Will U.S. bonds hit 120?

Federal Reserve Chair Janet Yellen signaled interest rates may rise by the middle of next year. She said the central bank’s stimulus program could end this fall and benchmark interest rates could rise about six months later. Data today showed the number of Americans filing applications for unemployment benefits held last week near the lowest level in almost four months.

Equities: The E-mini S&P 500 (CME:ESM14), after digesting the rate-talk and guidance by Yellen and company, came down yesterday, and are starting the morning off on a bearish note today. The market is down 3.5 points to 1848.75. We had been watching the 1867 level closely as we saw a short covering rally headed into the Fed meeting. However, looking back we see that the 1867 held solidly as a key resistance level. Yesterday, the market put in a bearish outside reversal day on the daily candlestick charts, and thus we believe the market could continue to test lower levels, as higher interest rates sooner rather than later could make bulls nervous.

Bonds: The U.S. 30-year Treasury bonds are down 1 tick today to 131’30, after seeing significant selling yesterday after Yellen was more hawkish than the market was anticipating. At this point, we still believe the bonds could be in for a multi-point downmove this year. We could see a “summer sell-off” in bonds, especially if we continue to see above-expectations jobs reports. We would not be surprised to see the bonds headed to 120, which is a key 50% Fibonacci extension level from the big sell-off earlier in 2013.

Currencies: The key story that spawned from yesterday’s Federal Open Market Committee meeting was a big rally in the U.S. Dollar Index (NYBOT:DXH14). This index has rallied further today, up 26 ticks to 80.39. The Swiss Franc took a dive yesterday, and is continuing the weakness today, down 39 ticks to 113.06. We had a key resistance level of 115.50, but the Franc could only approach 115 before seeing sellers emerge to bring it lower. The  Canadian dollar is well below the 90 level today, trading down 16 ticks to 88.65, while the recently strong British pound is down 32 ticks to 184.89, below the key daily pivot of 165.55. At this point, our key line in the sand for the Euro is around 138.60. If the Euro has trouble heading above that level and staying there, we could see the Euro head lower to at least 1.35. Again, Yellen’s hawkishness seemed to surprise the market, and caused a big rally in the USD as the market adjusted for the rate guidance the FOMC provided.

Commodities: The commodity that has suffered a lot over the past few sessions is gold (COMEX:GCJ14), with gold trading down another $14 today to $1,328. The gold bulls seemed to have been spoked a lot by the rate guidance. However, this area of around $1,326 is a key daily moving average support, which could hold for the short term. Coffee (NYBOT:KCK14) is down more than 4% today to $1.7750, after holding above the $2 level for several sessions earlier this month. $1.70 could be key support.

WTI crude oil (NYMEX:CLJ14) is rallying along with equity markets today, trading up $.21 to $99.38. The recent volume has looked bullish to us, and we do not detect significant reversal signals yet.

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