Red and Green month STIRS trade higher

Its been a quite a bit of a rollarcoaster the last few days, as worries intensifying over the PIGS nations (Portugal, Ireland, Greece, Spain), has lead to massive rally in long end Euribors particularly, and a sell of in the front months as LIBOR rates rise. The front end of the the curve has been flattened quite aggressively as we see the costs of insuring debt from these nations increase pretty much on a daily basis.
Its typical of the market to react in this way given that this news has actually been out there since December, and this move really came out of nowhere.
We are trading at all time highs in the Shatz, as we are yielding near 1%. It is tough to see yield falling much below that, and it is for this reason I see we have huge downside potential in the schatz.
As far as stocks go, from a technical perspective the S&P 500 future may have done itself some small favours last week. Although we are now definitely in a short term downtrend a strong rally going into the close on Friday produced a daily hammer candlestick and prevented too much ground being lost over the week. Friday’s low of 1040.75 will prove a crucial support level going into next week; a breach would most likely see a brisk move down to 1026.00 with further support around 1015.00. To the upside 1067.00 will be the bulls’ first target as a break of here would place the S&P back into the previous two weeks trading range. Before getting too excited about the recent down move it must be remembered as part of any recovery there will be pullbacks and that we are still above the 200 day moving average, from a technical viewpoint it is too early to be thinking of a double dip.
A large concern for those hoping that the current equity weakness is merely a pullback, is the current strength in the Bund and US Ten Year. It is often said that the fixed income markets are the leaders of new trends. With that in mind it should therefore be considered significant that the Bund is priced at its highest levels since April 2009, and the US Ten Year continues to show strength disproportionate to the prevailing equity weakness. If government bond markets continue to trend upwards we believe further equity weakness is around the corner.
It is rare that equity markets simply fall off a cliff with no form of squeeze or retracement. It is usual to see an aggressive squeeze on shorts that come late to the party as bulls perceive lower prices as a good opportunity to buy. We therefore believe that equities will witness an aggressive pullback over the next 10 days which will provide a good selling opportunity.