As worries over the impact of delta variant grew, US stocks and treasury yields tumbled sharply overnight. Markets appeared to be pricing out some of the more optimistic growth scenarios for the quarters ahead. Instead, investors turned cautious as restrictions could still come back, which is happening in some countries like Australia already, even though the economy is more adapted to it after more than a year of “drills”.
10-year yield closed down -0.119 at 1.181, breaking 1.2 handle for the first time since February. The strong break of 38.2% retracement of 0.504 to 1.765 at 1.28 was a surprise to us, which indicates rather pessimistic developments too. The fall from 1.765 would now be targeting 61.8% retracement at 0.9857, which is close to 1% handle. We’d expect strong support from there to finish the correction, as we’re just back to reality.