Equities rallied yesterday on excitement about the earnings season and good US retail sales numbers. It is also helping that the market is getting optimistic about the EU bank stress tests and German numbers are holding up. Other risk trades have also rallied with varying degrees of conviction — USDJPY, AUDJPY, copper. I wonder whether the sell-off has gone far enough — fiscal retrenchment must be in the price by now and double-dip fears are being counteracted by expectations for a strong earnings season.

Treasury yields have fallen below 3% but have failed to fall any further as risk assets dropped in price. With the mood now potentially turning yields could rally. The risk-reward ratio looks favourable since even if risk assets do not rally strongly there seems to be a floor under the yield. Treasury futures prices, which have an inverse relationship with yields, seem to have hit a resistance level. The market has failed to rally very much on high-volume up-days (bright green on the chart), suggesting that the rally is at least having a pause. It would be better to have seen some selling on volume (bright red bars) but the shift in the story seems enough to justify a trade.

Intraday the market is rallying on low volume, even for this time of day. It would be nice to wait for a better entry price, nearer the top of the recent range, but a low-volume rally could come to an end any moment and there is a risk that risk assets could have another strong day.