Ending a rollercoaster - but mostly lower - week for risk assets around the globe which saw the Fed hike the most since 1994, a shock Swiss National Bank hike and the latest boost in UK borrowing costs, as well as a bevy of central banks surprising hawkishly, stocks in Europe finally rebounded after hitting an 18 month low earlier this week, while US equity futures were bid Friday after a rout triggered by fears of recession pushed the S&P into a bear market on Monday. S&P futures rose 1% and Nasdaq futures rebounded 1.2% signaling steadier sentiment compared with Thursday’s plunge in US shares to the lowest since late 2020, after the BOJ refused to change its Yield Curve Control conditions, sending the Yen plunging, and helping the dollar snap two days of losses as Treasury yields were flat with the 10Y around 3.21%. The Stoxx Europe 600 index jumped about 1.2% after hitting its lowest level in more than a year.

Friday also brings an absolutely massive triple-witching, and although Bloomberg believes that the roughly $3.2 trillion in options expiry may lead to short covering, which could bring temporary relief for the stock market...

... we disagree, as the bulk of open interest is around 4,100 or several hundred points above spot, meaning moves today will have little impact on "derivative tails wagging the dog."

In any case, absent a massive 5% rally today which sends stocks into the green, the S&P is looking at being down 10 of the past 11 weeks, a feat that has been repeated just once in history: 1970. Let's go Brandon!

In premarket trading, Revlon surged after a report that Reliance Industries Ltd. is considering buying the company. Major technology and internet stocks were higher, rebounding from Thursday’s rout. Apple Inc., Microsoft Corp. and Meta Platforms Inc. were among those advancing. US-listed Chinese stocks also soared in the premarket, a day after the Nasdaq Golden Dragon China Index’s 4.4% slide, with e-commerce giant JD.com (JD US) leading the pack ahead of the closely watched 618 online shopping event. Additionally, Chinese tech giants such as Alibaba surges on a Reuters report that China’s central bank has accepted Ant Group’s application to set up a financial holding company. Alibaba shares surge 11% following the report. Among other large- cap Chinese internet stocks, JD.com +9.3%, Pinduoduo +7.5%, Baidu +5.6%. Here are some of the biggest U.S. movers today:

• Adobe (ADBE US) shares fall 4% in premarket trading on Friday after the software company cut its revenue forecast for the full year as it expects currency fluctuations, seasonal shifts in demand and the decision to end sales in Russia and Belarus to weigh on its business.
• Roku (ROKU US) shares climb 3.9% in premarket trading after the company and Walmart said they entered a pact to enable streamers to purchase featured products fulfilled by Walmart directly on Roku.
• US Steel (X US) shares rise 5.2% in US premarket trading after the metal giant’s 2Q22 guidance came in well above consensus estimates, according to Morgan Stanley analysts led by Carlos De Alba.
• Rhythm (RYTM US) shares are 13% lower in US premarket trading after the company’s Imcivree injection failed to win approval for one of the two supplemental indications it sought and the company announced a financing agreement with HealthCare Royalty Partners.
• Revlon (REV US) shares surge 65% in premarket trading after Reliance Industries is considering buying Revlon in the US, ET Now reports, citing people familiar with the matter.

Markets are rounding off a turbulent week buffeted by interest-rate increases which are rapidly draining liquidity, sparking losses in a range of assets. Global stocks face one of their worst weeks since pandemic-induced turmoil of 2020. The question is how far assets have to sink before the tightening cycle is fully priced in. Bucking the global hawkish trend, Japan, retianed super-easy monetary policy and yield curve control, defying pressure to track the global trend toward tighter settings. As a result, the Japanese yen is on course for its biggest fall against the dollar since March 2020 while Japan’s 10-year bond yield retreated below the Bank of Japan’s cap of 0.25%, after earlier hitting 0.265%, the highest since 2016. The Swiss franc surged to its highest level against the yen since 1980.

“Investors have to ask themselves how long the rate-hiking cycle will go and how deep the economic slowdown will be,” said Michael Strobaek, global chief investment officer at Credit Suisse Group AG, which is overweight equities and recently closed its underweight position in bonds. “Peak hawkishness, i.e. the peak in expectations repricing, might be close. Once we are there, it is not only possible but likely that we will see a rebound in both equities and bonds. However, this rebound will be very difficult to time.”

Despite the ongoing slow-motion crash, US stocks attracted another $14.8 billion in the week to June 15, their sixth consecutive week of additions, according to EPFR Global data. In total, $16.6 billion flowed into equities globally in the period, while bonds had the largest redemptions since April 2020 and just over $50 billion exited cash, the data showed.

European equities climbed after a choppy start. Euro Stoxx 600 rallied 1.4%. FTSE MIB outperforms peers, adding 1.7%. European real estate companies are among the best performers, rebounding after several days of losses following concerns higher interest rates will weigh on the sector’s financing abilities. Sweden’s Samhallsbyggnadsbolaget i Norden (SBB) rises as much as 10%, Aroundtown +6.5%, Wallenstam +5.9%, Vonovia +4.9%. Here are some of the biggest European movers:

• Nokian Renkaat shares gain as much as 11% after the Finnish tire manufacturer raised its net sales guidance for 2022 while also keeping its profit guidance intact.
• Italy’s FTSE MIB index rises as much as 2%, leading gains among major European stock markets; Italy-Germany 10-year bond yield spread falls to one- month low. Best performers on the index include Campari +5.4%, Pirelli +5.3%, DiaSorin +5.1%, Recordati +4%
• Ferrari gains as much as 2.4% in the wake of upgrades from Intesa Sanpaolo and Banca Akros after the luxury carmaker unveiled its electrification strategy on Thursday.
• Glencore climbs as much as 3.9% in London after the commodities group said its first-half trading profit will be bigger than it typically reports for an entire year.
• Playtech rises as much as 6.4% after the gambling operator announced the deadline for TTB to make a firm offer has been extended to next month.
• Lisi advances as much as 9.6% after Kepler Cheuvreux upgraded the Boeing supplier to buy, saying its post-Covid recovery isn’t yet priced in.
• Volvo Cars falls as much as 5.4% to the lowest since April after DNB cut its recommendation on the shares to sell due to falling demand, also noting risks related to the Polestar SPAC listing.
• Rexel drops as much as 3.9% as Kepler Cheuvreux analyst William Mackie cuts his recommendation to hold from buy, citing the “rapidly rising probability of a recession.”

Italian bonds led a rally in European debt after European Central Bank President Christine Lagarde pledged that borrowing costs of more indebted nations in the euro-area won’t be allowed to spiral out of control. Italy’s 10-year yield fell 20 basis points and German equivalents dropped six basis points.

Asian stocks tumbled to a two-year low as traders fear the global rush to hike interest rates may result in a steep economic downturn.  The MSCI Asia Pacific Index slumped as much as 1.5% Friday. The measure has fallen every session this week, and is on track to post its largest weekly drop since since the early days of the pandemic in March 2020. Asia stocks have fallen along with global peers as concerns over the potential for more jumbo rate hikes by the Federal Reserve, which raised its benchmark by 75 basis points on Wednesday, triggered a broad market rout. As the global campaign to rein in decades-high inflation continues, investors worry policy tightening may become overdone and throw major economies into recessions.  Japanese shares led Friday’s slump in Asia, with the decision by the Bank of Japan to keep its ultra-loose monetary settings unchanged providing limited fillip as volatility in the yen grows. Stocks in China and Hong Kong bucked the regional selloff, as Beijing’s pro-growth policy lends support to views that Chinese equities can keep outperforming.    Read: Yen Tumbles as BOJ Stands Pat, Makes Rare Reference to FX Market “In the immediate short term (next 2-3 months), we continue to expect Asian stocks to remain volatile,” Chetan Seth, Asia Pacific equity strategist at Nomura Holdings in Singapore, wrote in a note.“However, we do expect some stabilization into late 3Q as equity valuations reset and positive catalysts emerge.” The catalysts Nomura is looking for are the Fed turning less hawkish as US inflation shows signs of softening and China loosening its Covid-Zero stance. Equity benchmarks in Australia and Vietnam were the other big losers in Asia on Friday, with each dropping more than 1.5%.

Japanese stocks trimmed losses as the yen weakened after the Bank of Japan’s decision to maintain its easy-money policy.  The Topix fell 1.7% to 1,835.90 as of market close, while the Nikkei declined 1.8% to 25,963.00. Both gauges had been down more than 2.6% earlier in the day. The yen was down 1.3% to around 134 per dollar. Toyota Motor Corp. contributed the most to the Topix Index decline, decreasing 3.6%. Out of 2,170 shares in the index, 423 rose and 1,689 fell, while 58 were unchanged. The Topix fell 5.5% this week, its worst since April 2020. BOJ Holds Firm to Deepen Outlier Status, Keep Pressure on Yen “If the yen further weakens, this will help the Nikkei 225 to remain firm to some extent,” said Makoto Furukawa, chief portfolio strategist at Mitsubishi UFJ Morgan Stanley. “The Japanese stock market is not so different from the global trend, and monetary policy that comes out from the US and Europe is much more important for Japanese equities.”

Key stock gauges in India completed their worst weekly declines in more than two years as spiraling inflation and rate hikes by central banks dampened the outlook for business recovery.     The S&P BSE Sensex slipped 0.3% to 51,360.42 in Mumbai, bringing its weekly decline to 5.4%, the most since May 2020. The NSE Nifty 50 Index dropped 0.4% on Friday, taking its tumble to 5.6%. Tata Consultancy Services lost 1.7% and was the biggest drag on the Sensex, which had 22 of the 30 member stocks trade lower. Fifteen of 19 sectoral indexes compiled by BSE Ltd. declined, led by a gauge of oil and gas companies.  Among central bank monetary-policy measures this week, the US Federal Reserve made its biggest increase in policy rates since 1994. India’s markets “are largely taking cues from the global markets, in absence of any major domestic event,” Ajit Mishra, vice-president research at Religare Broking Ltd. wrote in a note. Foreign institutional investors have withdrawn $25.7 billion from Indian stocks this year through June 15, and the sell-off is headed for its ninth consecutive month. “We reiterate our negative view on markets and suggest continuing with the ‘sell on rise’ approach,” according to the note.

In FX, Bloomberg dollar spot index rose by around 0.4% as the greenback advanced against all of its Group-of-10 peers apart from the Swiss franc. Treasury yields rose by up to 9 bps, led by the front end. The yen was the worst G-10 performer and slumped as much as 1.8% to 134.63 per dollar after the Bank of Japan kept policy on hold, defying speculation it would follow its global peers and move toward tightening. The BOJ made a rare reference to the currency market, saying it needed to watch its impact on the economy and markets. The euro fell below $1.05 before paring, after touching an almost one-week high yesterday. European bond yields fell and investors rushed back to Italian debt for a third day after ECB President Christine Lagarde pledged that borrowing costs of more indebted nations in the euro-area won’t be allowed to spiral out of control. Sterling eased against a broadly stronger dollar, giving up some of its sharp gains made the previous day, when the Bank of England’s pledge to take a more aggressive stance against inflation boosted the UK currency. Market awaits speeches by BOE policymakers Silvana Tenreyro and Huw Pill later in the day for possible clues into the outlook for inflation and monetary policy.

In rates, Treasuries are cheaper across the curve with losses led by front-end following flurry of block trade in 2-year note futures over the European session. US yields cheaper by up to 5bp across front-end of the curve, flattening 2s10s spread by 2.5bp on the day; 10-year yields around 3.22%, cheaper by 2.5bp and underperforming bunds by 7bp Italian bonds outperform after ECB President Christine Lagarde’s pledge to support borrowing costs of indebted nations in the euro-area.  Bloomberg notes five block trades in 2-year note futures for combined 25k were posted between 3:25am ET and 4:36am ET appeared skewed toward sellers, helping front-end of the cash curve underperform. IG dollar issuance slate empty so far; at least six IG issuers are said to have stood down over the past couple of days, as investors wait for market calm before re-launching deals.

The German cash curve bull steepens, trading richer by ~12bps in 5s. Gilts bull flatten, with 10y yields down 8bps around this week’s lows near 2.4%. US 2s10s narrow 3bps. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing ~14bps to a one-month low near 188bps.

In commodities, crude futures advance. WTI drifts 1% higher to trade near $118.75. Base metals are mixed; LME tin falls 0.9% while LME nickel gains 1.1%. Spot gold falls roughly $7 to trade near $1,850/oz

Bitcoin is currently modestly firmer, but the overall sessions range is in proximity to USD 20k with the current trough at USD 20.19k.

Looking at the day ahead now, and data releases include US industrial production and capacity utilisation for May, along with the final Euro Area CPI reading for May. Central bankers include Fed Chair Powell, the ECB’s Simkus and the BoE’s Tenreyro and Pill. Of note, Jerome Powell gives welcome remarks before the Inaugural Conference on the International Roles of the U.S. Dollar at 845am ET. He is not expected to discuss monetary policy.

Market Snapshot

• S&P 500 futures up 1.0% to 3,703.75
• MXAP down 1.2% to 157.22
• MXAPJ down 0.4% to 521.87
• Nikkei down 1.8% to 25,963.00
• Topix down 1.7% to 1,835.90
• Hang Seng Index up 1.1% to 21,075.00
• Shanghai Composite up 1.0% to 3,316.79
• Sensex little changed at 51,457.72
• Australia S&P/ASX 200 down 1.8% to 6,474.80
• Kospi down 0.4% to 2,440.93
• STOXX Europe 600 up 1.2% to 407.54
• German 10Y yield little changed at 1.66%
• Euro down 0.4% to $1.0502
• Brent Futures up 0.5% to $120.35/bbl
• Brent Futures up 0.5% to $120.39/bbl
• Gold spot down 0.4% to $1,849.84
• U.S. Dollar Index up 0.75% to 104.41

Top Overnight News from Bloomberg

• A small tweak to the BOJ’s bond purchase plan this week blew up an arbitrage strategy popular with overseas investors known as the basis trade. It exacerbated a supply shortage of government bonds that has ramped up pressure on domestic financial institutions, leading them to turn to the BOJ for help to relieve the strain
• President Joe Biden said a US recession isn’t inevitable and acknowledged that aides warned him about the inflationary risk of his flagship relief bill, while insisting that he won’t soften his stance on Russia even if it costs him re-election
• The WTO clinched a historic package of accords including on vaccine production and fishery subsidies, ending the trade body’s seven-year negotiating drought
• China’s local governments are caught in an unexpectedly severe budget squeeze, creating a dilemma for officials over whether to boost debt or tolerate weaker economic growth

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks mostly suffered firm losses amid the global risk-aversion after the recent flurry of central bank rate increases and with weak data in the US stoking recession fears. ASX 200 was led lower by underperformance in tech and the commodity-related sectors, although gold miners have weathered the storm after the recent upside in the precious metal. Nikkei 225 was pressured and failed to benefit from the BoJ decision to keep policy settings unchanged. Hang Seng and Shanghai Comp. pared opening losses amid virus-related optimism after Beijing reported zero cases outside of quarantine and with US-China defence meetings showing signs of cooling tensions.

Top Asian News

• China in Talks With Qatar for Gas Field Stakes, Reuters Says
• Kuroda Deepens BOJ’s Outlier Status, Keeping Pressure on Yen
• ByteDance Disbands Shanghai Games Studio in Expansion Setback
• BOJ Offers to Buy Cheapest-to-Deliver JGBs for Extended Time
• Gold Heads for Weekly Drop as Traders Weigh Rate Hikes, Growth

European bourses are now firmer across the board, Euro Stoxx 50 +1.2%, as performance picks up following a mixed open amid comparably quiet newsflow. Stateside, US futures are performing similarly, ES +1.0%, though the complex is cognisant of commentary from Chair Powell later. Note, today is Quad Witching; recently, GS’ Rubner highlighted “literally massive” USD 3.2tln notional open interest of US listed options which expire on June 17th, writing that the passing of this may allow the market to move more freely.

Top European News

• UK is to set out new data rules which diverge from the EU on Friday as it seeks to ease pressure on businesses, while it believes the new rules will maintain free flow of data from Europe and does not expect the EU to object to its data reforms, according to Reuters.
• German Finance Minister Lindner told ECB President Lagarde that the ECB's talk regarding fragmentation threatens to dent confidence, according to FT.
• Hungarian Chief of Staff Gulyas says the idea of a global minimum tax is not accepted by the Hungarian government.

Central Banks

• BoJ kept policy settings unchanged as expected with rates at -0.10% and QQE with yield curve control maintained to target 10yr JGB yields at around 0% with the decision on YCC made via an 8-1 vote as Kataoka dissented. BoJ repeated its April guidance that it will offer to buy 10yr JGBs at 0.25% every business day unless it is highly likely that no bids will be submitted and it also reiterated guidance on policy bias that it will take additional easing steps without hesitation as needed with an eye on the pandemic's impact on the economy. Furthermore, the BoJ said the economy is picking up as a trend though some weakness has been seen and they must carefully watch the impact of FX moves on Japan's economy and prices.
• BoJ's Kuroda says upward pressure is being seen in bond yields, and it is important for FX to move stable reflecting fundamentals, no change to the concept that YCC strongly supports the economic recovery; does not see a limit in YCC. Recent rapid JPY weakness is a weakness for the economy.. Does not see a need for further policy easing now. Not thinking about raising the cap on the BoJ's long-term yield target above 0.25%, as it could result in higher yields and weaken the effect of monetary easing.
• BoJ purchases JPY 70.1bln in ETFs.
• BoJ offers to purchase the cheapest-to-deliver issuance for an extended time as of June 20th.
• ECB's Knot says that several 50bps rate increases are possible in the event that inflation worsens, via BNR; does not see hikes reaching 200bp before early-2023.
• BoE's Pill says markets will have to make their own judgement on whether the BoE is considering a 50bp hike, via Bloomberg TV; stresses the conditionality around the inclusion of "forcefully" in the statement, in the context of "if necessary". Trying to signal that we may need to act further, looking at the persistence of inflationary pressure. Price pressures becoming embedded would be a trigger for more aggressive BoE action.

FX

• Yen recoils after racking up big risk averse gains as BoJ sticks rigidly to ultra accommodative stance with additional measures to maintain YCC, USD/JPY hovers just under 135.00 vs 131.49 low on Thursday.
• Buck benefits after extending post-FOMC retreat in wake of weak US data and pronounced bounce in Treasuries, DXY extends recovery to 104.540 from 103.410 low.
• Franc maintains SNB hike momentum to rally further across the board, USD/CHF around 0.9650 compared to par-plus peaks earlier in the week.
• Euro underpinned by decent option expiry interest and hawkish ECB commentary, but Aussie undermined as Government gives authorities power to stop coal exports; EUR/USD on the 1.0500 handle and above 1+ bln rolling off between 1.0500-1.0495, AUD/USD capped just under 0.7000.
• Kiwi gleans some traction from a rise in NZ manufacturing PMI and RBNZ rate hike calls; NZD/USD straddles 0.6350, AUD/NZD cross sub-1.1050.
• Lira lags following latest CBRT survey showing higher inflation forecasts and USD/TRY rate, latter at 18.8874 by year end vs 17.5682 previously and circa 17.3200 at present.

Fixed Income

• Debt extends intraday ranges as volatility remains high on Friday.
• Bunds veer from 142.56 to 144.99, Gilts between 111.83 and 112.91 and the 10 year T-note within a 116-19/115.28+ range.
• Hawkish comments from ECB's Knot largely discounted as EZ periphery bonds outperform on anti-fragmentation dynamic, but BoE's Pill rattles Sonia strip.

Commodities

• WTI and Brent are currently set to end the week with gains in excess of USD 1.00/bbl overall, though the benchmarks reside towards the mid-point of the over USD 11.00/bbl range for the week.
• Newsflow has been comparably limited but primarily focused on familiar themes.
• US Energy Secretary called an emergency meeting with oil refiners next week to discuss steps companies can take to increase refining capacity and output, according to Reuters citing a DoE spokesperson.
• White House is reportedly considering fuel export limits as pump prices surge and options such as waiving anti-smog rules are also being discussed, according to Bloomberg.
• Qatar Energy set August Al-Shaheen crude term price at a premium of USD 9.24/bbl above Dubai quotes which is the highest in 3 months, according to traders cited by Reuters.
• Brazil's Petrobras is to announce a fuel price increase today, according to Reuters citing local press.
• China's national oil majors are reportedly in advanced discussions with Qatar around investment in North Field East LNG and for long-term contractual purchases of LNG, according to Reuters sources.
• Australia has invoked measures to give authorities the power to prevent coal exports if needed in an attempt to avert the risk of blackouts, according to the FT.
• Spot gold is rangebound in European hours having successfully surpassed the cluster of DMAs between USD 1843-1848/oz during Thursday’s blockbuster session.

US Event Calendar

• 09:15: May Capacity Utilization, est. 79.2%, prior 79.0%
• 09:15: May Manufacturing (SIC) Production, est. 0.3%, prior 0.8%
• 09:15: May Industrial Production MoM, est. 0.4%, prior 1.1%
• 10:00: May Leading Index, est. -0.4%, prior -0.3%

DB's Jim Reid concludes the overnight wrap

The Bank of Japan (BOJ) continues to buck the global trend of monetary tightening, as this morning the central bank decided to maintain its purchases of government bonds and equities. The decision was widely anticipated but the BOJ indicated that it must “pay due attention” to foreign exchange markets, following the yen’s rapid weakening to its lowest level in 24 years earlier this week. The Yen has weakened around -1.3% to 134/USD as we type. Meanwhile, Japan’s benchmark 10yr bond yields hit a six-year high of 0.268% at one point, moving beyond the BOJ’s 0.25% cap ahead of the policy decision. However, yields retreated to the 0.25% after its daily unlimited fixed-rate purchasing operations.

This just continues what has been a very expensive week for the BoJ in terms of JGB QE after having had to buy $9.6tn yen worth. As one of our Asian FX strategists Tim Baker highlighted this morning, that's US$72bn. Tim highlighted that this is almost what the Fed and ECB were doing in an entire month last year, for economies 5-3x larger than Japan's. Japan's QE this week has been running more than 20x the pace of the Fed's QE in 2021, adjusted for the size of the economy. Can they continue to hold this line? You wouldn't think they could but it depends on global yields and central banks, the Yen and Japanese inflation. See my CoTD (link here) on this earlier this week. Watch out for the BoJ press conference after this goes to print this morning for any hints as to how determined they are to continue their policy settings.

The BoJ caps an array of central bank meetings over recent days, and markets have experienced another rout over the last 24 hours as multiple headlines added to investors fears about an imminent recession. It marked a big shift from just a day earlier, when the initial focus after Chair Powell’s press conference had been on his comment (when referring to +75bps) that he didn’t “expect moves of this size to be common”. But futures swiftly turned negative as growing doubts were cast on how firm that commitment really was, not least since we’ve all seen just how swiftly the Fed have shifted posture over the last week in response to worse-than-expected data. On top of that, the latest decisions by the SNB and the BoE (more on which below) only added to the hawkish drumbeat that much higher rates are in the offing, whilst weak US housing data served to aggravate those fears about an imminent growth slowdown.

With all said and done, you were hard-pressed to find a major asset that didn’t lose ground yesterday. The major equity indices slumped heavily on both sides of the Atlantic, with the S&P 500 (-3.24%) losing more than -3% for the second time this week, as it also hit its lowest level since late 2020. Indeed, just 14 companies in the entire index moved higher on the day. Elsewhere, the NASDAQ saw an even larger decline, falling -4.08% to have now lost more than a third of its value since its all-time closing peak back in November. It’s lost -9.96% since Friday’s CPI and -6.12% this week. And it was a similar story in Europe too, as the STOXX 600 (-2.47%) fell to a one-year low of its own.

Whilst equities were selling off, sovereign bonds continued to trade with elevated volatility, a function of continued central bank surprises, murky forward guidance, and heightened uncertainty around the near-to-medium-term outlook as economic data gets worse. In short it was a wild, wild ride yesterday. The sell-off initially accelerated after the SNB became the latest central bank to surprise. They hiked rates for the first time in 15 years, executing a 50bps move, combined with a change in FX policy, that our strategist Robin Winkler argues marks a once-in-a-decade policy regime shift (link here). In turn, that led to a massive reaction in the Swiss Franc, which strengthened by +2.91% against the US Dollar on the day in its biggest daily appreciation since 2015.

Then we had the Bank of England, where they hiked rates by +25bps as widely expected, with 3 of the 9 committee members continuing to vote for a larger 50bp increment. Notably, their statement sent a stronger signal on inflation, saying that the Committee would be “particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.” In turn, that saw investors reappraise the path of future rate hikes in a more hawkish direction, and are now expecting more than +150bps worth of hikes over the next 3 meetings, so equivalent to at least a 50bp move at each one. Our UK economist writes in his reaction note (link here) that he expects the BoE to hike by 50bps in August and September now, which for reference would be the largest single hikes since they gained operational independence in 1997.

Against that backdrop, sovereign bond yields whipped around yet again. European yields were much higher on tighter policy and then Treasury yields moved higher in sympathy during European trading but gradually fell after another batch of underwhelming housing data lent new fears that growth was on unstable footing. Yields on 10yr Treasuries fell -8.9bps to 3.20%, but at their intraday peak they’d been up +20.7bps, so some sizeable moves in both directions. The move in nominal yields traced real yields, which were as high as +21.7bps intraday at the 10yr point, before finishing the day just +1.1bps higher. 10yr breakevens fell -10.4bps on the prospect of slower growth, which drove nominal yields lower on the day. In Asia, this morning, 10yr yields are witnessing a reversal with yields up +4.33bps to 3.24% while 2yr yields (+6bps) also moved higher to 3.15% as I type. Our US rates strategists have updated their views in the face of some large forces in both directions with the 10yr now expected to hit 3.85%. They also updated their year-end 2yr call to 3.85%, so a flat curve. See the full update here.

Meanwhile in Europe, 10yr bunds gained +7.2bps (+28.3bps at the peak) in a very choppy session. However, there was a considerable tightening in peripheral spreads for a second day running, with the gap between Italian and German 10yr yields down -13.7bps to 202bps, which followed comments from Italian central bank governor Visco that the spread should be under 150bps based on economic fundamentals. The heightened uncertainty and wild swings in yields also translated to heightened currency volatility, where the Euro traded in its widest intraday range since March 2020, which was as low as -0.60% and as strong as +1.50% against the dollar before ultimately appreciating +1.01%.

As mentioned, sentiment was further dampened by weak US housing data yesterday, with both housing starts and building permits in May falling by even more than expected. Housing starts were down to an annualised rate of 1.549m (vs. 1.693m expected), their lowest level in over a year, whilst building permits were down to an annualised rate of 1.695m (vs. 1.778m expected). We also got a sign of how tighter monetary policy was affecting the market, with Freddie Mac’s data showing that a 30-year fixed mortgage rate for the week ending yesterday rose to 5.78% (vs. 5.23% in the previous week). That’s the highest level since November 2008, as well as the largest weekly increase in the rate since 1987. And it just shows how the much more rapid pace of Fed hikes now expected by investors over the last week is already filtering its way through to the real economy.

Those moves lower in the US and European equities have been echoed in Asian markets this morning. The Nikkei (-1.59%) is the largest underperformer with the Kospi (-1.08%) also trading sharply lower. Elsewhere, the Hang Seng (+0.78%) is recovering from earlier losses while mainland Chinese stocks also turning around with the Shanghai Composite (+0.15%) and CSI (+0.26%) both trading up.

Outside of Asia, stock futures in the DMs are bouncing with contracts on the S&P 500 (+0.52%), NASDAQ 100 (+0.67%) and DAX (+0.31%) all heading higher.

Looking forward, Russian President Putin will be giving a speech today at the St Petersburg Economic Forum, which his press secretary Peskov has tried to build anticipation for, and could offer a flavour of how combative the Kremlin plans to be in its international approach. That came as German Chancellor Scholz, French President Macron and Italian PM Draghi endorsed Ukraine’s EU candidacy in a visit to the country yesterday. Otherwise, European natural gas futures pared back their significant increases in the morning to close -1.94% lower, marking a change in direction after their massive increases over the previous 2 sessions.

To the day ahead now, and data releases include US industrial production and capacity utilisation for May, along with the final Euro Area CPI reading for May. Central bankers include Fed Chair Powell, the ECB’s Simkus and the BoE’s Tenreyro and Pill.