Week review · w/c 26 September 2022 · Post-FOMC 75bp, the BoE, and gilts spiralling lower

A multi-distribution week auction that saw an aggressive reversal into the Friday close after failing to break through the yearly low, 3657. This would indicate shorter time frame players, but perhaps not. HTF traders have seen some significant moves post Jackson Hole and the August highs; perhaps it was wise for them to exit ahead of such a highly targeted low. Delta was trading mainly positive prints from 3676, indicating buyers were becoming more aggressive.

MarketsUS equity markets fell this week, with the Dow briefly entering bear market territory and closing at a new 2022 low as concerns about recession risk grew after the Federal Reserve's 75-basis-point (bps) rate hike to combat inflation. The Dow fell 4% last week, the S&P 500 fell 4.7% and the Nasdaq fell 5%. Treasury yields reached their highest level in more than a decade. The yield curve inversion deepened as the two-year note yield rose above 4.2%, indicating growing scepticism about the economy's near-term health. Oil fell on Friday as global recession fears and a stronger dollar, which reached multi-decade highs against the euro and the pound, raised concerns about the global economy.

BoJAfter the BoJ's relatively muted policy announcement, the Japanese yen spiked lower, with the benchmark USD/JPY rate probing above the closely watched 145.00 figure. The central bank kept all of its key policy settings: the target short-term lending rate was kept at -0.1 per cent, and the yield on the 10-year Japanese Government Bond (JGB) was kept at 0%.

Governor Haruhiko Kuroda and company provided no fuel for such speculation with this announcement, instead stating that they are monitoring FX market movements and their impact. As was the case for much of the time after the 2008 financial crisis, this could indicate that the Bank is more concerned with managing the pace of yen moves than their direction.

BoEThe BoE hiked as expected, but a mini-budget from the incoming finance minister sent GBP and gilts spiralling lower as participants lost confidence in the government's economic policy.

The price action in UK gilts is deteriorating. For investors in sterling-denominated bonds a daunting list of challenges has emerged, and the Treasury's mini-budget has done little to bolster confidence. Widening rate differentials are no consolation for the pound, as foreign exchange remains the primary vehicle for pricing UK country risk.

Notable tweetWhat has been happening to yields this year, and to inflation expectations going forward?

Into the FedFriday's open gap closed, but the auction failed at Thursday's close. From Friday to the pre-Fed Wednesday, a balance between 3843 and 3919: the auction was coiling, building energy. Balance into the FOMC meeting. Review your past notes: how often do we see balance into big events?

Wednesday, FOMCAn FOMC false break: shorts got trapped below balance, then drove the auction higher on Powell's comments that rates may eventually normalise. The FOMC spike high came at Thursday's cash closing spike high: short-term buyers got trapped at higher prices and then scrambled to exit, adding fuel to the liquidation move below prior balance. A selling imbalance post FOMC: the tone of the speech was that more is to come from the Fed.

ThursdayAn open gap. Interestingly, the auction managed to close the gap, only just! Not convincing: longs trapped. Thursday's auction consolidated lower, and buyers failed again to push back into the FOMC range, with sellers waiting at the FOMC lows.

FridayAn open drive lower: the ON auction trapped longs who were unable to get paid, and they scrambled to exit on the open. The auction initially held above 3700, trapping more longs. HTF targets were hit and shorts covered into the close.

Daily and weekly one-time framing lower: all targets hit by sellers but one. Aggressive short covering commenced 3 points above the yearly lows.

A multi-distribution week, one-time framing lower on the daily and weekly. Weekly POC 3780, weekly mid 3793, quarter open 3800, the 3808 composite HVN and the weekly VAH at 3898.

Quarterly and monthlyThe monthly profiles are looking balanced, for now.

Why look at the weekly and monthly?Using the composite profiles gives me a lot of clarity in understanding the market. Understanding the story and the basic mechanics of what is going on simplifies almost every other aspect of my trading, especially timing.

By identifying areas of balance and acceptance in the auction I have a natural edge: I can identify value and the pivots of change. In balance I look to fade the extremes. When activity leaves an area of acceptance, I monitor the strength and conviction of the move, using volume and value as my guide. As a general rule, if a move is genuine, volume and value will move away from prior acceptance to a new area.