Spread & Containment
Futures Slide As Soaring Oil Nears $85
Futures Slide As Soaring Oil Nears $85
While cash bonds may be closed today for Columbus Day, which may or may not be a holiday – it’s difficult to know anymore with SJW snowflakes opinions changing by the day – US equity futures are open…
While cash bonds may be closed today for Columbus Day, which may or may not be a holiday - it's difficult to know anymore with SJW snowflakes opinions changing by the day - US equity futures are open and they are sliding as soaring oil prices add to worries over growing stagflation (Goldman and Morgan Stanley both slashed their GDP estimates over the weekend even as they both see rising inflation), fueling concern that a spreading energy crisis could hamper economic recovery (as a reminder, yesterday we had one, two, three posts on stagflation, showing just how freaked out Wall Street suddenly is).
Rising raw material costs, labor shortages and other supply chain bottlenecks have raised concerns of elevated prices hammering corporate profits while rising rates are suggesting that a tidal wave of inflation is coming. And while cash bonds may be closed, one can easily extrapolate where they would be trading based on TSY futures which are currently trading at a 1.65% equivalent.
But while cash bonds may be closed, the big mover on Monday was oil, with WTI surging nearly 3% and touched a seven-year high as an energy crisis gripping the major economies showed no sign of easing. Meanwhile, Brent rose just shy of $85, rising to the highest since late 2018 when the Fed abruptly reversed tightening course. Over in China, coal futures reached a record as flooding shuttered mines.
The surge in oil lifted shares of Chevron Corp, Exxon Mobil Corp and APA Corp between 1.2% and 3% in premarket trading. At the same time, rising rates hit FAAMGs, with Apple, Microsoft and Amazon all falling between 0.6% and 0.8%. The surge above 1.6% for 10-year Treasury yields is intensifying debate among strategists over how to position investor portfolios amid anxiety over whether transitory inflation is transitioning into stagflation. Lucid Group rose 2.2% and Occidental Petroleum climbed 3.1%, leading gains in the U.S. premarket session. Here are some of the biggest movers and stocks to watch today:
- U.S.-listed Chinese tech stocks soar 2% to 5% in premarket trading, extending their recent rebound. Rally supported by Beijing slapping a smaller-than-expected fine on food delivery giant Meituan and last week’s news that U.S. President Joe Biden was planning to meet with Xi Jinping before the end of the year. Alibaba (BABA US +5%) leads gains, while JD.com (JD US) and Baidu (BIDU US) rise 2% apiece
- Watch U.S. energy stocks as oil surges past $80 a barrel as the global power crunch rattled a market in which OPEC+ has only been restoring output at a modest pace. Exxon Mobil (XOM US +1.1%), Chevron (CVX US +1%) and Occidental (OXY US +3.1%) among top risers in premarket trading.
- Robinhood (HOOD US) dropped 2%; the company was under pressure in U.S. premarket trading as a looming share sale by early investors and a toughening regulatory environment for cryptocurrencies are adding to the headwinds in the stock market for the darling of the U.S. retail trading mania.
- ChemoCentryx (CCXI US) up 2% in U.S. premarket trading, adding to Friday’s massive gains after the drug developer won U.S. approval for Tavneos as a treatment for a rare autoimmune disorder
- Cloudflare (NET US) slides 1.8% in U.S. premarket trading after Piper Sandler downgraded stock to neutral
- Akerna Corp. (KERN US) gained in Friday postmarket trading after Matthew Ryan Kane, a board member, bought $346,032 of shares, according to a filing with the U.S. Securities & Exchange Commission.
“We see rising risks to global growth and evidence of more persistent inflation, which makes us more cautious on the outlook for global markets overall,” Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, wrote in a note to clients.
In Europe, the Stoxx 600 Index fell 0.2%, led by declines in travel and property firms. Miners and energy stocks were the two strongest-performing sectors in Europe on Monday on rising prices for iron ore and oil. The Stoxx 600 Basic Resources Index climbed as much as 2.4%, while the Energy Index gains as much as 1.5% to the highest since Feb. 24, 2020. European banking stocks also advanced on Monday, following four weeks of gains, and traded about 1.3% below pre-pandemic high. The sector has gained 36% ytd, is the best performer among 20 European sectors in 2021. Up 0.7% today, outperforming a slightly weaker broader Stoxx 600 Index and as investors tilt toward cyclical sectors.
Earlier in the session, Asian stocks jumped, buoyed by Hong Kong-listed technology shares including Meituan, which was consigned a lower-than-expected regulatory fine. The MSCI Asia Pacific Index climbed as much as 0.9%, driven by the consumer-discretionary and communication sectors. Alibaba and Meituan were the top contributors to the gauge, each surging about 8% in the first trading in Hong Kong after the food-delivery giant was handed a $533 million fine for violating anti-monopolistic practices. The result of the investigation into Meituan is “a relief and likely to provide closure to the share price overhang,” Citigroup analysts wrote in a note Friday, when the penalty was announced. Hong Kong’s stock gauge was among the top performing in the region. Japan’s benchmarks also climbed as the yen weakened to an almost three-year low against the dollar and new Prime Minister Fumio Kishida said he’s not considering changes to the country’s capital-gains tax at present. Improved sentiment in China is providing much-needed support to Asian equities, which declined for four straight weeks amid uncertainty circling global markets. Power shortages in China and India, supply-chain woes, inflation risks and rising bond yields are all on the radar as the earnings season kicks off. “We are still in a market that is very, very concerned about the growth outlook,” said Kyle Rodda, market analyst at IG Markets. These sort of rallies that appear almost inexplicable are “symptomatic of the market still trying to piece together all pieces of the puzzle,” he added.
Australia The S&P/ASX 200 index fell 0.3% to close at 7,299.80, with most subgauges taking a hit. Miners advanced, posting gains for a third session, offsetting losses in healthcare and consumer discretionary stocks. Star Entertainment was the worst performer after a report saying the company had enabled suspected money laundering, organized crime and fraud at its Australian casinos for years. Fortescue surged after the company said it plans to build a green energy factory to rival China. In New Zealand, the S&P/NZX 50 index dropped 0.5% to 13,019.37.
In FX, the pound crept higher to touch an almost 2-week high versus the dollar and the Gilt curve shifted higher, led by the front-end, after the Bank of England’s Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action. Australia’s dollar led gains among G-10 currencies on the back of increases in oil, natural gas and iron ore prices and as Sydney emerges from a 15- week lockdown on Monday. Iron ore futures extended gains as improved rebar margins at Chinese steel mills buoyed demand prospects. The yen dropped against the dollar, with analysts forecasting more weakness ahead as the nation’s yield differentials widen.
As noted above, treasury futures slumped in U.S. trading Monday, with the cash market closed for Columbus Day; they implied a yield of 1.65% on the 10Y. 10-year note futures price is down 8+/32, a price change equivalent to a yield increase of about 3bp. Benchmark 10-year yield ended Friday at 1.615%, its highest closing level since June, as investors focused on the inflationary aspects in mixed September employment data. China's10-year government bond futures declined to a three-month low while the yuan advanced as the central bank’s latest liquidity draining weakened expectations of fresh monetary policy easing. Futures contracts on 10-year notes fall 0.4% to 99.14, the lowest level since July 12. It dropped 0.4% on Friday. 10-year sovereign bond yields rose 5bps, the biggest gains in two months, to 2.96%.
Looking ahead, upcoming reports on third-quarter company profits which start this week are seen as the next potential pressure point in a market already under siege from slowing global growth, sticky inflation and tighter monetary policies. Global earnings revisions are sliding - an omen for U.S. stocks that have taken their cue from rising earnings estimates all year.
“The coming earnings’ season in the U.S. will be heavily scrutinized for pricing power, margins and clues on the shortage situation, as well as wage pressures,” according to Geraldine Sundstrom, a portfolio manager at Pacific Investment Management Co. in London. “Already a number of large multinationals have issued warnings about production cuts and downgraded their Q3 outlook due to supply chain and labor shortages.”
- S&P 500 futures down 0.3% to 4,371.25
- STOXX Europe 600 down 0.2% to 456.41
- German 10Y yield up 1.5 bps to -0.135%
- Euro little changed at $1.1568
- MXAP up 0.8% to 196.45
- MXAPJ up 0.7% to 642.13
- Nikkei up 1.6% to 28,498.20
- Topix up 1.8% to 1,996.58
- Hang Seng Index up 2.0% to 25,325.09
- Shanghai Composite little changed at 3,591.71
- Sensex up 0.5% to 60,358.30
- Australia S&P/ASX 200 down 0.3% to 7,299.79
- Kospi down 0.1% to 2,956.30
- Brent Futures up 1.9% to $83.98/bbl
- Gold spot down 0.1% to $1,755.02
- U.S. Dollar Index up 0.11% to 94.17
Top Overnight News from Bloomberg
- The U.S. labor market will see “ups and downs” as the pandemic lingers, but it’s premature to judge that the recovery is in peril, said San Francisco Federal Reserve President Mary Daly
- Treasury Secretary Janet Yellen said she expects Congress to take action soon to bring the U.S. into line with a global minimum tax agreed on last week by 136 countries
- Chinese builders are looking to payment extensions or debt exchanges to avoid default on imminent bond obligations as liquidity conditions tighten for the real estate sector
- Austria will get a new chancellor, though the career diplomat stepping into Sebastian Kurz’s shoes is a close ally of the departing conservative leader who resigned over a corruption scandal
- Just because pandemic inflation is transitory doesn’t mean it’s going away anytime soon. That’s the awkward conclusion that policy makers and investors are arriving at, as prices accelerate all over the world. European natural gas has climbed 25% in two weeks, and oil topped $80 for the first time since 2014. Fertilizers hit a record on Friday, which means food prices -- already at a 10- year peak -- will likely rise even higher
A more detailed summary of overnight news from Newsquawk
Asia-Pac stocks traded mostly positive but ended the day somewhat mixed after having shrugged off the early weakness stemming from last Friday’s lacklustre performance stateside and disappointing NFP jobs data. Note, markets in Taiwan and South Korea were closed. ASX 200 (-0.3%) was the laggard with underperformance in tech, consumer stocks and defensives overshadowing the gains in commodities and with Star Entertainment the worst hit with losses of more than 20% after media outlets alleged that it enabled suspected money laundering, organised crime, fraud and foreign interference which the Co. said were misleading reports. However, downside for the index was limited as New South Wales businesses reopened from the lockdown that lasted for over three months. Nikkei 225 (+1.6%) reversed opening losses as exporters cheered a weaker currency and with the government mulling over JPY 100bln financial support for chip factory construction. Hang Seng (+2.0%) and Shanghai Comp. (Unch) were both positive following talks between China's Vice Premier Liu He and USTR Tai on Saturday in which China was said to be negotiating for a cancellation of tariffs and sanctions. The advances in Hong Kong were led by tech stocks including Meituan despite the Co. being fined CNY 3.4bln by China’s market regulator for monopolistic behaviour, as the amount was seen to be a slap on the wrist, while the gains in the mainland were only mild as participants also reflected on the substantial liquidity drains by the PBoC totalling a net CNY 510bln since Saturday. Finally, 10yr JGBs were pressured amid the gains in Japanese stocks and lack of BoJ purchases in the market, while price action was also not helped by the continued weakness in T-note futures amid the semi-holiday conditions in US for Columbus Day in which the NYSE and the Nasdaq will open but bonds trading will remain shut.
Top Asian News
- Australian IPOs Heading for Biggest Haul Since 2014: ECM Watch
- Syngenta’s Shanghai IPO Proposal Suspended For Earnings Update
- China Junk-Rated Dollar Bond Rout Deepens Amid Builder Worries
- China’s 10-Year Bond Yield Jumps By The Most Since August
Bourses in Europe are mostly but modestly lower (Euro Stoxx 50 -0.1%, Stoxx 600 -0.2%) whilst the FTSE 100 (+0.2%) bucks the trend, owing to firm performances in its heavyweight sectors. US equity futures meanwhile trade within tight ranges with broad-based losses of some 0.3-0.4%. Fresh fundamental catalysts have remained light, although inflation and stagflation remain on traders' minds heading into this week's US and Chinese inflation metrics and against the backdrop of rising energy prices. Thus, the sector configuration sees Basic Resources, Oil & Gas and Banks at the top of the bunch, whilst the downside sees Travel & Leisure, Real Estate and Retail, with no overarching theme to be derived. Basic Resources is the marked outperformer as base metals are bolstered in what seems to be a function of the coal shortage in Asia, with iron ore contracts also surging overnight and copper following suit, in turn boosting the likes of Rio Tino (+3.2%), Antofagasta (+3.1%), Glencore (+3.1%), BHP (+2.8%). The top of the Stoxx 600 is dominated by metal names. In terms of individual movers, Carrefour (-2.2%) is softer after sources stated that exploratory talks over a Carrefour-Auchan tie-up ended due to the complexity of the deal. Evotec (+0.7%) holds onto gains as it seeks a Nasdaq listing. Roche (+0.6%) and Morphosys (+3.7%) underpin the health sector after the Cos received Breakthrough Therapy Designation from the US FDA for gantenerumab for the treatment of Alzheimer's disease.
Top European News
- BOE Officials Double Down on Signals of Imminent Rate Hike
- Brexit Clash on Northern Ireland Means Headaches for Johnson
- Asos CEO Beighton Steps Down as Sales Growth Slows
- Adler Shares Flounder After Asset Disposal Plan, Past M&A Report
In FX, the Aussie has secured a considerably firmer grip of the 0.7300 handle vs its US rival as COVID-19 restrictions are relaxed in NSW and base metals tread water after a mostly positive APAC equity session overnight. However, Aud/Usd is also firmer on the back of ongoing Greenback weakness and long liquidation from what some are calling ‘stretched’ levels of IMM positioning going in to Friday’s NFP release, while the Aud/Nzd cross has rebounded further above 1.0550 in wake of a rise in NZ virus cases that has prompted the PM to keep Auckland on level 3 alert for another week pending review. Hence, Nzd/Usd is capped around 0.6950 and continues to lag on the unwinding of Kiwi longs built up in advance of last week’s universally anticipated 25 bp RBNZ hike. Back to the Buck, but looking at the index in relation to where it was before and after the latest BLS report, 94.000 is providing some underlying support on Columbus Day that is not a full US market holiday, but will see cash Treasuries remain closed. Moreover, the DXY is gleaning momentum within a narrow 94.028-214 range via marked Yen underperformance amidst the latest rout in bonds and more pronounced technical impulses as Usd/Jpy extends beyond 112.50 and sets yet another 2021 peak around 112.95.
- GBP - Sterling is taking up post-payrolls Dollar slack as well, but firmer in its own right too as comments from BoE Governor Bailey and MPC member Saunders add to the growing expectation that rate hikes may be delivered sooner than had been expected before the former revealed that policy-setters were evenly divided at 4-4 in August on the subject of minimum criteria being achieved for tightening. Cable is hovering under 1.3650 and Eur/Gbp is sub-0.8500 in response, with the latter not really fazed by the UK-EU rift on NI protocol.
- CAD/NOK - The Loonie remains firm against its US peer after the stellar Canadian jobs data and Usd/Cad continues to probe support/bids at 1.2450 against the backdrop of strength in oil prices that is also keeping the Norwegian Krona afloat and Eur/Nok eyeing deeper sub-10.0000 lows irrespective of marginally mixed vs consensus inflation metrics.
- CHF/EUR/SEK - All rather rangy, aimless and looking for inspiration or clearer direction as the Franc straddles 0.9275 vs the Greenback, but remains firmer against the Euro above 1.0750 following only a faint rise in Swiss domestic bank sight deposits. Meanwhile, the Euro is pivoting 1.1575 vs the Buck and looks hemmed in by decent option expiry interest just outside the range given.1 bn rolling off between 1.1540-50 and 1.6 bn from 1.1590-1.1600 at the NY cut. Elsewhere, the Swedish Crown is slipping on risk-off grounds towards 10.1250 having tested resistance circa 10.1000.
In commodities, WTI and Brent front-month futures continue the upward trajectory seen during the APAC session, with the complex underpinned heading into the winter period and against the backdrop of higher gas prices. The gains have been more pronounced in the US counterpart vs the global benchmark with no clear catalysts behind the outperformance, although this may be a continuation of the unwind seen after reports suggested a release of the US SPR (Strategic Petroleum Reserve) is unlikely. For context, reports of such a release last week took the WTI-Brent arb to almost USD 4.2/bbl vs USD 2.7/bbl at the time of writing. Furthermore, there have also been reports of lower US production under President Biden's "build back better" initiative, which puts more weight on renewable energy, with some energy analysts also suggesting that OPEC+ sees less of a threat from a "shale boom" as a result. Back to price action, WTI has been in the limelight after topping the USD 80/bbl overnight and extending gains to levels north of USD 81.50/bbl (vs low 79.55/bbl), whilst the Brent Dec contract topped USD 84.00/bbl (vs low USD 82.50/bbl). In terms of other news flow, sources suggested the fire at Lebanon's Zahrani fuel tank has been put out after the energy minister suggested the fire was contained – the cause of the fire is not yet known. Gas prices also remain elevated with UK nat gas futures relatively flat on the day but still north of GBP 2/Thm vs GBP 1/Thm mid-August and vs GBP 4/Thm last week, whilst the Qatari Energy Minister said he is unhappy about gas prices being high amid negative follow-through to customers. Over to metals, spot gold and silver are somewhat lacklustre, but with magnitudes of price action contained, with the former meandering just north of USD 1,750/oz and the latter above USD 22.50/oz heading into this week's key risk events. Overnight, iron ore futures were bolstered some 10% in Dalian and Singapore Exchanges amid fears of coking coal supply shortages - coking coal is an essential input to produce iron and steel. Traders should also be cognizant of the Chinese metrics released this week as another elevated PPI metric could see the release of more state reserves, as had been the case over the recent months. Using the Caixin PMIs as a proxy for the release, the PMI suggested sharp increases in both input costs and output prices – largely owed to supply chain delays, with the "rate of inflation was the quickest seen for four months, amid reports of greater energy and raw material costs. This, in turn, led to a solid increase in prices charged". The measure for output prices its highest in three months, whilst "the pressure of rising costs was partly transmitted downstream to consumers, as the demand was not weak."
US Event Calendar
- Nothing major scheduled
DB's Jim Reid concludes the overnight wrap
A reminder that it’s Columbus Day today where US bond markets are closed. Equity markets are open but expect it to be quiet. Ahead of this, this morning we have published our latest monthly survey results covering over 600 global market participants. See here for more. For the first time since June, the biggest perceived risk to markets is now higher yields and inflation, whilst direct Covid-19 risks are out of the top 3 for the first time. A further equity correction before YE remains the consensus now. 71% expect at least another 5% off equities at some point before YE (68% correctly suggested that last month). A very overwhelming 84% thought the next 25bps move in 10yr US Treasury yields would be up. Of some additional interest is that the definition of stagflation is varied but that the majority think it’s a high or very high risk for the next 12 months. The extreme of this view surprised me. While I’ve long thought the market has underestimated the inflation risks I would still say there is enough of a growth cushion for 2022. However it’s clear the risks have built. Anyway, lots more in the survey. Thanks for filling it in and see the results for details.
The week ahead will centre around the US CPI release on Wednesday but it might be a touch backward looking given that energy has spiked more recently and that used car prices are again on the march after a late summer fall that will likely be captured in this week’s release. Elsewhere, we’ve got a potentially more challenging US earnings season than that seen over the last year will commence with the big financials from Wednesday. In addition minutes from the last FOMC will give clues to the latest taper thinking on Wednesday as well. The IMF/World Bank meetings will generate plenty of headlines this week with their latest world outlook update tomorrow the highlight. The best of the rest data wise consists of JOLTS (Tuesday),which we think is a better labour market indicator than payrolls albeit a month behind, US PPI (Thursday) which will give a scale of building pipeline price pressures, US retail sales and UoM consumer sentiment (Friday), and China’s CPI and PPI (Thursday).
With all that to look forward to, markets have started the week on a strong note, with equity indices including the Hang Seng (+2.02%), Nikkei (+1.57%), CSI (+0.32%) and Shanghai Composite (+0.32%) all moving higher, whilst the Kospi (-0.11%) has seen a slight decline. Japanese stocks have been buoyed by comments from new PM Kishida over the weekend that he isn’t currently considering changes to the country’s capital-gains tax. That comes with just 20 days remaining until the country’s general election. Separately in China, the country’s energy woes continue with 60 of 682 coal mines closed in the Shanxi province due to heavy floods, with Chinese coal futures up +8.00% this morning. And the property market issues are continuing to persist, with a new Chinese developer Modern Land seeking a 3 month extension to a $250 million dollar bond due to mature on October 25. By the end of last week, a Bloomberg index of Chinese junk-rated dollar bonds had seen yields climb to a decade-high above 17%, so clearly one to still look out for. Unlike in Asia, equity futures are pointing lower in the US and Europe this morning, with those on the S&P 500 down -0.21%.
In terms of the main highlight it’s clearly US CPI mid-week. Given my views that inflation risks have been massively understated this year I’ve been saying for months that these reports have potentially been the most important monthly data we have seen for years. But since they mostly come and go with a “meh… mostly transitory” and a relative whimper, I’ve clearly been wrong to over hype them. So ignore me when I say that this month’s report might not be that interesting. With energy soaring over the last month and signs of inflation pressures continuing to build elsewhere then I’m not sure we can read too much into this month’s figures. Take used cars. Given the 2-3 month lag between actual prices and their CPI impact, this month will more than likely reflect a softening of prices in the summer. However September saw prices rise +5.4% so this will probably show up towards the end of the year along with the recent rise in energy costs. Our economists expect a +0.41% headline (vs. +0.27% previously) and +0.27% core (vs. +0.10%) mom rate. This is a bit above consensus and would take the yoy rate to 5.4% (up a tenth) and 4.1% (unch) respectively.
Speaking of inflationary pressures, this morning has seen energy prices take a further leg higher, with WTI oil (+1.90%) moving back above $80/bbl for the first time since late 2014, whilst Brent crude (+1.42%) has moved above $83/bbl. European natural gas prices will continue to be an important one to follow amidst the astonishing price surge there, but the declines at the end of last week mean prices finished the week down by more than -45% since their intraday peak on Wednesday, before the comments from Russian President Putin that brought down prices.
The rest of the day-by-day calendar is at the end as usual but although it’s a second tier release normally, tomorrow’s JOLTS will be interesting in as far as it might confirm that the main labour problems in August were a lack of supply rather than demand. The report’s full value is reduced by it being a number of weeks out of date but there’s a reasonable argument for saying that this is a better gauge of the state of the labour market than the payroll release. We go through Friday’s mixed report at the end when looking back at last week.
Outside of data, it’s that time again as earnings season gets going, with a number of US financials kicking things off from mid-week. In terms of the highlights, we’ll hear from JPMorgan Chase, BlackRock and Delta Air Lines on Wednesday. Then on Thursday, we’ll get UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp and Walgreens Boots Alliance. Finally on Friday, we’ll hear from Charles Schwab and Goldman Sachs. For more info on the upcoming earnings season, you can read DB’s equity strategists Q3 S&P 500 preview here.
Back to markets, it was interesting over the weekend that the BoE’s Saunders chose to endorse market expectation of an earlier start to the hiking cycle in the UK rather than push back against it. He is on the more hawkish end of the spectrum but it was an important statement. Earlier, Governor Bailey suggested that there could potentially be a very damaging period of higher inflation ahead if policy makers didn’t react. Interestingly our survey showed that the market thinks the BoE is likely to make a policy error by being too hawkish so a battle seems likely to commence over policy here in the UK over the coming weeks and months. The November meeting appears live. Those comments have helped to support the pound this morning, which is up by +0.16% against the US Dollar.
Looking back to last week now, risk sentiment was supported in the first full week of Q4 by easing European energy prices and a cease fire on the debt ceiling that avoided disaster and bought Washington lawmakers 8 weeks to find a more permanent solution. Global equity indices thus gained on the week: the S&P 500 picked up +0.79%, with a slight -0.19% pullback on Friday, and European equities kept pace with the STOXX 600 rallying +0.97% (-0.28% on Friday). Cyclical stocks led the way on both sides of the Atlantic; energy stocks were among the best performers whist financials benefitted from higher yields and a steeper curve.
Speaking of which, US 10yr Treasury yields gained a punchy +14.1bps to close the week at 1.603%, their highest levels since early June. The benchmark gradually increased 3.0bps after Friday’s employment data. Inflation compensation continued to drive rate increases, as US 10yr breakevens gained +13.5 bps to finish the week at 2.515%. We need to go back to May to find higher levels. The sovereign yield increases were global in nature, with German bunds gaining +7.3bps and UK gilts +15.6bps higher. German 10yr breakevens gained +3.9bps while UK breakevens were +12.0bps higher.
US nonfarm payrolls increased +194k in September, well below consensus expectations of a +500k gain, though private payrolls increased +317k and net two month revisions were up +169k. The unemployment rate ticked down to a post-pandemic low of 4.8% on the back of a declining labour force participation rate. Average hourly earnings were robust, increasing +0.6% mom (+0.4% expected). Taken in concert, the print likely cleared the (admittedly low) bar to enable the FOMC to announce tapering at the November meeting, whilst also feeding the creeping stagflation narrative (see survey results).
Elsewhere, building on a preliminary July deal, the OECD said 136 nations have signed up to implement a 15% minimum global tax rate to address adequate taxation of multinational tech firms. As part of the deal, countries agreed not to impose any additional digital services taxes.
Spread & Containment
In This “Age of Funemployment,” Is a Recession Possible?
For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary: Come mothers and fathers throughout…
For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary:
Come mothers and fathers throughout the land
And don’t criticize what you can’t understand
Your sons and your daughters are beyond your command
Your old road is rapidly aging… For the times they are a-changing– Bob Dylan, 1963
Bob Dylan turned 82 this week, and I guess he’s a little old fashioned now, too, since he recorded an album of Sinatra standards in 2015 (“Shadows in the Night”) and a Christmas carols album in 2009.
The times are changing in the employment market, too. Work has almost become a four-letter word…
Suzy Welch, 62, a Baby Boomer professor of management practice at NYU’s Stern School of Business and co-author with her late husband Jack of several best-selling business books, wrote a fascinating Op-Ed column in The Wall Street Journal last week (“For Gen Z, Unemployment Can Be a Blast, May 18, 2023).
She introduced her latest batch of “bright and shiny young MBA students” who spoke of their lazy, hazy plans after graduation: “I’ll work when I work. Until then, I’ll just do some funemployment.”
Ms. Welch said she “literally screamed in class” the first time she heard that word, shouting, “What, what, what? Are you literally saying ‘funemployment’ – like unemployment can be fun?” The class then “burst into laughter.”
Yes, of course that’s what they meant, but they were trying to keep that word secret from the older generation of up-tight Baby Boom professors, since those draft-dodging, dope-smoking hippies of the Vietnam era had now become like their parents – and their students didn’t trust anyone over 30!
For those young ones who still want to work, the older employers must also watch their step, since the old hierarchical order at work is mostly dead, if not buried. In his new book, “Generation Why” (released this month), Dr. Karl Moore of Montreal’s McGill University speaks of the new workplace rules, which sound like no rules – a dangerous minefield for managers. In his introduction, Moore makes three points.
There are three basic changes from our (Boomer) management era:
(1) Transparency over secrecy: Young workers can discover all your faults, errors, and past mistakes by surfing the Internet, so transparency is king;
(2) Credentials no longer matter as much; an MBA is the old BA, but experience trumps degrees, so all that massive college debt may be wasted; and
(3) Introverts and quieter thinkers can now lead, not just those bombastic extroverts. By Moore’s measures, 30% to 35% of C-suite leaders are now introverts. *
*To clarify terms, “C-suite” refers to anyone with “Chief” in the title, like Chief Executive Officer, Chief Operating/Chief Financial, or Chief Managing Officer. Also, here are the generally accepted birth cohorts:
Moore has a CEO Insights course at McGill for MBAs. He also takes 30 students each year to some of the fastest growing global economies to see how they do it. He calls it the “Hot Cities of the World Tour.”
They just returned from Ghana and Ivory Coast this March. In these 12-day tours, he also has a chance to dine and talk with these 30 students (Millennials and now Gen Z kids) to probe their views.
As cohorts in two colleges in Southern California in the 1970s, Moore and I emailed over this, and he told me these tours are promoted as “Taking the Future to the Future,” meaning future business leaders go to where the world is growing fastest. Some of his previous trips were to Israel, the UAE, India, and South Africa.
In his study of young workers for this book, Moore conducted over 800 interviews with under-35 workers (and shirkers) in Canada, the U.S., Japan, and all over Europe, as well as over 750 C-suite executives. Previous to his academic career, Moore also spent 11 years working in high tech firms, so he has the advantage of being a capitalist believer and doer, not just a business critic, as is so common in academia.
In the U.S., Moore writes, over one third of workers are Millennials (age 27-42), recently surpassing Gen X as the largest component of our workforce. Globally, there are 1.8 billion Millennials, about a quarter of the world, and 86% of Millennials come from developing economies, which may determine who rules the Century. Put bluntly, will the hardest workers of the world surpass our new funemployment cohort?
How Can We Have A Recession With So Many Job Openings?
A classic warning sign of a recession ahead is an inverted yield curve, which we have endured for nearly a year now without a recession. The yield curve inverted before the last four real recessions, in 1982, 1990, 2000, and 2008.
Even with the artificial 2020 recession, caused by a forced COVID-19 lockdown, the yield curve was neutral before that recession. Today, we have the most inverted yield curve since the double-dip recessions of 1979-82, yet we still stubbornly grow our GDP each quarter since mid-2022.
It’s hard (some say impossible) to have a recession with the unemployment rate at a record low, jobs continuing to expand at a solid pace, nearly 10 million jobs going begging and wages usually outpacing prices, resulting in real wage gains. Everywhere you look, you’re likely to see “HELP NEEDED” signs.
Jobs are opening even faster: The percentage of all U.S. business owners reporting job openings that they cannot fill rose by 2 points to 45% in April — maybe because “funemployment” is still widely preferable?
The labor force participation rate remained at 62.6% in April, below the pre-pandemic reading of 63.3% in February 2020, but that rate itself was historically low. It was over 64% from 1984 to 2012, peaking in 2001, when I argue (in recent columns) that we moved from a Growth economy to a Debt economy.
Funemployment Comes Home to Roost
To close on a personal note, I’ve worked every month since April 1962, age 16, first on a paper route by car, then as a night janitor to work my way through college. I commuted to work at a desk job for nearly 40 years before moving to my late parents’ home in the San Juan Islands of Washington State to work online as an editor. I tried to match the work ethic of my parents, who worked in the Great Depression.
This week marks the date when two of our five grown grandchildren arrive to live with us for the next few months, and maybe longer, as part of their funemployment option. It’s a grandparents’ dream come true, having these wonderful young ones around us – and a great help in our old age, a win-win situation.
One says, “I don’t want to sit in an office from 9 to 5 each day.” I responded, “Neither did I, nor probably 90% of those who did it, but we felt we had to.” These kids already have online and “gig” jobs, not office jobs.
I know I’m old-fashioned about work, but (with Karl Moore) I’m learning from the youth, and I know that both of these two fine youngsters will find fulfilling jobs and careers after living with us, with the caveat that retail jobs, construction, and even janitor work aren’t careers, but training ground for showing up on time, respecting rules, learning manners, and serving customer needs. They’ll find their best work.
It’s a brave new world for old fogies. But it’s comforting to know these kids will soon be old fogies, too.recession depression unemployment pandemic covid-19 yield curve lockdown recession gdp unemployment africa india japan canada europe
June 2023 Monthly
June is a pivotal month. The US debt-ceiling
political drama cast a pall over sentiment even if it did not prevent the
dollar from rallying or the S&P…
June is a pivotal month. The US debt-ceiling political drama cast a pall over sentiment even if it did not prevent the dollar from rallying or the S&P 500 and NASDAQ from setting new highs for the year. It is as if the two political parties in the US are playing a game of chicken and daring the other side to capitulate. Both sides are incentivized to take to the brink to convince their constituents that they secured the best deal possible. No side seems to really want to abolish the ceiling because it has proven to be an effective lever for the opposition to win concessions over the years. Still, a higher debt ceiling and some reduction in spending in the FY24 budget are the middle ground.
Many think that this time is different. The partisanship, they say, is so extreme that a default is possible. They can point to severe distortions in the T-bill market and the elevated prices to insure against a US default (credit default swaps). Neither side can be sure it will not be blamed for a default's expected and unexpected consequences. The risk of playing chicken is that neither driver swerves at the last minute. There are only downside scenarios in a default situation, even if it lasts for a short term and no bond payment is missed. On the other side of the debt ceiling, bill issuance will rise, and the Treasury will rebuild its account held at the Federal Reserve. This could drive up short-term rates and reduce liquidity.
In addition to fiscal policy, a monetary policy drama is also playing out. The Federal Reserve began hiking rates in March 2022, and at the May meeting, Chair Powell indicated that a pause was possible. Although he made it clear that it was not a commitment, the markets saw the quarter-point move as the last. However, a combination of stronger economic data, sticky price pressures, and some hawkish comments saw the pendulum of expectation swing toward a hike at the June 13-14 meeting (60%). Moreover effective Fed funds rate (weighted average) is about 5.08%, and the market-implied year-end effective rate is around 5.0%. It was near 4% as recently as May 4, which illustrates the extent of the interest rate adjustment. Even if the Fed stands pat in June, we expect Chair Powell to validate market expectations that another hike will likely be forthcoming (July).
There continue to be worrisome economic signs in the US, including the inverted yield curves, the precipitous decline in the index of Leading Economic Indicators, an outright contraction in M2 money supply, the tightening of lending standards, and a reduction in credit demand. However, at the same time, despite some slowing, the labor market is strong, with an improvement in prime working-age participation. Consumption rose by 3.7% in Q1 and appears off to a good start in Q2, with stronger auto and retail sales in April. Supply chain disruptions have improved, shipping costs have receded and are back within the 2019 range. The Atlanta Fed's GDP tracker sees growth of 1.9% in Q2, near the Fed's non-inflation speed limit of 1.8% and though a bit faster than Q1 (1.3%).
Another drama that has unfolded is the stress on US banks. Banks with increasing low-yielding assets did not offer competitive interest rates with prime money market funds (only invest in US government/agency paper) and the US bill market itself. While the banking system lost deposits, several of the largest banks reported increased net interest income. However, even after the deposits at small banks stabilized, pressure continued on their shares. That selling pressure seemed to be exhausting itself. June may be a pivotal period for this drama too. Still, many regional banks are exposed to the commercial real estate market, which is under pressure.
Europe avoided a tragic winter energy crisis, but the drama is that inflation is providing sticky, and the regional economy looks as if it stalled at the end of Q1. Indeed, revisions show that the German economy contracted 0.3% in Q1 after a 0.5% contraction in Q4 22. The eurozone and UK economies expanded by 0.1% quarter-over-quarter in the year's first three months. The eurozone and UK appear stuck in low gear, but the market is confident of quarter-point hikes by the European Central Bank and the Bank of England in June.
Japan has a drama of its own. The Bank of Japan is under new management, but it turns out that its extraordinary policy was not simply a function of former Governor Kuroda's idiosyncrasies. Several surveys of market participants saw June/July as the likely timing of an adjustment in the policy settings. However, Governor Ueda's call for patience suggests little sense of urgency, and some expectations are being pushed out to the end of Q3. The recent history of lifting interest rates or currency caps suggests a dramatic market response even under the best circumstances. Still, the best time to adjust the cap on the 10-year bond is when it is not being challenged. The BOJ is the last of the central banks with a negative policy rate. This is increasingly difficult to justify. The swaps market is not pricing in a positive rate until early in the second half of the fiscal year, which begins on October 1.
Geopolitics are always dramatic. It seems clear that US officials, including President Biden, had recognized that bringing NATO to Russia's border was provocative. After relatively mild responses to Russia's invasion of Georgia and the taking of Crimea, the reaction to last year's invasion of Ukraine is a big shock to nearly everyone. The US has led a coalition that has stymied Russia by arming Ukraine with weapons, training, money, and intelligence.
Initially, China appeared to be a net loser of Russia's invasion. NATO is stronger. US leadership was again demonstrated. Parallels between Ukraine and Taiwan were drawn ubiquitously. There has been a rapprochement between South Korea and Japan, and both are boosting military spending. The US secured new bases in the Philippines. However, China is finding its own opportunities.
Just as the US thinks Russia is in a quagmire, China may think it has the US in one. President Biden has cast the defense of Ukraine as the frontline of the battle between democracy and authoritarianism. However, American public support is not particularly strong, and continued unlimited support may become a political issue in next year's election. Meanwhile, China has moved into the vacuum created by the US and European sanctions. China has secured Russia into its sphere of influence, which Beijing could not have dreamed of before the invasion. Using the swap lines with the PBOC has allowed several developing countries to pay for imports from China. It is similar to producer-financed sales in market economies. China is exploiting niches that the US and Europe have created purposefully or otherwise. Even taking into account the problematic debt that has arisen from the Belt Road Initiative, it is creating and solidifying a trade network that may be of increasing importance to China going forward.
The sharp rise in interest rates in May made for a challenging time for risk assets. Equity indices for developed and emerging market economies fell in May, but there were notable exceptions. The S&P 500 and NASDAQ rallied to new highs for the year. Germany's DAX and French CAC set record highs, while Japan's Topix and Nikkei reached their best levels since 1990. Among emerging markets, Brazil (~6%), Chile (~4%), Poland (~3%), Hungary (~6%), Taiwan (~6%), and South Korea (~2.3%) are notable exceptions.
Emerging market currencies mostly fell in May. The JP Morgan Emerging Market Currency Index fell by 1.3% after slipping about 0.35% in April. It is the first back-to-back monthly decline since a four-month drop in June through September last year. It is essentially flat on the year. Latin American currencies continue to stand out. They accounted for four of the top five emerging market currencies in May: Colombia (~5.1%), Mexico (~1.9%), Peruvian sol (~1.0%), and Chile (~0.4%). The South Korean won was the exception; its 1% gain put it in the top five.
BWCI bottomed early last November near 92.80, confirming the dollar's top. It rallied into early February to peak near 98.15. The decline into March retraced about half of the rally, while the year's low set in late May (~95.25) is within 0.75% of a critical area. This is consistent with our base case that while there may be some scope for additional dollar gains, it looks limited as the interest rate adjustment also appears to be complete or nearly so. In our analysis of the different currencies below, we have tried to quantify where the base case breaks down.
Dollar: The interest rate adjustment, where the market converges to the Fed rather than vice versa, and the knock-on effect of supporting the US dollar unfolding broadly aligns with the view sketched here last month. The two-year yield rose by around 65 bp in May to about 4.65%, the highest since mid-March. The year-end policy rate is near 5% rather than 4.5% at the end of April. We suspect that the interest rate adjustment is nearly complete, helped by what will likely be slower economic growth after the rebound in Q2. The growth profile may be almost a mirror image of 2022. Then, the economy contracted in H1 and rebounded in H2. This year, the economy appears to have grown near trend in H1 and looks set to slow in H2. The odds of a Fed hike on June 14 were around 65% before the Memorial Day holiday (May 29), and it is fully discounted for the July meeting. The Fed's economic projections will be updated. The 0.4% median forecast for growth at the March meeting seems too low and will likely be increased. At the same time, the 4.5% year-end unemployment rate seems too high. Unemployment was at 3.4% in April. The median forecast bring it down a bit. The debt ceiling wrangling does not put the US in the best light, but barring an actual default, it will not have lasting impact. Outside of the T-bill market and the credit-default swaps, investors took this peculiar American political tradition in stride. Our working hypothesis has been that the dollar was going to "correct" the selloff that began in early March as the bank stress struck. In the last full week of May, the Dollar Index exceeded the retracement target near 104.00. A move above the 104.70 area would suggest potential back toward the 200-day moving average (~105.75) and the March high near 106.00. A break below the 103.00 area would suggest a high may be in place.
rates could not keep pace with the dramatic swing higher in the US. Germany's
two-year yield rose by about 20 bp in May, less than half what the US
experienced. Yet, the euro's roughly 2.75% decline in May was not only a dollar
story. The proverbial bloom came off the rose. The fact that with a combination
of preparedness and good luck (low oil/gas prices and a mild winter), the
eurozone avoided an energy crisis. The positive economic impulses carried into
February, but by the end of March, economic growth stalled, or worse. After a
second look, Germany contracted by 0.3% in Q1 (initially estimated at zero)
after a 0.5% decline in economic output in Q4 22. The European Central Bank
started later than most G10 countries to begin adjusting monetary policy, and
institutional rigidities may make price pressures more resistant. The ECB meets
on June 15 and the market is confident of a quarter-point hike that would lift
the deposit rate to 3.50%. The staff will also update its economic forecasts. The
terminal rate is seen at 3.75% in late Q3 or early Q4. On June 28, European
banks are due to pay back the ECB around 475 bln euros of loans (Targeted
Long-Term Refinancing Operations). They account for around 6% of the assets on
the ECB's balance sheet and almost 45% of the outstanding TLTRO loans. The
sheer magnitude of the maturity could prove disruptive, and some banks may look
to find replacement funding. The ECB's balance sheet has been reduced by about
3% this year and the repayment of the TLTRO would do more with a single blow. Recall
that end of the of last year, European banks returned almost 492 bln euros. The
euro overshot our $1.0735 objective. We suspect the euro's downside correction
is nearly over, but a break of the $1.0680 area may signal losses back to the
March low near $1.05.
(May 26, indicative closing prices, previous in parentheses)
Spot: $1.0725 ($1.1020)
Median Bloomberg One-month Forecast $1.0890 ($1.0960)
One-month forward $1.0740 ($1.1040) One-month implied vol 6.8% (7.5%)
Japanese Yen: Rising US rates seemed to have dragged the greenback higher against the Japanese yen. The gains in May took it a little through JPY140, the highest level since the end of November, and beyond the halfway marker of the drop from last October's high near JPY152. Just as there may be some more room for the US 10-year yield to climb above 3.80%, there may be scope for the dollar to rise further against the yen. The next important chart area is around JPY142.50. Underlying price pressures in Japan continue to rise, and the weakness of the yen only adds to the pressure on the BOJ to adjust its monetary settings. The economy expanded by 0.4% in Q1, well above expectations, and in late May, the government upgraded its monthly economic assessment for the first time in ten months. Several surveys found many see a window of opportunity in June or July for the BOJ to adjust monetary policy. Most of the speculation has focused on yield-curve-control (YCC), which caps the 10-year yield at 0.50%. We do not think it will be abandoned entirely, and targeting a shorter-dated yield may be considered. It could lift the overnight target rate to zero from -0.10%. If experience is any guide, when it comes, the timing will likely surprise, and it is bound to be disruptive. It will likely weaken the correlation between the exchange rate and US yields. Lastly, there is much talk about a snap election in Japan over the summer as Prime Minister Kishida looks to secure his mandate and support for him, and the cabinet has risen recently. He hosted the G7 summit and brandished leadership. Politically, it may be the most opportune time before September 2024 LDP leadership contest, while the economy is relatively strong, the stock market is near 30-year highs, and he is perceived favorably.
Spot: JPY140.60 (JPY136.30)
Median Bloomberg One-month Forecast JPY133.45 (JPY133.05)
One-month forward JPY139.95 (JPY135.75) One-month implied vol 10.8% (9.5%)
British Pound: May was a month of two halves for sterling. In the first half of the month, it extended its recovery off the for the year set on March 8 near $1.1800. Sterling peaked on May 10 at around $1.2680, its best level since June 2022 and an impressive recovery from last September's record low of about $1.0350. In the second half of May, sterling trended lower and fell back to almost $1.2300. Our base case is that the move is nearly over, with the $1.2240 area likely to hold back steeper losses. However, if this area goes, another cent decline is possible in this benign view. Stubborn inflation and a firm labor market have produced a dramatic interest rate adjustment in the UK that may lend sterling support. The year-end policy rate is seen above 5.50%. This is a 70 bp increase since the middle of May. The two-year and 10-year Gilt yields were mostly flat in the first half of May and soared around 75 bp in the second half. The 10-year breakeven (the difference between the inflation-protected security and the conventional bond) rose a little more than 10 bp in the last couple of weeks. The Bank of England meets on June 22, the day after the May CPI is published. The market is debating whether a 25 bp or 50 bp hike will be delivered. We lean toward the smaller move unless the incoming data surprises.
Median Bloomberg One-month Forecast $1.2400 ($1.2480)
One-month forward $1.2355 ($1.2575) One-month implied vol 8.0% (7.6%)
Canadian Dollar: The Canadian dollar fell by about 0.60% against the US dollar in May, making it the best performer in the G10. The Swiss franc was second with twice the loss. After testing April's low (~CAD1.3300) in early May, the US dollar recovered and set the month's high (~CAD1.3650) in late May. While interest rate developments can help explain the broader gains in the greenback, the exchange rate with Canada seems to be more sensitive lately to the general risk environment (for which we use the S&P 500 as a proxy) and oil. The price of July WTI collapsed from around $76.60 at the end of April to a little below $64 on May 4. It worked its way back up to almost $75 on May 24 before stalling. There has been a significant interest rate adjustment in Canada over the last few weeks. The 2-year yield rose by nearly 60 bp. At the end of April, the market was pricing in a cut before the end of the year and now it is fully discounting a hike. The Bank of Canada meets on June 6. The swaps market has a 33% chance of a hike and a hike is fully discounted by the end of Q3. At the end of April, a June hike was seen as less than a 10% risk. A move above CAD1.3700 could signal a return to this year's high set in March near CAD1.3860.
Spot: CAD1.3615 (CAD 1.3550)
Median Bloomberg One-month Forecast CAD1.3405 (CAD1.3475)
One-month forward CAD1.3605 (CAD1.3540) One-month implied vol 6.0% (5.8%)
Australian Dollar: The surprising quarter-point hike by the Reserve Bank of Australia saw the Australian dollar fray the upper end of the $0.6600-$0.6800 range that has dominated since late February. Disappointing employment data, concerns about the pace of China's recovery, and the sharp selloff of the New Zealand dollar (following the central bank's hike that could be the last one) weighed on the Australian dollar. It recorded the lows for the year slightly below $0.6500. There is little meaningful chart support ahead of $0.6400, but a move back above $0.6600 would suggest a low is in place. The squeeze on households can e expected to increase in the coming months as mortgages taken on in the early days of the pandemic will begin to float at higher rates. The RBA meets on June 6 and there seems to be little chance of a hike, though the market is not convinced that the tightening cycle is finished. A small hike (~15 bp) is possible in Q3. The first estimate of Q1 GDP is due the day after the RBA meeting, but we assume officials will have some inkling. Although there is some talk of the risk of a contraction, it likely grew slowly.
Median Bloomberg One-month Forecast $0.6785 ($0.6710)
One-month forward $0.6525 ($0.6625) One-month implied vol 10.3% (10.1%)
Mexican Peso: Between the central bank's pause and the broader dollar's strength, the peso fell on profit-taking after it reached a new seven-year high in the middle of May. However, the considerations that have driven it higher remain intact, suggesting its high is not in place. Those forces include the attractive carry (11.25% policy rate) and a relatively low vol currency (especially among the high-yielders), the near-shoring and friend-shoring that has seen portfolio and direct investment inflows, and, partly related, the healthy international position, with record exports and stronger worker remittances. The dollar fell to almost MXN17.42 in mid-May and its bounce stalled near MXN18.00. A break of the MXN17.60 area may signal a retest of the lows, but in the medium term, there is potential toward MXN17.00. While Mexico's government has not facilitated an investor-friendly environment, the market appears to be rewarding the strong and independent central bank and Supreme Court.
Spot: MXN17.6250 (MXN18.00)
Bloomberg One-Month Forecast MXN18.1675 (MXN18.26)
Chinese Yuan: China is notoriously opaque in terms of information and economic data. The market's general sense is that Beijing will take more measures to ensure growth stays on track with weak price impulses. The low CPI (0.3% year-over-year in April) is partly a function of weak demand, but the overcapacity in some sectors, such as autos, also is deflationary. A reduction in required reserves is possible. The expected policy divergence is more important to investors than modest swings in China's large and persistent trade surplus. As the dollar moved to new highs for the year in mid-May above CNY7.00, PBOC officials expressed concern about the volatility and one-way market. And the yuan's losses have been extended further. The next important chart area is near CNY7.10. Still, the yuan remains correlated with the euro and yen, and their weakness helped drag the yuan to new lows for the year. Chinese assets may not be particularly attractive to foreign asset managers, but the yuan is being used more to settle trade (and not just with Russia and Hong Kong). Its share of the SWIFT messages rose to 2.3% in April, the most in six months.
Spot: CNY7.0645 (CNY6.9185)
Median Bloomberg One-month Forecast CNY6.8625 (CNY6.8570)
One-month forward CNY7.0500 (CNY6.9060) One-month implied vol 5.4% (4.9%)
Drilling down on treatment-resistant fungi with molecular machines
Fungal infections can be among the hardest to treat, and since the pandemic began they’ve become only more common. To prevent future antifungal resistance,…
Fungi are present on the skin of around 70% of the population, without causing harm or benefit. Some fungal infections, like athlete’s foot, are minor. Others, like Candida albicans, can be deadly – especially for individuals with weakened immune systems.
Fungal infections are on the rise because of an aging population and an increased prevalence of chronic diseases. At the same time, fungi are becoming more resistant to treatment. As a result, fungal infections could soon become a serious public health threat.
In 2022, the World Health Organization released its first-ever “Fungal Priority Pathogen List,” calling for improved surveillance, public health interventions and the development of new antifungal drugs.
We are an interdisciplinary team of chemists and biologists charting a new path to tackle drug-resistant infections. We are using tiny nanoscale drills that combat harmful pathogens at the molecular level. As the traditional antimicrobial research pipeline struggles, our approach has the potential to rejuvenate the fight against these stubborn infections.
Molecular machines as alternative antifungals
While doctors urgently need new antifungal drugs, developing them is challenging. First, it is difficult to develop drugs that selectively kill fungi without harming human cells because of their many similarities.
Second, fungi can rapidly develop resistance to multiple antifungal drugs at once when medications are misused or overused. As such, developing antifungal drugs is much less rewarding for drug companies than developing medications for chronic conditions like diabetes and hypertension that require long-term use.
One solution to this problem could lie in a Nobel Prize-winning technology: molecular machines.
Molecular machines are synthetic compounds that rapidly rotate their components at about 3 million times per second when exposed to light. Doctors can use a light-tipped probe to activate these molecular machines to treat internal infections, or a lamp for skin infections. The light starts the machines spinning, and that rotational motion pushes them to drill through and puncture the cell’s membranes and organelles, which results in cell death.
Our group first used this technology to kill cancer cells in 2017. To target the right cells, molecular machines can be linked to specific peptides that bind only to the desired cells, allowing, for instance, the targeting of specific cancer types. Since then, we have used these molecules to kill bacteria, destroy tissue and stimulate muscle contraction. These properties make molecular machines an enticing candidate technology to address the growing fungal threat.
Testing antifungal molecular machines
Researchers first tested the ability of light-activated molecular machines to kill fungi in Candida albicans. This yeastlike fungus can cause life-threatening infections in immunocompromised people. Compared with conventional drugs, molecular machines killed C. albicans much faster.
Subsequent studies found that molecular machines could also kill other fungi, including molds like Aspergillus fumigatus and species of dermatophytes, the types of fungi that cause skin, scalp and nail infections. Molecular machines even eliminated fungal biofilms, which are slimy, antimicrobial-resistant communities of microorganisms that stick together on surfaces and commonly cause medical device-associated infections.
Unlike conventional antifungals, which target the fungal cell membrane or cell wall, molecular machines localize to the fungal mitochondria. Often referred to as the “powerhouses of the cell,” mitochondria produce energy to power other cellular activities. When activated with visible light, molecular machines destroy the fungal mitochondria. Once the fungal cell’s mitochondria stop working, the cell loses its energy supply and dies.
At the same time, molecular machines also disrupt the tiny pumps that remove antifungal agents from the cell, thus preventing the cell from fighting back. Because these molecular machines act by a mechanical instead of a chemical mechanism, fungi are unlikely to develop defenses against this treatment.
In lab experiments, combining light-activated molecular machines with conventional antifungal drugs also reduced the amount of fungi in C. albicans-infected worms and in pig nails infected with Trichophyton rubrum, the most common cause of athlete’s foot.
New frontiers for fighting fungal infections
These results suggest that combining molecular machines with conventional antifungals can improve existing therapies and provide new options for treating resistant fungal strains. This strategy could also help reduce the side effects of traditional antifungals, such as gastrointestinal upset and skin reactions.
Fungal infection rates will likely continue to rise. As such, the need for new treatments will only become more urgent. Climate change is already causing new human pathogenic fungi to emerge and spread, including Candida auris. C. auris is often resistant to treatment and spread rapidly in health care facilities during the COVID-19 pandemic. According to the Centers for Disease Control and Prevention, strained health care systems, overuse of immunosuppressants and misuse of antibiotics have all been implicated in outbreaks of C. auris.
In the future, researchers could use artificial intelligence to create better antifungal molecular machines. By using AI to predict how different molecular machines will interact with fungi and human cells, we can develop safer and more effective antifungal molecules that specifically kill fungi without harming healthy cells.
Antifungal molecular machines are still in the early stages of development and are not yet available for routine clinical use. However, continuing research gives hope that these machines could one day provide better treatments for fungal infections and other infectious diseases.
Ana L. Santos receives funding from the European Union's Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No. 843116.
Jacob Beckham receives funding from the National Science Foundation Graduate Research Fellowship Program.
James M. Tour receives funding from the Discovery Institute and the Robert A. Welch Foundation (C-2017-20190330). Rice University owns intellectual property on the use of electromagnetic (light) activation of molecular machines for the killing of cells. This intellectual property has been licensed to a company in which James M. Tour is a stockholder, although he is not an officer or director of that company.disease control pandemic covid-19 treatment testing spread european world health organization
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