Eurodollar future shorts were given reason to cover yesterday and they did so to the extent of 50,000. This is not much short covering given the ‘non-commercial’ community is net short futures and options at a record breaking -1m. Still, the decline in open interest from yesterday’s trade is not consistent with the bullish implications of stronger price action.
The set-up to trade on Monday was a Friday finish near the session high. That high in many but the shortest duration fixed income contracts in the States was near to the recent, post-FOMC range high. The break of that range (high) in early trade on Monday prompted a technical buying binge that left most contracts, again, meaningfully higher.
The noted record ‘large-spec’ short positions along with a 2 session, 3% equity swoon were powerful influences in yesterday’s trade. Additionally, Yellen’s remarks last week about there being room for further improvement of broader measures of employment got play over the weekend.
Technical conditions still appear favorable over the short-term, though I am disinclined to position as such.
Rather, I would continue to focus on the inability for fixed income, over a longer period, to make any headway against the single session-FOMC date decline.
Additionally, Fed officials have not expressed a sufficient amount of displeasure with the post-FOMC change in implied rates to warrant significant upside correction. Rather, the major risk remains toward a completion of the winter weather impacted weak economic report series and a ramp-up in long depressed capital spending and gains in consumer spending consistent with steady income and job growth.
Bearish technical prospects would improve if yesterday’s gains were removed today. Absent that, there is room for a choppy trade throughout the week.