The cautious market tone seen at the start of 2015 has gotten even more cautious this week as key technical support levels have broken in a wide array of instruments.
West Texas Intermediate broke decisively below $50, the euro below $1.20, 10-Year U.S. Treasury yields below 2.0% and the S&P 500 below 2,000, to name only a few of the notable breaks.
These important shifts in technical patterns have been driven by rising risk aversion rather than changing fundamentals, traders said.
While many of these moves were deemed extended or overdone, it may be wiser to wait for better entry levels rather than attempt to bottomfish at current levels, they said.
In oil, NYMEX February light sweet crude was down $2.21 at $47.83 per barrel, after trading in a $47.63 to $50.37 range.
The earlier low was the lowest level seen since Spring 2009, when crude bottomed at $43.83 April 21. WTI posted a 2009 low of $33.55 on Feb 12. Some support may be seen around $48.01, the April 27, 2009 low.
WTI traded below its 200-month moving average $60.43 last month and continues to do so. In late 2001/early 2002 and again in late 2008/early 2009, WTI traded below its 200-month MA for a few months, but otherwise since 2000, has traded above that mark.
In FX, the euro broke below the psychological $1.2000 level Monday to test new nine-year lows near $1.1861 and Tuesday also tested sub $1.1900 waters, where the pair found a mild degree of support.
The euro was trading at $1.1930 Tuesday, in the middle of a $1.1884 to $1.1969 range.
While the focus remained on the November 15, 2005 lows near $1.1640, traders would not be surprised to see a pullback to $1.2000 and maybe even a bit beyond, if U.S. Treasury yields continue to decline.
Ten-year U.S Treasury yields held at 1.943% in afternoon action, up from an earlier low of 1.889%, which was within striking distance of the 1.873% low yield seen October 15, 2014, the day of the fixed income flash crash.
This was in stark contrast to the 2.331% high yield seen a littler over a month ago, when on December 5, when U.S. non-farm payrolls for November surprised by rising 321,000.
U.S. Treasuries have been in hot demand as safe-havens this week, but also because U.S. yields were lofty when compared to other G-3 yields.
Earlier Tuesday, 10-Year Japanese Government bond yields hit a record low yield just under 0.28% and 10-Year German Bunds posted a record low yield near 0.44%.
2015 trading action has seen the average of G-3 government bond yields dip below 1% for the first time ever, noted Steve Englander, global head of G10 FX strategy at CitiFX.
Englander said:
"Even during the 1930s rates were well above current levels in both the U.S. and abroad. It is also striking that this is not happening during the panic phase of a crisis but after the panic is over and we have had significant recoveries in asset prices globally."
The yield moves lower suggest that global investors "think we are going nowhere for a long time," he said.
Englander added:
"This could be secular stagnation but it could also be a policy impasse: fiscal policy/helicopter money may be the solution but policymakers are sticking to the conventional non-conventional tools and these are not expected to work terribly well."
Getting some of the upcoming risk events (Greek elections, ECB/Fed decisions) off the table will go a long way to improve risk sentiment, which should, at some point, lead to higher yields, analysts said.
"Judging by the steady increase in real five-year rates, one generally consistent with the lead up to the 2004 tightening cycle, there is more optimism in this market than meets the eye," said Eric Green, head of U.S. rates and economic research at TD Securities.
He maintained that "the prevailing bias at the Fed remains intact" and TD looked "for the March meeting to lay the groundwork for rate hikes in Q3."
"With the trifecta of ECB QE, a bottom in oil prices, and the Greek elections behind us, that sets the stage for a move higher in Treasury yields by the end of Q1," Green said.
U.S. stocks saw a steady march higher at the end of 2014, so it was not a surprise to see profit-taking in early 2015, analysts said.
The S&P 500 was down 1.16% at 1,997 Tuesday afternoon, on the low side of a 1,992.44 to 2,030.25 range.
Only last Monday, the index posted a new record high of 2,093.55. At the earlier low, the S&P 500 was down 4.8% from its life-time peak.
Earlier, the S&P broke below a key trendline support, drawn from the October 15 (fixed income flash crash) lows (1820.66), which came in Tuesday today around 2,018-2019.
A clear-cut close below that level would target the next level of support at 1,973.77 (Dec. 17 lows). The 38.2% Fibonacci retrace (of the Oct/Dec rally) comes in ahead of that at 1,989.31.
The CBOE Volatility Index or VIX stood at 22.25, on the high side of a 19.52 to 22.90 range. In 2014, the VIX saw a range of 10.28 (July 3) to 31.06 (Oct. 15).
VIX levels below 20 are deemed risk-friendly, levels over 40 deemed risk-averse and levels in the middle deemed neutral.