +2K vs -1K prior US Dollar Index longs at 16K vs 25K prior