MBS Live Day Ahead: Potential Coronavirus Correction, Day 2: It's Still Bad For Bonds
Heading into this morning, it looked as if bonds would have a fighting chance, at the very least. The fight in question is against the big bounce toward higher yields that will inevitably follow a shift in the broader psychology (both market and medical community) surrounding coronavirus. Simply put, as soon as the tide turns in the battle against the disease, so too should the the recent stint of multi-year low rates.
Yesterday's trading session was a prime candidate for "day 1" of that correction. This wasn't due to any specific update on the disease, but rather the cues sent by various financial markets. In particular, Chinese equities managed to carve out gains on their second day back from a weeklong holiday. The US bond market also happened to be at a very logical point of resistance as far as the charts were concerned (overbought technicals, stochastic crosses, 1.50% resistance in 10yr yields).
That's not to say we're completely deprived of justification from coronavirus stats. Yesterday's best argument was that the percent increase in cases continues to shrink, even as the numbers of new cases rise by greater amounts. This could be a factor of the Chinese medical system's capacity to confirm cases rather than a material deceleration, so it's more of a hopeful anecdote than unequivocal grounds for reversal.
Now in today's overnight session, the virus-related updates are a bit more specific with some company I've never heard of--Ascletis Pharma Inc--conducting trials at some hospital in China I've never heard of. To be fair, if we look deeper at last week's headlines regarding early development of a vaccine, we find it's the same company. In researching that company, we also find huge insider buying a few days ago.
But wait! Savvy observers are yelling at their screens saying "IT'S NOT A VACCINE!" And they're absolutely right. The company in question specializes in antivirals and AIDS/HIV treatment, among other things. The drug combination in this case is RITONAVIR and TMC-310911 (substantially similar to DARUNAVIR).
Why am I dumping these big, pointless drug names on you? If you've ever had the flu and been given Tamiflu, you've take OSELTAMIVIR. Notice any similarities here? The RITONAVIR and DARUNAVIR cocktail is just an attempt to throw two heavy-hitting antivirals at a heavy-hitting virus. Antivirals have a pretty decent level of efficacy. Their mechanism of action is well understood and scientists generally agree they have a high enough level of efficacy and low enough incidence of side effects to be a worthwhile ally in the fight against serious viruses. It makes total and complete sense that an antiviral cocktail could help people with coronavirus get better.
Just one problem though: it's not a vaccine and it's not going to do anything to slow the spread of the disease. This news is all about treatment of people already diagnosed. I'm personally a bit surprised that markets haven't ferreted out these details and reversed the silly little reaction to this overnight news, but perhaps that's why bonds have been able to push back against the post-ADP-Employment-Report weakness in the past hour.
Even then, the bigger picture remains most critical. As mentioned, the technicals are aligned in an ominous way with both long and short-term momentum indicators suggesting a bounce is in-progress, and the 1.50% technical floor seemingly happy to serve as the trampoline. It's counterpart will be the ceiling at 1.67%. So far today, we've only seen 1.66%, and if that continues to be the case, there's a chance markets could settle here and exercise some logic with respect to the coronavirus snake oil trade overnight.
Today's biggest piece of domestic econ data hits at 10am ET with ISM Non-Manufacturing.