Dollar Slump Halted as Stocks and Bonds Retreat
Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds….
Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds. The euro traded at par for the first time in two weeks, while sterling reached almost $1.1490, its highest since September 15. The US 10-year yield has fallen by 45 bp in the past five sessions. Yet, the scar tissue from the last bear market rally is still fresh and US equity futures are lower after the S&P 500 had its best two days since 2020. Europe’s Stoxx 600, which has gained more than 5% its three-day rally is more around 0.9% lower in late morning turnover. The large Asia-Pacific bourses advanced, led by a nearly 6% rally in Hong Kong as it returned from holiday. Similarly, the bond market, which rallied with stocks, has sold off. The US 10-year yield is up around seven basis points to 3.70%, while European yields are 7-14 bp higher. Peripheral premiums are also widening. The dollar is firmer against most G10 currencies, with the New Zealand dollar holding its own after the central bank delivered was seems to be a hawkish 50 bp hike. Emerging market currencies are mostly lower, including Poland where the central bank is expected to deliver a 25 bp hike shortly. After rising to $1730 yesterday, gold is offered and could ease back toward $1700 near-term. December WTI is consolidating after rallying around 8.5% earlier this week as the OPEC+ decision is awaited. Speculation over a large nominal cut helped lift prices. US and European natural gas prices are softer today. Iron ore is extended yesterday’s gains, while December copper is paring yesterday’s 2.35% gain. December wheat is off for a third session, and if sustained, would be the longest losing streak since mid-August.
The Reserve Bank of New Zealand quickly laid to rest ideas that the Reserve Bank of Australia's decision to hike only a quarter of a point yesterday instead of a half-point was representative of a broader development. It told us nothing about anything outside of Australia. The RBNZ delivered the expected 50 bp increase and acknowledged it had considered a 75 bp move. In addition, it signaled further tightening would be delivered. It meets next on November 23, and the market has more than an 85% chance of another 50 bp hike discounted.
Both Australia and Japan's final service and composite PMI were revised higher in the final reading. Japan's service PMI was tweaked to 52.2 from 51.9. It was 49.5 in August. Similarly, the composite is at 51.0, up from 50.9 flash reading and 49.4 in August. In Australia, the service and composite PMI were at 50.2 in August. The flash estimate put it at 50.4 and 50.8, respectively. The final reading is 50.6 and 50.9 for the service and composite PMI.
Softer US yields weighed on the dollar against the yen. On Monday, it briefly traded above JPY145. Today, it traded at a seven-day low, slightly above JPY143.50. US yields are firmer, and the greenback has recovered and traded above JPY144.50 in early European turnover. The intraday momentum indicators are getting stretched, and the JPY144.75 area may cap it today. The Australian dollar traded to almost $.06550 yesterday but has struggled to sustain upticks over $0.6520 today. Initial support is seen in the $0.6450-60 area. Trade figures are out tomorrow. The New Zealand dollar initially rose to slightly through $0.5800 on the back of the hike but has succumbed to the greenback's strength. It returned little changed levels around $0.5730 before finding a bid in Europe. The US dollar reached CNH7.2675 last week and finished last week near CNH7.1420. It fell to almost CNH7.01 today and bounced smartly. A near-term low look to be in place, a modest dollar recovery seems likely.
UK Prime Minister Truss will speak at the Tory Party Conference as the North American session gets under way. We argued that calling retaining the 45% highest marginal tax rate a "U-turn" was an exaggeration and misreading of the new government. It was the most controversial part of the mini budget apparently among the Tory MPs. This was a strategic retreat and a small price to pay for the other 98% of Kwarteng's announcement. Bringing forward the November 23 "medium-term fiscal plan" (still to be confirmed with specifics) is more about process than substance. The fact that she seems to be considering not making good her Tory predecessor pledge to link welfare payments to inflation suggests she has not been chastened by the cold bath reception to her government's first actions. However, on another front, Truss is changing her stance. As Foreign Secretary she drafted legislation that overrode the Northern Ireland Protocol unilaterally. In a more profound shift, she has abandoned the legislation and UK-EU talks resumed this week Truss is hopeful for a deal in the spring. Lastly, we note that the UK service and composite PMI were revised to show smaller deterioration from August. The service PMI is at 50 not 49.2 as the flash estimate had it. It was at 50.9 previously. The composite remains below 50 at 49.1, but the preliminary estimate had it at 48.4 from 49.6 in August.
Germany's announcement of the weekend of a 200 bln euro off-budget "defensive shield" has spurred more rancor in Europe. Not all countries have the fiscal space of Germany. Two EC Commissioners called for an EU budget response. They seem to look at the 1.8 trillion-euro joint debt program (Next Generation fund) as precedent. This is, of course, the issue. During the pandemic, some suggested this was a key breakthrough for fiscal union, a congenital birth defect of EMU. However, this is exactly what the fight is about. If there is no joint action, the net result will likely be more fragmentation of the internal markets. Still, the creditor nations will resist, and Germany's Finance Minister Linder was first out of the shoot. While claiming to be open to other measures, Linder argued that challenge now is from supply shock, not demand. On the other hand, the European Parliament mandated that all mobile phones, tablets, and cameras are equipped with USB-C charge by the end of 2024. The costs savings is estimated to be around 250 mln euros a year. No fiscal union, partial banking, and monetary union, but a charger union.
The final PMI disappointed in the eurozone. The Big 4 preliminary readings were revised lower, suggesting conditions deteriorated further since the flash estimates. It was small change, but the direction was uniform. On the aggregate level, the service PMI was revised lower to 48.8 from 48.9 and 49.8 in August. The composite reading eased to 48.1 from 48.2 preliminary estimate and 48.9 in August. Italy and Spain, for which there is no flash report, were both weaker than expected, further below the 50 boom/bust level. France was the only one of these four that had a composite reading above 50 and improved from August. Separately, France reported a dramatic 2.4% rise in the August industrial output. The median forecast in Bloomberg's survey was for an unchanged report. Lastly, we note that Germany's August trade surplus was a quarter of the size that economists (median in the Bloomberg survey) expected at 1.2 bln euros instead of 4.7 bln. Adding insult to injury, the July balance was revised to 3.4 bln euros from 5.4 bln.
The euro stalled near $1.00 yesterday, the highest level since September 20. However, it has come back better offered today and fell slightly below $0.9925 in early European activity. Initial support is seen around $0.9900 and then $0.9840-50. The euro finished last week slightly above $0.9800. We suspect that market may consolidate broadly now ahead of Friday's US jobs report. The euro's gains seem more a function of short covering than bottom picking. Sterling edged a little closer to $1.15 but could not push through and has been setback to about $1.1380. The intraday momentum indicators allow for a bit more slippage and the next support area is around $1.1350.
Fed Chair Powell has explained that for inflation, one number, the PCE deflator best captures the price pressures. However, he says, the labor market has many dimensions and no one number does it justice. Weekly initial jobless claims fell to five-month lows in late September. On the other hand, the ISM manufacturing employment index fell below the 50 boom/bust level for the fourth month in the past five. The JOLTS report showed the labor market easing, with job openings falling by nearly a million to its lowest level in 14 months. Yet, despite the talk about the Reserve Bank of Australia's smaller cut as some kind of tell of Fed policy (eye roll) and the drop in JOLTS, the fact of the matter is that the market view of the trajectory of Fed policy has not changed. Specifically, the probability of a 75 bp hike is almost 77% at yesterday's settlement, which is the most since last Monday. The terminal rate is still seen in
Attention may turn to the ADP report due today but recall that they have changed their model and explicitly said that it is not meant to forecast the national figures. Those are due Friday. Also, along with the ADP data, the US reports the August trade figures today. We are concerned that the US trade deficit will deteriorate again and note that dollar is at extreme levels of valuation on the OECD's purchasing power parity model. That may be a 2023 story. What counts for GDP, of course, is the real trade balance, and in July it was at its lowest level since last October. Despite the strong dollar, US goods exports reached a record in July. Imports fell to a five-month low, which, at least in part, seems to reflect the difficult in many consumer businesses in managing inventories. The final PMI reading is unlikely to draw much attention. The preliminary reading had the composite rising for the first time in six months but still below the 50 at 49.3. The ISM services offer new information. The risk seems to be on the downside of the median forecast for 56.0 from 56.9.
Yesterday, we mistakenly said that would report is August building permits and trade figure, but they are out today. Permits, which likely fell for the third straight month, as the tighter monetary policy bits. The combination of slowing world growth and softer commodity prices warns the best of the positive terms-of-trade shock is behind it. The trade surplus is expected to fall for the second consecutive month. Even before the RBA delivered the 25 bp rate hike, the market had been downgrading the probability of a half-point move from the Bank of Canada. Last Thursday, the swaps market had it as a 92% chance. At the close Monday, it had been downgraded to a little less 72%. Yesterday, it slipped slightly below 65%. Further softening appears to be taking place today, even after the RBNZ's 50 bp hike. The odds have slipped below 50% in the swaps market.
After finishing last week slightly above CAD1.38, the US dollar has been sold to nearly CAD1.35 yesterday. No follow-through selling has been seen and the greenback was bid back to CAD1.3585. The Canadian dollar has fallen out of favor today as US equity index futures are paring gains after two strong advances. There may be scope for CAD1.3630 today if the sale of US equities resumes. The greenback has found a base around MXN19.95. The risk-off mod can lift it back toward MXN20.10-15. Look for the dollar to also recover more against the Brazilian real after bouncing off the BRL5.11 area yesterday.
Disclaimerbonds pandemic sp 500 equities stocks monetary policy fed link currencies us dollar canadian dollar euro gdp recovery gold japan hong kong canada european europe uk france spain italy germany poland eu
“We Are Headed For Another Train Wreck”: Bill Ackman Blames Janet Yellen For Restarting The Bank Run
"We Are Headed For Another Train Wreck": Bill Ackman Blames Janet Yellen For Restarting The Bank Run
Yesterday morning we joked that every…
Yesterday morning we joked that every time Janet Yellen opens her mouth, stocks dump.
Yellen opens mouth and stocks dump— zerohedge (@zerohedge) March 21, 2023
Well, it wasn't a joke, and as we repeatedly noted today, while Jerome Powell was busting his ass to prevent a violent market reaction - in either direction - to his "most important Fed decision and presser of 2023", the Treasury Secretary, with all the grace of a senile 76-year-old elephant in a China market, uttered the phrase...
- YELLEN: NOT CONSIDERING BROAD INCREASE IN DEPOSIT INSURANCE
... and the rest was silence... or rather selling.
Commenting on our chart, Bloomberg's Mark Cudmore noted it was Yellen who was "to blame for the stock slump", pointing out that "the pessimistic turn in US stocks began within a minute of Janet Yellen starting to speak."
The S&P 500 rose almost 1% in the first 47 minutes after the Fed decision. Powell wasn’t the problem either: the index was 0.6% higher in the first 17 minutes after his press conference started.
Why am I picking that exact timing of 2:47pm NY time? Because that is the minute Yellen started speaking at the Senate panel hearing. The high for the S&P 500 was 2:48pm NY time and it fell more than 2.5% over the subsequent 72 minutes. Good effort.
Picking up on this, Bloomberg's Mark Cranfield writes that banking stocks globally are set to underperform for longer after Janet Yellen pushed back against giving deposit insurance without working with lawmakers. He adds that "to an aggressive trader this sounds like an invitation to keep shorting bank stocks -- at least until the tone changes into broader support and is less focused on specific bank situations." Earlier, we addressed that too:
*YELLEN: NOT CONSIDERING BROAD INCREASE IN DEPOSIT INSURANCE— zerohedge (@zerohedge) March 22, 2023
At least until spoos drop below 4K again
Looking ahead, Cranfield warns that US financials are likely to be the most vulnerable as they are the epicenter of the debate. Although European or Asian banking names may outperform US peers, that won’t be much consolation for investors as most financial sector indexes may be on a downward path.
The KBW bank index has tumbled from its highs seen in early February, but still has a way to go before it reaches the pandemic-nadir in 2020. Traders smell an opening for a big trade and that will fuel more downside. Probably until Yellen blinks.
And if Bill Ackman is right, she will be doing a whole lot of blinking in days if not hours.
While we generally make fun of Ackman's self-serving hot takes on twitter, today he was right when he accused Yellen of effectively restarting the small bank depositor run which according to JPMorgan has already seen $1.1 trillion in assets withdrawn from "vulnerable" banks. This is what Ackman tweeted:
Yesterday, @SecYellen made reassuring comments that led the market and depositors to believe that all deposits were now implicitly guaranteed. That coupled with a leak suggesting that @USTreasury, @FDICgov and @SecYellen were looking for a way to guarantee all deposits reassured the banking sector and depositors.
This afternoon, @SecYellen walked back yesterday’s implicit support for small banks and depositors, while making it explicit that systemwide deposit guarantees were not being considered.
We have gone from implicit support for depositors to @SecYellen explicit statement today that no guarantee is being considered with rates now being raised to 5%. 5% is a threshold that makes bank deposits that much less attractive. I would be surprised if deposit outflows don’t accelerate effective immediately.
Ackman concluded by repeating his ask: a comprehensive deposit guarantee on America's $18 trillion in assets...
A temporary systemwide deposit guarantee is needed to stop the bleeding. The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.
... but as we noted previously pointing out, you know, the math...
Math: $18 trillion in deposits, $125 billion in the deposit insurance fund. https://t.co/Zsu2RsJk41 pic.twitter.com/nb3Ypnt1gd— zerohedge (@zerohedge) March 21, 2023
... absent bipartisan Congressional intervention - which is very much unlikely until the bank crisis gets much, much worse - this won't happen and instead the Fed will continue putting out bank fire after bank fire - even as it keeps hiking to overcompensate for its "transitory inflation" idiocy from 2021, until the entire system burns down, something which Ackman's follow-up tweet was also right about:
Consider recent events impact on the long-term cost of equity capital for non-systemically important banks where you can wake up one day as a shareholder or bondholder and your investment instantly goes to zero. When combined with the higher cost of debt and deposits due to rising rates, consider what the impact will be on lending rates and our economy.
The longer this banking crisis is allowed to continue, the greater the damage to smaller banks and their ability to access low-cost capital.
Trust and confidence are earned over many years, but can be wiped out in a few days. I fear we are heading for another a train wreck. Hopefully, our regulators will get this right.
Narrator: no, they won't.
China’s Auto Industry Association Urges “Cooling” Of Price War, As Major Manufacturers Slash Prices
China’s Auto Industry Association Urges "Cooling" Of Price War, As Major Manufacturers Slash Prices
Just hours after we wrote about maniacal…
Just hours after we wrote about maniacal price cutting in the automotive industry in China, China's auto industry association is urging automakers to "cool" the hype behind price cuts.
The statement was made in order to "ensure the stable development of the industry", Automotive News Europe reported on Tuesday.
The China Association of Automobile Manufacturers even went so far as to put out a message on its official WeChat account, stating that "A price war is not a long-term solution". Instead "automakers should work harder on technology and branding," it said.
The consumer disagrees...
Recall we wrote earlier this week that most major automakers were slashing prices in China. The move is coming after lifting pandemic controls failed to spur significant demand in China, the Wall Street Journal reported this week. Ford and GM will be joined by BMW and Volkswagen in offering the discounts and promotions on EVs, the report says.
Retail auto sales plunged the first two months of the year and automakers are facing additional challenges in trying to transition their business models to prioritize EVs over conventional internal combustion engine vehicles.
Ford is offering $6,000 off its Mustang Mach-E, putting the standard version of its EV at just $31,000. Last month, only 84 of the vehicles were sold, compared to 1,500 sales in December. There was some pulling forward of demand due to the phasing out of subsidies heading into the new year, and Ford had also cut prices by about 9% in December.
A spokesperson for Ford called it a "stock clearance".
Discounts at Volkswagen are ranging from around $2,200 to $7,300 a car. The cuts will affect 20 gas powered and electric models. Its electric ID series is seeing price cuts of almost $6,000. The company called the cuts "temporary promotions due to general reluctance among car buyers, the new emissions rule and discounts offered by competitors."
Even more shocking is Citroën-maker Dongfeng Motor Group, who is offering a 40% discount on its C6 gas-powered sedan, now priced at $18,000.
Kelvin Lau, an analyst at Daiwa Capital Markets, told the Journal that automakers are also trying to get rid of 500,000 vehicles collectively stored in their inventory, most of which are older vehicles that won't meet new emissions standards.
David Zhang, a Shanghai-based independent automobile analyst, added: “Some car makers have been seeing very few sales. At this rate, the manufacturers’ production and dealership networks will collapse.”
COVID origins debate: what to make of new findings linking the virus to raccoon dogs
New reports suggest the pandemic’s origins may be linked to raccoon dogs sold at Wuhan’s Huanan Wholesale Seafood Market. A virologist explains.
The origin of SARS-CoV-2, the virus that causes COVID, has long been a topic of heated debate. While many believe SARS-CoV-2 spread to humans from an animal at Wuhan’s Huanan Wholesale Seafood Market, others have argued the virus was accidentally leaked from a lab at the Wuhan Institute of Virology.
Over the past week there has been intense activity surrounding the emergence of new data relevant to this question. In particular, reports emerged that the pandemic’s origins may be linked to raccoon dogs which were being sold illegally at the market.
The excitement stemmed from a re-analysis of raw data generated as part of official investigations into the role of the Huanan Wholesale Seafood Market in the outbreak.
The team of international scientists working on this re-analysis (from North America, Europe and Australia) alerted the World Health Organization and discussed the topic in an article published in The Atlantic. And the scientists themselves have now released a report on the issue, providing greater detail.
So what can we make of their findings? Will this development shift the course of the ongoing debate? Let’s take a look.
The Huanan market
In January 2020, writing about the emergence of what we now call SARS-CoV-2, I stated the importance of understanding how this pandemic began. It remains important to determine the virus’s origins because this knowledge may help us stop the next pandemic occurring.
Even very early in 2020, it was clear that the central Chinese city of Wuhan (a major metropolis and travel hub) was the epicentre of the outbreak. Within Wuhan, the Huanan seafood market stood out as it was associated with many – but not all – of the earliest cases. Indeed, the market was closed on January 1 2020, animals were culled, and the site was disinfected.
Suspicions arose given the role that animal trade and markets had played in the emergence of the closely related SARS-CoV-1 virus (which caused SARS, a widespread outbreak of viral respiratory disease) nearly two decades earlier. Evidence emerged that the Huanan seafood market also sold live mammals, including a fox-like mammal known as a raccoon dog, that we now know are susceptible to SARS-CoV-2.
Later epidemiological and genetic analyses further focused in on the market, and even specific stalls within it, as being the origin of the pandemic.
Read more: The original Sars virus disappeared – here's why coronavirus won’t do the same
The new data
As part of the official investigations into the market, swabs were collected from various parts of the market in the two months after it shut down at the start of 2020. The scientists who undertook this research, from the Chinese Center for Disease Control and Prevention, posted their analysis as a pre-print (a study yet to be peer-reviewed) in February 2022.
In this, the team concluded that the market likely played a significant role in SARS-CoV-2’s early spread, but that they couldn’t detect the virus in samples taken directly from animals. They reported that all the virus evidence found was associated with humans, and it was therefore likely the virus had been brought into the market by humans, not animals, and so perhaps the pandemic began elsewhere.
However, prior to any official peer-reviewed publication, the raw data from this work was released on an open scientific database called Gisaid. And the group of scientists who re-analysed this data did actually find an association between SARS-CoV-2 and animals, in particular raccoon dogs in the market.
They found DNA from animals mixed in with SARS-CoV-2 in a number of samples from the market. Some positive samples contained no human DNA and mostly raccoon dog DNA. This mix of virus and animal material is consistent with an infected animal – not a human – shedding virus, which is what you might expect if SARS-CoV-2 originated from animals brought into the market. Unfortunately, samples from a living raccoon dog were either not taken or not reported, and the official investigation makes no mention of raccoon dogs.
Where to from here?
While this latest data is one additional piece of the puzzle that supports an origin of the pandemic linked to Wuhan’s animal trade, it is unlikely to provide irrefutable evidence. It’s important to note it’s also a pre-print.
Ideally, we would like animal samples from early December 2019, and to compare animal virus genomes with human ones. It will also be crucial to follow events backwards through the animal trade and farming systems to work out where the animals got the virus from in the first instance.
Further, we must bear in mind that the virus could have easily been given to a raccoon dog by an infected human, or that the association between raccoon dog DNA and SARS-CoV-2 may be coincidental.
Read more: We want to know where COVID came from. But it’s too soon to expect miracles
However, evidence is accumulating that official investigations have left a gap in their research – particularly around the role that animals like raccoon dogs and the wildlife trade played in the origins of the pandemic.
While it may be unlikely that we will ever get concrete evidence as to how SARS-CoV-2 entered the human population, we can still think pragmatically and seek to alter behaviour and practices to reduce the chance of a new pandemic. One immediate target would be food systems (encompassing farm to fork), and how to make farming and the wildlife trade safer for all, potentially by enhancing virus surveillance in animals.
Connor Bamford receives funding from Wellcome Trust, UKRI, SFI and BMA Foundation.disease control center for disease control pandemic coronavirus genetic dna spread wuhan europe world health organization
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