Janet Yellen speaks at 10:00 am in front of the Senate today. Traders will hang on her every word, trying to discern what it means for financial assets across the world.
However, two assets will probably be enough to figure out whether the markets are in a risk-on or risk-off environment: the U.S. 10 year Treasury yield and the USD/JPY cross.
Since the start of the 2014, risk-on/risk-off behavior among asset classes has taken on a more traditional tone. Here was my characterization in last month’s Macro Wrap:
While markets last year worried more about the impact of higher rates on the U.S. economy, growth actually seems to be the bigger worry to start 2014. Chinese systemic fears, weak U.S. corporate guidance, and emerging market growth scares are grabbing the headlines. More importantly, financial asset prices are moving in lockstep with risk-on/risk-off perceptions about global growth getting better or worse.
As a result, so far in 2014, stock prices have generally moved with yields – higher with higher yields, and lower with lower yields.
With that in mind, the 10 year yield is at an important spot, just above its 200 day moving average:
The 10 year Treasury yield has spent very little time below the 200 day ma since the start of 2013, a very favorable period for U.S. stocks. The yield is testing the 200 day ma for the second time in the past month. The 2.50 level is the even more important long-term level to watch as a potential risk-on/risk-off pivot point.
The USD/JPY cross has moved similarly to U.S. rates in the past year. The cross has moved higher with higher U.S. rates (higher USD vs. the Japanese Yen), and lower with lower U.S. rates (lower USD vs. the Japanese Yen). It is also now quite close to its 200 day ma:
The 100 level is the crucial spot psychologically, which also coincides with the 200 day ma. USD/JPY has not traded convincingly below its 200 day ma since late 2012. We still have an open options position in FXY.
The reaction of these two prices near their 200 day ma’s could be a meaningful signal about global appetite for risky assets over the next few months. They’ll be at the top of my screen as the macroeconomic calendar picks up in early March.