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The Canary in the Coal Mine, A Positive

Blue Line Futures - Tue Sep 27, 2022

BLUE LINE- MORNING EXPRESS

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Went out to brokerage clients before the bell

The below is a portion of our full report.

E-mini S&P (December) / NQ (December)

S&P, yesterday’s close: Settled at 3670.00, down 39.00

NQ, yesterday’s close: Settled at 11,316.25, down 60.50

Fundamentals: U.S. benchmarks have been in freefall since the August CPI read on September 13th. All things considered, there really has not been much of a pause, let alone a short-term reprieve. When markets move so directionally, up, or down, it tends to garner sentiment, thus building the likeliness of a mean reversion. Such became more probable at the end of last week, post-FOMC, but dysfunction in the currency and rate space exacerbated the Fed’s hawkishness at hand, stoking the U.S. Dollar and Treasury yields sharply higher. When chaos crosses paths, it amplifies, in recent days markets have absorbed the Fed’s third consecutive 75bp rate hike, a flash crash in the British Pound, and repricing of sovereign debt. Lost in the shuffle was a Fed that was maybe only moderately more hawkish than anticipated. The CME’s FedWatch Tool is signaling 125bps (425-450bps) worth of hikes through yearend with a 61% probability, up from 43.8% one week ago. The committee sees a yearend Fed Funds rate at 4.4% and a terminal rate of 4.6% in 2023. Ahead of last week’s policy decision, we made the case for shock and awe, a hike of 100bps. Ultimately, their yearend rate projections coupled with expectations of slowing growth did the talking and the 2s10s spread inverted to the -0.50bps floor. However, something has happened over the last four days, four tests of -0.50bps and marginally more, but the 2s10s spread has yet to decisively break through. In fact, amid all the chaos and dysfunction that carried into Monday’s U.S. hours, the 2s10s spread finished at -0.43%. This may not sound like a significant feat, but if the yield curve begins steepening and coupled with 5-year Breakevens at the lowest level since June 2021 (cut by one third from March peak), this could be the canary in the coal mine, telling us the worst is in, or at least a substantial reprieve is around the corner.

Technicals: As one may gather from our discussion above, we believe risks are skewed to the upside. Therefore, we are establishing a cautiously Bullish Bias. With that said, we must see construction and it is understood that a break of new lows is very negative. Yesterday’s late intraday high and failure in the S&P comes in at 3697; holding out above here would be constructive. Still, such construction must lead to a close above major three-star resistance at ... Click here to get our (FULL) daily reports emailed to you!

Bias: 

Resistance: 

Pivot: 

Support: 

NQ (Dec)

Resistance: 

Pivot: 

Support:

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