Yesterday markets were little changed, with decent volumes in Europe (Eurostoxx +40% vs 20 days average) and US (S&P500 +30% vs 20 days average), ahead of Friday’s end of quarter quadruple witching (stock index futures, stock index options, stock options, and single stock futures expiry…it is the most important technical expiry of the year). Another close at records highs for Nasdaq with some curve-steepening activity (the 2-year yield declined 1bps to 1.62%, while the 10-year yield increased 4bps to 1.92%).

In focus, the German IFO registered a robust increase in December, outperforming consensus estimates. Current conditions and expectations both gained for the third straight month. Another confirmation of the positive Macro momentum.

The US House of Representative impeached Trump on charges of abuse of power and obstructing Congress, with the support of almost all Democrats but not a single Republican. As we already said, it is very unlikely that the Senate will find the president guilty (vast Republican majority at the Senate). It seems this impeachment process is more about 2020 election, a move set to erase consensus to Republicans.

This morning the Bank of Japan kept all policy settings unchanged as expected, from the -0.1% short-term policy rate to the 10-year yield target around 0%. In addition, it also introduced a lending facility for its holdings of ETFs. Loans will be extended for up to a year, and after a period of introduction lending operations will be conducted daily on request. The facility has been framed as a move to boost liquidity (given that the BOJ owns the majority of Japanese ETFs). BOJ executives estimated Japan’s growth to be 1.4% in the year starting in April, increasing the likelihood that the BOJ will upgrade its projection of 0.7% in a quarterly report next month.

Also, today, we are waiting for the Bank of England rate decision at 13:00 CET. Current UK rates implied probability for an interest rate cut is very low, 1%. However, with a more dovish committee at the November meeting, and weak dataflow since, we might see some dovish signals, potentially paving the way for a cut in January or March. Money markets see an 80% probability of the central bank cutting by 25 basis points in December 2020, up from about 30% on Friday, mainly due to recent uncertainties. 

BOE pricing for a move in 2020


The Sterling continued to drop as concern the UK may be headed for a no-deal Brexit leading to long positions unwinding (erased all past days gain).

British Pound spot index



Markets look overbought and stretched in the short-run.  The S&P, Dow, Nasdaq, Russel, Sox etc all have completed so called DeMark sell setups. Those come after another set of signals on the S&P two weeks ago led to a 100 point mini correction on the S&P. One gauge of velocity, the S&P500 14-week relative strength, recently exceeded 70, entering in overbought territory. Last week the index traded at 26.3 times five-year normalized earnings and a similar RSI breakout happened only 27 times since 1933.

However, we doubt the market can move from now into year’s end.

S&P500 14-week relative strength index


The WSJ recently published the Wall Street forecast for next year Treasury yields. As it already happened in several occasions, everyone expects higher interest rates in 2020 (bullish risk, bearish bonds).

Interestingly, the chart shows that interest rate bears have only been right three times in the last ten years, 2018, 2013 and 2009.

US Treasury yields projection in 2020