The possibility of QE3 stopping is not necessarily a bad thing. It suggest that the US economy has recovered to a healthy-enough state that the Fed can remove all the life-support equipments and place it under regular observation. In this scenario, we’ll see yields starting to rise as demand for treasuries will decrease – in large part due to lack of FED purchases – but also due to yields moving close to the natural average of 3% in a healthy economy.
When Fed released its latest FOMC meeting minutes, the above scenario did not materialize. Price of 10Y T-Notes fell as traders priced in the possibility of lower future demand, but price reverted quickly and traded even higher due to fear of uncertainty and risk-aversion pushing traders and investors to seek safety. Rightly or wrongly, fear of a market collapse should QE3 be stopped spook traders significantly. Though we are not in a position to judge whether that constitute reasonable and rational reaction, we can certainly identify the overall sentiment of the market – heavily “risk-off”.
This risk-off climate is not only felt via yields, but also sorely visible from S&P 500 which recorded the largest decline since 2013. Dow Jones Industrial Average is also trading below 14,000 now. Asian stocks opened lower, and now European Bourses are looking to trade lower as well.
Whether the market’s reaction to the FOMC minute is reasonable/rational or not, Treasuries will face current resistance barrier on its way to test 132.0, another historically significant level itself. Stochastic is showing that current price levels is considered Overbought, with readings potentially heading lower with a potential Stoch/Signal cross coming up.
Price is threatening to break the topside of the downward sloping channel, though Stochastic is suggesting that a move back towards the bottom of the channel may have a higher probability with Stoch readings potentially pushing lower. However, should price be able to break from the Channel Top, then a test of 132.0 becomes more likely, and a break of 132.0 may usher in a shift in momentum from a bearish one to a neutral or perhaps even a bullish one.
Noting the difficulties from a technical perspective for price to travel higher, an eventual break will symbolize an ever greater risk-aversion sentiment in the market that could mean much lower prices for stocks, and strengthening USD value to bring conventional “risk currencies” such as EUR/USD and AUD/USD lower.
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