Stocks finished lower for a second consecutive day, with breadth continuing to show more losers than advancers. This trend actually began sometime last week. The NYSE McClellan Oscillator has broken lower at this point and appears to be indicating a potential trend change. While nothing is definitive yet, it is noteworthy and will continue to be monitored, as declining market internals can signal deteriorating liquidity conditions within the market.
Based on my readings and research, this collapse appears to be driven by the effects of quantitative tightening and increased debt issuance in Germany. With fewer buyers in the market to absorb the additional debt, German bund yields have risen, pushing them to trade more in line with Euro OIS rates.Treasury yields. Historically, these two rates traded much closer together.
From our perspective, these dynamics also appear to be driving credit spreads lower in the U.S. overall. Naturally, the U.S. equity market tends to interpret narrowing credit spreads as a signal that everything is fine. However, the underlying reasons for these spreads behaving this way are not necessarily positive and seem to stem from liquidity strains and the absence of liquidity as the effects of QT and increased debt issuance begin to take a toll.
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