LIVE MARKETS BofA flags liquidity stresses in U.S. Treasury market

  • Major indexes surge; Nasdaq up >3%; banks outperform
  • Financials lead S&P 500 sector gainers; energy down most
  • Dollar, gold slide, crude off >10%; bitcoin rallies >8%
  • U.S. 10-Year Treasury yield rises to ~1.94%

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BofA Securities in its latest research note on Wednesday highlighted liquidity strains in U.S. Treasuries. Over the last two weeks, the bank cited the wash-out of popular trades that reflect multiple rate hikes by the Federal Reserve this year, such as shorting the front-end of the Treasury curve, flatteners, as well as, shorting the belly of the U.S. TIPS market.

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The exit from these trades has left the Treasury market susceptible to liquidity issues, BofA said.

The extent of near-term uncertainty is evident in increased volatility, the bank said, citing the spike in implied volatility of Treasuries across the curve. On Tuesday, the ICE BofA MOVE Index (.MOVE), which tracks traders' expectations of swings in the Treasury market, hit 140.03, the highest since March 2020. Specifically, the three-month volatility of the U.S. 10-year Treasury note hit 0.568 basis points on Wednesday, a one-year high.

Aside from volatility, BofA cited the "uncertain utility" of U.S. Treasuries in portfolios given the surge in inflation. The risk-off environment has led investors to price out the more aggressive 50 basis-point hike at next week's FOMC meeting, although the rate hike cycle remains firmly on track.

BofA said 100 basis-points of tightening is clearly justified due to inflation and labor tightness. But beyond that, the bank said the rate hike path is contingent on the geopolitical state of the world, reflecting a Fed response that may start to show concern for slower growth against an inflation backdrop that could ease over the year.

"This...creates scope for higher structural inflation and constrains the potential response of the nominal UST curve in a risk-off dynamic," BofA said.

The bank noted that without a ceasefire or sharp easing of geopolitical tensions, it expects U.S. Treasury illiquidity to persist. "Fed or Treasury actions may be needed to sustain U.S. Treasury market functioning."

(Gertrude Chavez-Dreyfuss)



Europe’s benchmark index STOXX 600 closed 4.7% up, in a market bounce that comes after days of heavy selling.

It is the biggest daily increase in the index since March 2020.

The break from the heavy losses of recent weeks comes on the back of news of talks between Russia and Ukraine.

European autos (.SXAP) were up a staggering 9.5% today, with travel and leisure (.SXTP) not far behind, gaining 8.3%. European banks (.SX7P) closed 7.5% higher.

Basic resources (.SXPP) and oil and gas (.SXEP), both of which had been beneficiaries of increasing geopolitical tensions, pulled back to end the day 1.3% and 2.4% down respectively.

(Lucy Raitano)



The Australian dollar looks ripe for further upside as it continues to benefit from soaring commodity prices while also facing limited downside from economic or financial linkages or geographical proximity to the Russia-Ukraine conflict, according to analysts at Standard Chartered.

Coal, liquefied natural gas (LNG) and petroleum made up around 28% of Australia’s goods exports in 2021 “and would be boosted by higher energy prices,” FX analysts Steve Englander and Mayank Mishra said in a report.

“Similar price gains in other commodities like iron ore (34% of exports), copper and aluminium (5%) and agricultural commodities (12% of exports) imply a significant improvement in Australia’s terms of trade, making the currency valuations even more attractive,” they said.

Data by the Commodity Futures Trading Commission (CFTC) also shows that asset managers were covering shorts in the Aussie current from near record levels in recent weeks, and positioning remains near record lows. That suggests “room for more gains in the short term,” the analysts said.

Meanwhile, policies by Australia’s central bank, the Reserve Bank of Australia, should be supportive for the currency as it focuses on the inflation risks from the Russian invasion of Ukraine. Downside risks to the currency could emerge, however, if global growth concerns rise further and result in broad based risk aversion, they said.

The Aussie hit a four-month high of $0.7440 against the U.S. dollar on Monday and is up from a one-and-a-half-year low of $0.6968 on Jan. 28. It last traded at $0.7325.

Standard Chartered expects the Australian currency to reach $0.75 this quarter, $0.76 in the second quarter, $0.78 by year-end and $0.80 by the end of 2023.

(Karen Brettell)



Data released on Wednesday showed an Omicron-related stall-out in labor market churn and mortgage rates changing course and falling for the first time since December.

There were 11.263 million job openings in the United States in January, marking a slight decline from the prior month's upwardly revised - and record high - number, according to the Labor Department.

Analysts expected the number to hold steady at December's previously stated 10.925 million.

"The phrase 'little changed' appears 12 times in the latest Job Openings and Labor Turnover Survey for January 2022," notes Elise Gould, senior economist at the Economic Policy Institute.

The Job Openings and Labor Turnover Survey (JOLTS) (USJOLT=ECI), which measures labor market churn, also showed new hires remained essentially flat. And while layoffs/firings ticked higher, the quit rate slid lower.

"The hires rate remains higher than the quits rate in every major industry," Gould tweeted. "This indicates that when workers quit, they are taking other jobs-likely in the same sector-not dropping out of the labor force altogether."

The quit rate, a favorite indicator of erstwhile Fed chief and current Treasury Secretary Janet Yellen, is often seen as a barometer of consumer expectations, as workers are less likely to walk away from a gig in times of economic uncertainty.

The JOLTS report provided another piece to the puzzle regarding the extent to which the spike in COVID infections due to the Omicron variant threw sand in the engine of the jobs market recovery, which has faced headwinds of a worker drought in recent months.


Separately, a dip in interest rates sparked an 8.5% jump in mortgage demand last week, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate (USMG=ECI) took a pause in its upward climb for the first time in nearly three months, shaving off 6 basis points to 4.09%. This prompted a 8.6% jump in applications for loans to purchase homes (USMGPI=ECI) and a 8.5% increase in refi demand (USMGR=ECI).

"The war in Ukraine spurred an investor flight to quality, which pushed U.S. Treasury yields lower," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Looking ahead, the potential for higher inflation amidst disruptions in oil and other commodity flows will likely lead to a period of volatility in rates as these effects work against each other."

Even with last week's uptick, overall mortgage demand is cooling, having tumbled 36% from the same week last year, as illustrated in the graphic below:


Wall Street pulled its own U-turn, snapping its losing streak in a robust rally, with crude prices shifting into reverse and dragging energy (.SPNY) from the head of the pack to the rear.

(Stephen Culp)



U.S. stocks are bouncing on Wednesday, after four straight sessions of losses, as investors seek out bargains in stocks that have been hammered by concerns over the fallout of Russia’s invasion of Ukraine.

Russia announced a new ceasefire in Ukraine on Wednesday to let civilians flee besieged cities, but there were only limited signs of progress providing escape routes for hundreds of thousands of people trapped without medicine or fresh water. read more

Oil prices are dropping over 5% as some investors take the view that the U.S. ban on Russian oil may not worsen a supply shock. read more

All major indexes are posting strong gains, with the Nasdaq Composite (.IXIC) the best performer with a gain of 2.6%. Blue chips are laggards though the Dow Jones Industrial Average (.DJI) is still up 1.9%.

Of the 11 major S&P 500 sector indexes, all but energy (.SPNY) are in the green. Financials (.SPSY) are the best performer, rising 3.4%, while information technology (.SPLRCT), communication services (.SPLRCL) and consumer discretionary (.SPLRCD) are among outperformers.

Here is your Early-trade snapshot:


(Karen Brettell)



The crisis in Ukraine and subsequent spike in oil prices has helped ground shares of U.S. airlines, for which oil is a major expense. But there may be reasons for investors not to abandon them as they swoon.

Since mid-February the S&P 1500 airlines index (.SPCOMAIR) dropped 26% as of Tuesday's close against a 6.8% fall for the S&P 500 (.SPX). That includes a nearly 36% tumble for United Airlines Holdings and roughly 30% decline for Delta Air Lines (DAL.N) over that time.

In a note titled "Reasons to avoid panic selling aviation stocks," CFRA analyst Colin Scarola draws comparisons to 2011 when oil prices also spiked.

"During the 2011 oil price spike, buying the plunge in airline stocks paid off with 20%-plus outperformance of the S&P 500 by year-end 2013," Scarola writes.

Even with oil prices often above $100 a barrel, a group of airlines tracked by CFRA posted compound annual earnings growth of 15% to 22% during 2011 to 2013, spurred by strong demand.

As the economy emerges from the pandemic, "underlying demand for air travel is robust, in our view," Scarola says. "This sets airlines up to grow earnings again in 2022-2024, despite high oil prices."

Indeed, the S&P 1500 airlines index was surging in early Wednesday trade, rising over 5% amid a broad market upswing.

(Lewis Krauskopf)



The conflict between Russia and Ukraine, once known as "breadbaskets of Europe", is sending food prices to new record highs. The Russian Federation and Ukraine are responsible for 29% of the global wheat trade, according to the World Food Programme.

Chicago wheat futures have climbed around 60% so far this year, threatening to raise the cost of key food staples such as bread, due to the loss of exporters Ukraine and Russia and top producer China's agriculture minister stating that the condition of its wheat crop may be the "worst in history". read more

Albert Edwards, the global strategist at Societe Generale, warned about how the Ukraine war is unleashing "hell on earth" for food prices, adding that "you can always throw on an extra sweater; but you have to eat to survive."

Just a decade ago, surging food prices had triggered social unrest in many emerging markets. Edwards finds that food prices in emerging economies have risen far more sharply recently than even prior to "The Arab Spring" and far more than in developed economies.

In the near-term, the surging food and energy costs will trigger a "demand crushing global recession," according to Edwards, forcing governments to either subsidise households directly to offset the surge in "cost of living" expenses or impose 1970s-like price controls, financed by more quantitative easing.

(Bansari Mayur Kamdar) *****


With NYMEX crude futures ending Tuesday up 65% for 2022, it's perhaps no surprise that the energy (.SPNY) has been the top performing major S&P 500 (.SPX) sector so far this year, with a gain of nearly 39%.

However, given a strong positive correlation between crude and energy shares, as well as severely overbought conditions, both markets look vulnerable to surprise downside reversals.

Indeed, the rolling 10-week correlation between CLc1 and SPNY now stands at 0.96 (1.00 is a perfect positive correlation).

Crude futures hit a high of $130.50 on Monday. After failing to surpass this level, in the wake of President Biden's ban on Russian oil imports on Tuesday, crude futures are under pressure on Wednesday, falling around 5%. read more

With this decline, they are now around 2.01 times their 200-week moving average, putting them back below the 2.07/2.08 disparity resistance barrier - click here: read more Traders will eagerly await the weekly close vs this barrier, but the futures can be considered extended.

Momentum remains severely overheated. The weekly RSI is just shy of 90.00. read more

The energy sector itself is also severely overheated on a weekly basis. Its weekly RSI ended Tuesday greater than 80.00. Since late 1989, the RSI has ended a week above 80.00 only around 2% of the time:


Of note, historically, it can be feast or famine for the energy group in terms of its performance on a weekly basis. Since late 2001, energy has been the best and worst major S&P 500 sector the most times on a weekly basis (18% of the time in both cases).

Although still relatively early in 2022, energy has been the best sector 67% of the time, and the worst sector 11% of the time. Therefore, mean reversion would suggest potential for some lean weeks ahead, as investors may move back into beaten down groups. read more

Meanwhile, Russia says it will achieve its goal of ensuring Ukraine's neutral status and would prefer to do that through talks. read more

(Terence Gabriel)



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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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