MBS Live Recap: Catalonia (or China!) Helped Early; Powell Saved The Day

It was a pretty interesting session for how narrow the range continues to be in bond markets--interesting both for bonds themselves and for the analysts scrambling to make sense of the movement. 

Apart from last Friday's CPI data, there hasn't been an unequivocal market mover for bonds.  There hasn't been an obvious theme with a predictable reaction.  That resulted in the collective Western analytical mindset concluding that it must be something Western behind the movement.  The leading Western candidates for drama included Catalonian independence with Brexit headlines being a distant second.

I was pretty dismissive about Catalonia as a market mover until this morning, because the overnight surge in bonds (and massive drop in stocks) lined up perfectly with the 4am ET deadline for Catalonia to withdraw its declaration of independence.  Pretty esoteric.  Pretty complicated...  Kind of a stretch, even... but with US market participants waking up to widespread reports of Catalonia's importance from European market participants, the headlines wrote themselves.

Then this afternoon, an MBS Live member posed a question about China's central bank warning of a potential asset price collapse.  Who's China, again?  Everything was supposed to be about Catalonia I thought.  

But in following up on the China question, it looks like Chinese equities markets are a far better explanation of overnight market movement than Catalonia.  The red line in the chart below is Hong-Kong/Shanghai equities futures, and the chart serves as a great reminder that just because most analysts tell you markets are moving for one reason, it could be something completely different.  

So does this conclusively mean China is the new Catalonia?  Not necessarily.  We'll discuss that in greater detail in tomorrow morning's opener.  We could actually use the same red line to make a case against rapidly changing our focus (I scaled this chart to reinforce the importance of China, but if I zoomed it out, it would contradict that thesis at times).  Still, given the pace of today's move, it's going to be worth keeping an eye on both in the near-term future.

At the very least, we know the afternoon movement was due to an article claiming that Fed's Powell is a frontrunner to replace Yellen (according to sources familiar with Trump's interviews of potential Fed Chairs today).  The net effect of all of the above was modest improvements for Treasuries and MBS, and no conclusive momentum emerging for better or worse since the selling spree from early September leveled off in early October.