Ukraine 8217 s convoy attack halts FTSE damages yields boosts franc

The extended divergence between rallying stocks and tumbling bond yields came to a halt today on news that Ukrainian government troops attacked an armed Russian convoy, crossing the border from Russian territory. Traders fled into safety of already rallying bonds, boosting their prices and dampening yields, while stocks made a-180-degree turnaround from their earlier gains of the day.

Today’s initial decline in bond yields was driven by disappointing US reports on August Empire manufacturing survey, which pushed the stocks/yields divergence to fresh 17-month highs (as measured by S&P500/10-yr yield ratio). But news from Ukraine further dampened yields and brought stocks’ two-day rally to a halt. Stocks and bond yields generally move in tandem, reflecting the notion that improved business activity helps corporate revenues/earnings, feeding into better economic growth and higher interest rates.

FTSE-100 shooting star

The news from Ukraine broke in the last half hour of the FTSE session, thereby limiting part of the day’s gains, rather than eliminating all of the gains in US indices. This produced to a “shooting star” candle on the daily chart, which is particularly bearish when preceded by a positive trend. The negative psychology of the shooting star” formation asserts that a market, which ends the session at or near its opening value following a significantly higher intraday price, suffers from a serious inability to sustain those earlier gains. The failure to break above a confluence resistance of 100 and 55-day MA, as well as a close below the 200-DMA, also highlights the potential negativity. Neither the release of the MPC minutes nor the Jul CPI figures next week are likely to act as a catalyst for further declines in the FTSE, thus, leaving the geopolitics factor as the only major element in reversing this week’s gains. One possibility, however, could weigh on UK shares if the MPC minutes a reveal an expectedly hawkish by some members. A renewed failed attempt to break and CLOSE above 6720-50 next week would confirm future declines and likely call up 6,460.

CHFJPY stabilisation

The battle of safe haven currencies between the franc and yen may have reached an inflection point this week as the descent in CHFJPY stabilized around the 112.60 level, reaching its 55-WMA for the first time in November 2012. The gains of the past 6-days were boosted by Japanese data weakness, weighing on the yen and re-emerging Russia-Ukraine violence propping the franc. Although the weekly chart below suggests a nascent recovery in CHFJPY, bear in mind that the EURCHF cross has broken below the 1.21 level for the first time since January 2013, approaching the SNB’s 1.20 line in the sand, defended since August 2011. Part of the declines in EURCHF were also been driven by dismal Eurozone data, namely, Q2 GDP contraction in Italy and Germany, and stagnation in France. SNB jawboning next may be inevitable, but will it be enough to stem the fall? Using CHFJPY as a reference, we may see additional but modest gains towards the 114.00 confluence of 100 & 200 DMA, until yen flows re-emerge.

US-10 Year Yield at 14-month lows

As the 10-year yield hit 2.30%, it’s time we shifted to the monthly chart, which reveals the yield to be in the centre of its 2-year channel, suggesting 2.10-15% would not be far-fetched. We argued for the bearish case in yields on August 8,  and May 6,  referring to muted growth expectations and lack of inflationary dangers. As the Fed unwinds QE3 later this quarter, this case cases is apt to be more pronounced.

FTSE Shooting Star vs CHFJPY vs Yield Channel