Looking Ahead

Last week was a busy one for financial markets in general and FX markets in particular. The dollar staged  another advance across the board and the DXY notched a new high. The euro broke to new lows and the British pound remained under pressure. Yen lost ground across the board as stocks continued to rise alongside yield differentials.

One of the most important and most interesting developments is the rise in Treasury yields, esp. the 10 Yr notes. There are at least two relevant questions to be asked: What is driving the yields? and what are the possible effects. One possible explanation for the yield rise is that the market is pricing in a continued recovery which will, eventually, contribute to rising interest rates. Another possible explanation is that buyers of treasuries are simply bloated. With growing deficits (trade and budget) a huge supply of notes, and concerns over the future of US credit rating, the market may simply be asking for a higher risk premium to hold US debt. In either scenario, the short term expectation is bullish for the dollar.

Greece is expected to issue new bonds this week. The result of this auction will be telling and we will get a better idea as to whether or not the market puts any stock in the recently announce rescue deal for Greece.Either way, we should still expect euro rallies to serve traders as opportunities to reload their shorts rather than a trend reversal. Same goes for the British pound.

Yen was weaker across the board and this is expected to continue as long as we don't get into risk aversion mode. I have been using the S&P 500 as one measure of risk appetite and for the time being, it seems due for a pullback. I know I have been cautious since the middle of March and I also realize the danger in adopting a bearish bias  - the more time passes, the more liable I am to become entrenched in my position, waiting for a correction which may only come much, much later. Having said that, I still maintain my view that a short term pullback in the stock market is immanent and may have already started last week. The market climbed a wall of worry and it will descend a wall of reassurance. This is how the game is played. The S&P COT report also shows large speculators being net short for the first time in month - another red flag. The only positive for stocks at this time are the rising yields in bonds. If bonds loose their luster because the marker is pricing in a sustained recovery, we may witness a major capital reallocation from bonds to higher yielding assets like stocks and commodities.

Traveling today so no charts with this post.