Futures were grinding gingerly higher, perhaps celebrating the end of the Cheney family's presence in Congress, and looked set to re-test Michael Hartnett bearish target of 4,328 on the S&P (which marked the peak of yesterday's meltup before a waterfall slide lower when spoos got to within half a point of the bogey), when algos and the few remaining carbon-based traders got a stark reminder that central banks will keep hammering risk assets after the UK reported a blistering CPI print, which at a double digit 10.1% was not only higher than the highest forecast, but was the highest in 40 years.
The print appeared to shock markets out of their month-long levitating complacency, and yields - both in the UK and the US - spiked...
... and with yields surging, futures had no choice but to notice and after trading at session highs just before the UK CPI print, they have since tumbled more than 40 points and were last down 0.85% or 37 points to 4,271.
Nasdaq 100 futures retreated 0.9% signaling a selloff in technology names will continue. The dollar rose as investors awaited the minutes of the Fed’s last policy meeting for clues on policy makers’ sensitivity to weaker economic data.
In US premarket trading, retail giant Target slumped 4% after reporting earnings that missed expectations despite still predicting a rebound. Applied Materials and PayPal dropped at least 1.3%. Tech stocks are the forefront of the growing pessimism over equity valuations on the back of Fed rate increases. The S&P 500 had posted a small gain on Tuesday, aided by earnings reports from retailers Walmart Inc. and Home Depot. Here are some of the other biggest U.S. movers today:
- Manchester United (MANU US) rises as much as 17% in US premarket trading before trimming most of the gains, after Tesla CEO Elon Musk said he was buying the English football club but later added that he was joking.
- Hill International (HIL US) shares rise 61% in premarket trading hours after it announced Global Infrastructure Solutions will commence an all-cash tender offer for $2.85/share in cash, representing a premium of 63% to the last closing price.
- BioNTech (BNTX US) was initiated with a market perform recommendation at Cowen, which expects demand for Covid-19 vaccines to mirror annual flu trends as the pandemic enters its endemic phase.
- Bed Bath & Beyond (BBBY US) shares surge 20% in premarket trading, putting the stock on track for its sixth day of gains. The home-goods company has helped reinvigorate a wave of meme stock buying
- Agilent (A US) saw its price target boosted at brokers as analysts say the scientific testing equipment maker’s results were strong thanks to growth in biopharma and a recovery in China, while the company’s guidance was on the conservative side. Shares rose .
- Jefferies initiated coverage of Waldencast Plc (WALD US) class A with a buy recommendation as analyst Stephanie Wissink sees 29% upside potential.
- Sea Ltd. (SE US) ADRs slipped as much as 2.1% in US premarket trading, extending Tuesday’s declines, as Morgan Stanley cut its PT on expectations of slowing growth at the Shopee owner’s e-commerce business in the third quarter.
- Weber (WEBR US) downgraded to sell from neutral at Citi, which says there are too many concerns to remain on the sidelines, including a decline in point-of-sale traffic and macro factors like inflation weighing on consumer demand
In the past two months, US stocks rallied on signs of peaking inflation and an earnings-reporting season that saw four out of five companies meeting or beating estimates. Boosted by relentless systematic (CTA) buying and retail-driven short squeezes, as well as a surge in buybacks, stocks recovered more than 50% of the bear market retracement. Yet, continuing rate hikes and the likelihood of a recession in the world’s largest economy are weighing on sentiment. Meanwhile, concern is growing that Fed rate setters will remain focused on the fight against inflation rather than supporting growth.
“We expect the FOMC minutes to have a hawkish tilt,” Carol Kong, strategist at Commonwealth Bank of Australia Ltd., wrote in a note. “We would not be surprised if the minutes show the FOMC considered a 100 basis-point increase in July.”
In Europe, the Stoxx 600 fell after a strong start amid signs the continent’s energy crisis is worsening. Benchmark natural-gas futures jumped as much as 5.1% on expectations the hot weather will boost demand for cooling. In the UK, consumer-price growth jumped to 10.1%, sending gilts tumbling. Real estate, retailers and miners are the worst performing sectors. The Stoxx 600 Real Estate Index declined 2%, making it the worst-performing sector in the wider European market, as focus turned to UK inflation that soared to double digits for the first time in four decades and also to today's FOMC minutes. German and Swedish names almost exclusively account for the 10 biggest decliners. TAG Immobilien drops 5.4%, Wallenstam is down 4.7%, Castellum falls 4% and LEG Immobilien declines 3.3%. The sector tumbles on rising bond yields, with 10y Bund yield up 11bps, and dwindling demand for Swedish real estate amid rising rates.
Earlier on Wednesday, stocks rose in Asia amid speculation that China may deploy more stimulus to shore up its ailing economy while Japanese exporters were boosted by a weaker yen. After a string of weak data driven by a property-sector slump and Covid curbs, China’s Premier Li Keqiang asked local officials from six key provinces that account for 40% of the economy to bolster pro-growth measures. The MSCI Asia Pacific Index advanced as much as 0.8%, with consumer-discretionary and industrial stocks such as Japanese automakers Toyota and Honda among the leaders on Wednesday. The benchmark Topix erased its year-to-date loss. Chinese food-delivery platform Meituan also rebounded after dropping more than 9% in the previous session on a Reuters report that Tencent may divest its stake in the firm. Chinese stocks erased declines early in the day, as investors hoped for more economic stimulus after a surprise rate cut on Monday failed to excite the market. Premier Li Keqiang has asked local officials from six key provinces that account for about 40% of the country’s economy to bolster pro-growth measures.
“I believe policymakers have the tools to prevent a hard landing if needed,” Kristina Hooper, chief global market strategist at Invesco, said in a note. “I find investors are overly pessimistic about Chinese stocks -- which means there is the potential for positive surprise.” Asia’s stock benchmark is trading at mid-June levels as traders attempt to determine the trajectory of interest-rate hikes and economic growth globally -- as well as the impact of China’s property crisis and Covid policies. Meanwhile, minutes of the US Federal Reserve’s July policy meeting, out later Wednesday, will be carefully parsed. New Zealand stocks closed little changed as the country’s central bank raised interest rates by a half percentage point for a fourth-straight meeting. Australia's S&P/ASX 200 index rose 0.3% to close at 7,127.70, supported by materials and consumer discretionary stocks. South Korea’s benchmark missed out on the rally across Asian equities, as losses by large-cap exporters weighed on the measure
In FX, the Bloomberg Dollar Spot Index rose as the dollar gained versus most of its Group-of-10 peers. The pound was the best G-10 performer while gilts slumped, led by the short end and sending 2-year yields to their highest level since 2008, after UK inflation accelerated more than expected in July. The yield curve inverted the most since the financial crisis as traders ratcheted up bets on BOE rate hikes in money markets, wagering on 200 more basis points of hikes by May. The euro traded in a narrow range against the dollar while the region’s bonds slumped, led by the front end. Scandinavian currencies recovered some early European session losses while the aussie, kiwi and yen extended their slide in thin trading. EUR/NOK one-day volatility touched a 15.12% high before paring ahead of Norges Bank’s meeting Thursday where it may have to raise rates by a bigger margin than indicated in June given Norway’s inflation exceeded forecasts for a fourth straight month, hitting a new 34-year high. Consumer sentiment in Norway fell to the lowest level since data began in 1992, according to Finance Norway. New Zealand’s dollar and bond yields both rose in response to the Reserve Bank hiking rates by 50bps, while flagging concern about labor market pressures and consequent wage inflation; the currency subsequently gave up gains in early European trading. The Aussie slumped after data showing the nation’s wages advanced at less than half the pace of inflation in the three months through June, backing the Reserve Bank’s move to give itself more flexibility on interest rates.
In rates, treasuries held losses incurred during European morning as gilt yields climbed after UK inflation rose more than forecast. US 10-year around 2.87% is 6.5bp cheaper on the day vs ~13bp for UK 10-year; UK curve aggressively bear-flattened following inflation data, with long-end yields rising about 10bp. Front-end UK yields remain cheaper by ~20bp, off session highs, leading a global government bond selloff. US yields are higher on the day by by 4bp-7bp; focal points of US session are 20-year bond auction and FOMC minutes release an hour later. Treasury auctions resume with $15b 20-year bond sale at 1pm ET; WI 20-year yield at around 3.35% is ~7bp richer than July’s sale, which stopped 2.7bp through the WI level.
In commodities, oil fluctuated between gains and losses, and was in sight of a more than six-month low -- reflecting lingering worries about a tough economic outlook amid high inflation and tightening monetary policy. Spot gold is little changed at $1,774/oz
Looking at the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.
- S&P 500 futures down 0.3% to 4,293.00
- STOXX Europe 600 little changed at 443.30
- MXAP up 0.5% to 163.48
- MXAPJ up 0.2% to 530.38
- Nikkei up 1.2% to 29,222.77
- Topix up 1.3% to 2,006.99
- Hang Seng Index up 0.5% to 19,922.45
- Shanghai Composite up 0.4% to 3,292.53
- Sensex up 0.5% to 60,168.83
- Australia S&P/ASX 200 up 0.3% to 7,127.68
- Kospi down 0.7% to 2,516.47
- German 10Y yield little changed at 1.06%
- Euro little changed at $1.0178
- Gold spot down 0.0% to $1,775.21
- U.S. Dollar Index little changed at 106.50
Top Overnight News from Bloomberg
- More market prognosticators are alighting on the idea of benchmark Treasury yields sliding to 2% if the US succumbs to a recession. That’s an out-of-consensus call, compared with Bloomberg estimates of about a 3% level by the end of this year and similar levels through 2023. But it’s a sign of how growth worries are forcing a rethink in some quarters
- The euro-area economy grew slightly less than initially estimated in the second quarter as signs continue to emerge that momentum is unraveling. Output rose 0.6% from the previous three months between April and June, compared with a preliminary reading of 0.7%, Eurostat said Wednesday
- Egypt became a prime destination for hot money by tethering its currency and boasting the world’s highest interest rates when adjusted for inflation
- Norway’s $1.3 trillion sovereign wealth fund, the world’s largest, posted its biggest loss since the pandemic as rate hikes, surging inflation and Russia’s invasion of Ukraine spurred volatility. It lost an equivalent of $174 billion in the six months through June, or 14.4%
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks just about shrugged off the choppy lead from the US where markets were tentative amid mixed data signals and strong retailer earnings, but with gains capped overnight ahead of the FOMC Minutes and as participants digested another 50bps rate hike by the RBNZ. ASX 200 swung between gains and losses with the index indecisive amid a slew of earnings and with strength in the consumer sectors offset by underperformance in tech, energy and healthcare. Nikkei 225 climbed above the 29,000 level with the index unfazed by mixed data releases in which Machinery Orders disappointed although both Exports and Imports topped forecasts. Hang Seng and Shanghai Comp were somewhat varied with Hong Kong led higher by tech amid plenty of attention on Meituan after reports its largest shareholder Tencent could reduce all or the bulk of its shares in the Co. which a Tencent executive later refuted, while the mainland was less decisive amid headwinds from the ongoing COVID situation and with power restrictions disrupting activity in Sichuan, although reports also noted that Chinese Premier Li told top provincial officials that they must have a sense of urgency to consolidate the economic recovery and reiterated to step up macro policies.
Top Asian News
- RBNZ hiked the OCR by 50bps to 3.00%, as expected, while it stated that conditions need to continue to tighten and they agreed that maintaining the current pace of tightening remains the best means. RBNZ also agreed that further increases in the OCR were required to meet the remit objective and that domestic inflationary pressures had increased since May. Furthermore, the RBNZ raised its projections for the OCR and inflation with the OCR seen at 3.69% in Dec. 2022 (prev. 3.41%) and at 4.1% for both Sept. 2023 and Dec. 2023 (prev. 3.95%), while it sees annual CPI at 4.1% by Sept. 2023 (prev. 3.0%).
- RBNZ Governor Orr stated at the press conference that they are not forecasting a recession but expected below-potential growth amid subdued consumer spending. Governor Orr also stated that they did not discuss a 75bps rate hike today and that 50bps moves have been orderly and sufficient, while he added that getting rates to 4% would buy comfort for the policy committee and that a Cash Rate of around 4% is unambiguously above neutral and sufficient to meet the inflation mandate.
- Chongqing, China is to curb power use for eight days for industry.
- China’s Infrastructure Boom Gets Swamped by Property Woes
- Tencent 2Q Revenue Misses Estimates
- Hong Kong Denies Democracy Advocates Security Law Jury Trial
- UN Expert Says Xinjiang Forced Labor Claims ‘Reasonable’
- Singapore’s COE Category B Bidding Hits New Record
- Delayed Deals Add to Floundering Singapore IPO Market: ECM Watch
European bourses have dipped from initial mixed/flat performance and are modestly into negative territory, Euro Stoxx 50 -0.5%. Stateside, futures are under similar pressure awaiting fresh corporate updates and the July FOMC Minutes, ES -0.6%. Fresh drivers relatively limited throughout the session with known themes in play and focus on upcoming risk events; stocks also suffering on further hawkish yield action. Lowe's Companies Inc (LOW) Q1 2023 (USD): EPS 4.68 (exp. 4.58), Revenue 27.47 (exp. 28.12bln); expect FY22 total & comp. sales at bottom-end of outlook range, Operating Income and Diluted EPS at top-end. Target Corp (TGT) Q1 2023 (USD): EPS 0.39 (exp. 0.72), Revenue 26.0bln (exp. 26.04bln); current trends support prior guidance.
Top European News
- German Gas to Last Less Than 3 Months if Russia Cuts Supply
- European Gas Surges Again as Higher Demand Compounds Supply Pain
- Entain Falls; Citi Views Fine Negatively but Notes Steps by Firm
- UK Inflation Hits Double Digits for the First Time in 40 Years
- Crypto.com Receives Registration as UK Cryptoasset Provider
- Greenback underpinned ahead of US retail sales data and FOMC minutes, DXY holds tight around 106.500.
- Pound pegged back after spike in wake of stronger than expected UK inflation metrics, Cable hovers circa 1.2100 after fade into 1.2150.
- Kiwi retreats following knee jerk rise on the back of hawkish RBNZ hike, NZD/USD near 0.6300 from 0.6380+ overnight peak.
- Aussie undermined by marginally softer than anticipated wage prices and lower RBA tightening bets in response, AUD/USD well under 0.7000 vs 0.7026 at one stage.
- Yen weaker as yield differentials widen again, but Euro cushioned by more pronounced EGB reversal vs USTs, USD/JPY probes 21 DMA just below 135.00, EUR/USD bounces from around 1.0150 towards 1.0200.
- Loonie and Nokkie soft amidst latest slippage in oil, USD/CAD closer to 1.2900 than 1.2800, EUR/NOK nudging 9.8600 within 9.8215-9.8740 range.
- Debt retracement ongoing and gathering pace ahead of Wednesday's key risk events.
- Bunds now closer to 154.00 than 156.00 and 157.00 only yesterday, Gilts not far from 114.50 vs almost 116.00 and 117.00+ earlier this week and T-note sub-119-00 vs 119-31 at best on Monday.
- Sonia strip hit hardest as markets price in aggressive BoE hikes in response to UK inflation data toppy already elevated expectations.
- Crude benchmarks are currently little changed overall, having recovered from a bout of initial pressure; newsflow thin awaiting fresh JCPOA developments
- Spot gold is little changed overall but with a slight negative bias as the USD remains resilient and outpaces the yellow metal as the haven of choice.
- Aluminium is the clear outperformer amid updates from Norsk Hydro that they are shutting production at their Slovalco site (175k/T year) by end-September, due to elevated energy prices.
- OPEC Sec Gen says he sees a likelihood of an oil-supply squeeze this year, open for dialogue with the US. Still bullish on oil demand for 2022. Too soon to call the outcome of the September 5th gathering. Spare capacity at around the 2-3mln BPD mark, "running on thin ice".
- US Private Inventory Data (bbls): Crude -0.4mln (exp. -0.3mln), Cushing +0.3mln, Gasoline -4.5mln (exp. -1.1mln), Distillates -0.8mln (exp. +0.4mln).
- Shell (SHEL LN) announced it is to shut its Gulf of Mexico Odyssey and Delta crude pipelines for two weeks in September for maintenance, according to Reuters.
- Uniper (UN01 GY) says the energy supply situation in Europe is far from easing and gas supply in winter remains "extremely challenging".
- China sets the second batch of the 2022 rare earth mining output quota at 109.2k/T, via Industry Ministry; smelting/separation quota 104.8k/T.
- China's military is to partake in a military exercise in Russia, their participation has nothing to do with the international situation.
- Taiwan's Defence Ministry says they have detected 21 Chinese aircraft and five ships around Taiwan on Wednesday, via Reuters.
- Iran is calling on the US to free jailed Iranian's, says they are prepared for prisoner swaps, via Fars.
US Event Calendar
- 07:00: Aug. MBA Mortgage Applications, prior 0.2%
- 08:30: July Retail Sales Advance MoM, est. 0.1%, prior 1.0%
- 08:30: July Retail Sales Ex Auto MoM, est. -0.1%, prior 1.0%
- 08:30: July Retail Sales Control Group, est. 0.6%, prior 0.8%
- 10:00: June Business Inventories, est. 1.4%, prior 1.4%
- 14:00: July FOMC Meeting Minutes
DB's Tim Wessel concludes the overnight wrap
Starting in Europe, where the looming energy crisis remains at the forefront. An update from our team, who just published the fourth edition of their indispensable gas monitor (link here), where they note the surprisingly fast rebuild of German gas storage, driven by reductions in industrial activity, reduces the risk that rationing may become reality this winter. Many more insights within, so do read the full piece for analysis spanning scenarios. Keep in mind, that while gas may be available, it is set to come at a higher clearing price, which manifest itself in markets yesterday where European natural gas futures rose a further +2.64% to €226 per megawatt-hour, just shy of their closing record at €227 in March. But, that’s still well beneath their intraday high from March, where at one point they traded at €345. Further, one-year German power futures increased +6.30%, breaching €500 for the first time, closing at €507. Germany is weighing consumer relief measures in light of climbing consumer prices and also announced that planned nuclear facility closures would be “temporarily” postponed.
The upward energy price pressure and attenuated (albeit, not eliminated) risk of rationing pushed European sovereign yields higher. 10yr German bunds climbed +7.1bps to 0.97%, while 10yr OATs kept the pace, increasing +7.4bps. 10yr BTPs increased +15.9bps, widening sovereign spreads, while high yield crossover spreads widened +10.2bps in the credit space.
Equities were resilient, however, with the STOXX 600 posting a +0.16% gain after flitting around a narrow range all day. Regional indices were also robust to climbing energy prices, with the DAX up +0.68% and the CAC +0.34% higher. In the States the S&P 500 registered a modest +0.19% gain, with the NASDAQ mirroring the index, falling -0.19%. Retail shares drove the S&P on the day, with the two consumer sectors both gaining more than +1%, following strong earnings reports from Wal Mart and Home Depot.
Treasury yields also climbed, but the story was the further flattening in the curve. 2yr yields were +7.5bps higher while 10yr yields managed to increase just +1.6bps, leaving 2s10s at its second most negative close of the cycle at -46bps. 10yr yields are another basis point higher this morning. A hodgepodge of data painted a mixed picture. Housing permits beat expectations (+1674k vs. +1640k) while starts (+1446k vs. +1527k) fell to their slowest pace since February 2021. However, under the hood, even permits weren’t necessarily as strong as first glance, as single family permits fell -4.3% with gains in multifamily pushing the aggregate higher. Indeed, year-over-year, single family permits have now fallen -11.7% while multifamily permits are +23.5% higher. So the single family housing market continues to feel the impact of Fed tightening. Meanwhile, industrial production climbed +0.6% month-over-month (vs. +0.3%), with capacity utilization hitting its highest level since 2008 at 80.3%.
Drifting north of the border, Canadian inflation slowed to 7.6% YoY in July in line with estimates, while the average of core measures climbed to a record 5.3%. Bank of Canada Governor Macklem penned an opinion piece saying that while it looks like inflation may have peaked, “the bad news is that inflation will likely remain too high for some time.” In turn, Canadian OIS rates by December climbed +16.2bps.
In other data, the expectations component of the German ZEW survey fell to -55.3, its lowest level since October 2008 at the depths of the GFC. In the UK, regular pay (excluding bonuses) fell by -3.0% in real terms over the year to April-June 2022, its fastest decline on record.
On the Iranian nuclear deal, EU negotiators reportedly found Iran’s response constructive, though Iran still had some concerns. Notably, Iran is looking for guarantees that if a future US administration withdraws from the JCPOA the US will "have to pay a price”, seeking insulation from the vagaries of representative democracy.
Asian equity markets are trading higher after Wall Street’s solid performance overnight. The Nikkei (+0.76%) is leading gains across the region with the Hang Seng (+0.57%), the Shanghai Composite (+0.23%) and the CSI (+0.51%) all rebounding from its opening losses this morning. US futures are struggling to gain traction this morning with the S&P 500 (-0.02%) and NASDAQ 100 (-0.09%) trading just below flat.
The Reserve Bank of New Zealand lifted its official cash rate (OCR) for the fourth consecutive time by an expected +50bps to 3%, a seven-year high, while bringing forward the estimate of future rate increases. The central bank expects the OCR will reach 3.69% at the end of this year and expects it to peak at 4.1% in March 2023, higher and sooner than previously forecast.
Early morning data coming out from Japan showed that exports rose +19.0% y/y in July (v/s +17.6% expected) posting 17 straight months of gains while imports advanced +47.2% (v/s +45.5% expected) driven by global fuel inflation and a weakening yen. With the imports outweighing exports, the nation reported trade deficit for the 14th consecutive month, swelling to -2.13 trillion yen in July (v/s -1.91 trillion yen expected) compared to a revised deficit of -1.95 trillion yen in June.
In terms of the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.
Druckenmiller: “We Are In Deep Trouble… I Don’t Rule Out Something Really Bad”
Druckenmiller: "We Are In Deep Trouble… I Don’t Rule Out Something Really Bad"
For once, billionaire investor Stanley Druckenmiller did…
For once, billionaire investor Stanley Druckenmiller did not say anything even remotely controversial when he echoed what we (and Morgan Stanley) have been warning for a long time, and said the Fed's attempt to quickly unwind the excesses it itself built up over the past 13 years with its ultra easy monetary policy will end in tears for the U.S. economy.
“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I would be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”
And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said effectively repeating what we said in April that "Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" "
"Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" https://t.co/tfCHZMEkob— zerohedge (@zerohedge) April 16, 2022
He pointed to massive global quantitative easing that reached $30 trillion as what’s driving the looming recession: “Our central case is a hard landing by the end of next year", he said, adding that we have also had a bunch of myopic policies such as the Treasury running down the savings account, and Biden's irresponsible oil SPR drain.
Repeating something else even the rather slow "transitory bros" and "team MMT" know by now, Druckenmiller said he believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.
“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”
The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.
Druckenmiller said the Fed made a policy error - as did we... repeatedly... last summer - when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.
“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”
“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.
Commenting on recent events, Druck was more upbeat, saying “I like everything I’m hearing out of the Fed and I hope they finish the job,” he said. Now, the tightening has to go all the way. “You have to slay the dragon.” The problem is that, as the BOE demonstrated with its QT to QE pivot today, it's impossible to slay the dragon and sooner or later every central banks fails.
What happens then? According to Druck, once people lose trust in central banks - which at this rate could happen in a few weeks or tomorrow - he expects a cryptocurrency renaissance, something which may already be starting...
... and not just there, but in the original crypto - gold - as well...
Excerpts from his interview below:
Interest rates, the yield curve, and the Fed chasing a Phantom (lagging) Menace
– by New Deal democratThere’s a lot going on with interest rates in the past few days.Mortgage rates have increased above 7%:This is the highest…
- by New Deal democrat
There’s a lot going on with interest rates in the past few days.
Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE
Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE
With everything biw breaking, including an explosive move…
With everything biw breaking, including an explosive move in bond yields in the UK, 10Y yields rising above 4.00%, and Apple "suddenly" realizing there was not enough demand for the latest iteration of its iPhone 5, it was only a matter of time before some central bank somewhere capitulated and pivoted back to QE, and this morning that's precisely what happened when the BOE delayed the launch of QT and restarted QE "on whatever scale is necessary" on a "temporary and targeted" (lol) basis to restore order, which sent UK bond surging (and yields tumbling the most on record going back to 1996 erasing an earlier jump to the the highest since 1998)...
... the pound first surged before falling back as traders realized the UK now has both rate hikes and QE at the same time, the dollar sliding then spiking, the 10Y US TSY yield dipping from 4.00%, the highest level since 1998, and stock futures spiking from fresh 2022 lows, but then fizzling as traders now demand a similar end to QT/restart of QE from the Fed or else they will similarly break the market.
Needless to say, the BOE has opened up the tap on coming central bank pivots, and while the market may be slow to grasp it, risk is cheap here with a similar QE restarted by the Fed just weeks if not days away. Indeed, look no further than the tumbling odds of a November 75bps rate hike as confirmation.
As if the BOE's pivot wasn't enough, there was also a barrage of company specific news: in premarket trading, the world's biggest company, Apple tumbled 3.9% after a Bloomberg report said the company was likely to ditch its iPhone production boost, citing people familiar with the matter. Shares of suppliers to Apple also fell in premarket trading after the report, with Micron Technology (MU US) down -1.9%, Qualcomm (QCOM US) -1.8%, Skyworks Solutions (SWKS US) -1.6%. Other notable premarket movers:
- Biogen shares surged as much as 71% in US premarket trading, with the drugmaker on track for its biggest gain since its 1991 IPO if the move holds, as analysts lauded results of an Alzheimer’s drug study with partner Eisai.
- Lockheed drops as much as 2.3% in premarket trading as it was downgraded to underweight at Wells Fargo, which is taking a more cautious view on the defense sector on a likely difficult US budget environment into 2023.
- Mind Medicine slid 35% in premarket trading after an offering of shares priced at $4.25 apiece, representing a 31% discount to last close.
- Watch insurers, utilities and travel stocks as Hurricane Ian comes closer to making landfall on Florida’s Gulf coast.
- Keep an eye on southeastern US utilities including NextEra Energy (NEE US), Entergy (ETR US), Duke Energy (DUK US), insurers like AIG (AIG US), Chubb (CB US), as well as airline stocks
- Netflix (NFLX US) was raised to overweight from neutral at Atlantic Equities, the latest in a slew of brokers to turn bullish on the outlook for the streaming giant’s new ad- supported tier, though the stock was little changed in premarket trading
In other news, Hurricane Ian became a dangerous Category 4 storm as it roars toward Florida, threatening to batter the Gulf Coast with devastating wind gusts and floods.
European stocks dropped for a fifth day as Citigroup strategists said investors are abandoning the region at levels last seen during the euro area debt crisis. Miners underperformed as the strong dollar and concerns about demand for raw materials sent commodity prices to the lowest level since January. Retail stocks slumped, with the sector underperforming declines for the broader Stoxx 600, as concerns mount about a consumer spending crunch. UK retail stocks are particularly weak amid Britain’s market meltdown and after online clothing retailer Boohoo issued a profit warning. Boohoo cut its guidance for the year, with soaring energy and food bills stopping consumers from splashing out on clothes and shoes; peers including Asos (-7.5%) and Zalando (-3.5%) sank. Here are the biggest European movers:
- Roche gains as much as 6.5% in early trading, most since March 2020 after Eisai and partner Biogen said their drug significantly slowed Alzheimer’s disease. Roche partner MorphoSys rises as much as 22%. BioArctic jumps as much as 171% in Wednesday trading, its biggest intraday rise since 2018; the Swedish biopharma company is a partner of Eisai
- Sanofi shares rise as much as 2.2% after saying it sees currency impact of approximately 10%-11% on 3Q sales, according to statement.
- Burberry rises as much as 4.5% as analysts welcome the appointment of Daniel Lee, formerly of Bottega Veneta, to succeed Riccardo Tisci as creative director at the luxury designer.
- Retail stocks slide, with the sector underperforming declines for the broader Stoxx 600, as concerns mount about a consumer spending crunch. Boohoo slumped as much as 18% after cutting its guidance for the year, with soaring energy and food bills stopping consumers from splashing out on clothes and shoes; peers fell, with Asos down as much as 9.4% and Zalando -4.3%.
- Financial sectors including banks, real estate and insurance were the worst performers in Europe on Wednesday as hawkish comments from Fed officials stoked concerns over the economic outlook. HSBC fell as much as 5.3%, Barclays 6%, and insurer Aviva 7.9%
- Norway unveiled a plan to tap power and fish companies for 33 billion kroner ($3 billion) a year to cover ballooning budget expenditures, sending salmon farmers’ stocks falling. Salmar down as much as 30%, Leroy Seafood dropped as much as 26%, and Mowi slid as much as 21%
- Truecaller, which offers an app to block unwanted phone calls, falls as much as 23% in Stockholm after short seller Viceroy Research says it’s betting against the stock.
Adding to concerns, Deutsche Bank CEO Christian Sewing predicted a severe downturn in the lender’s home region and said the volatility whipsawing markets will continue for another year as central banks tighten rates to fight inflation, while ECB President Christine Lagarde said borrowing costs will be raised at the next “several meetings,” with several Governing Council members favoring a 75 basis point hike in October.
Meanwhile, natural gas prices in Europe surged after Russia said it may cut off supplies via Ukraine and the German Navy was deployed to investigate the suspected sabotage to the Nord Stream pipelines. Putin moved to annex a large chunk of Ukrainian territory amid a string of military setbacks in its seven-month-old invasion.
Asian shares also fell: Japanese equities slumped after the latest hawkish comments from Fed officials on raising interest rates in order to bring inflation down. The Topix fell 1% to close at 1,855.15, while the Nikkei declined 1.5% to 26,173.98. Toyota Motor Corp. contributed the most to the Topix decline, decreasing 1.6%. Out of 2,169 stocks in the index, 943 rose and 1,137 fell, while 89 were unchanged. “From here on, U.S. CPI inflation will be the most important factor,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management. “Now that the FOMC meeting is over, we will be getting a good amount of statements from Fed officials, and wondering what kind of statements will come out.”
Key equity gauges in India posted their longest stretch of declines in more than three months, as investors continued to sell stocks across global markets on worries over economic growth. The S&P BSE Sensex dropped 0.9% to 56,598.28 in Mumbai, while the NSE Nifty 50 Index fell by an equal measure. The indexes posted their sixth-consecutive decline, the worst losing streak since mid-June. Fourteen of the 19 sector sub-indexes compiled by BSE Ltd. declined. Metals and banking stocks were the worst performers. Healthcare and software firms gained. Reliance Industries and HDFC Bank contributed the most to the Sensex’s decline. Reliance Industries has erased its gain for the year and is headed for its lowest close since March. Out of 30 shares in the Sensex index, 12 rose, while 18 fell
In FX, the dollar’s rally brought losses to other currencies, including the euro and onshore yuan, which tumbled to its weakest level since 2008. A regulatory body guided by the People’s Bank of China urged banks to protect the authority of the yuan fixing after the onshore yuan fell to the weakest level against the dollar since the global financial crisis in 2008, amid an incessant advance in the greenback and speculation China is toning down its support for the local currency. The yen remained near the key 145 mark versus the dollar and within sight of levels that have drawn intervention from Japan. Speculation the sliding yen will compel Japan to intervene further, potentially funded by Treasuries sales, weighed on US debt.
“The fact we have such a strong increase in US yields is attracting flows into the US dollar,” said Nanette Hechler-Fayd’herbe, chief investment officer of international wealth management for Credit Suisse Group AG. “As long as monetary and fiscal policy worldwide are really not coming to strengthen their own currencies, we should be anticipating a very strong dollar.”
In rates, Treasury yields fell, following a more aggressive bull flattening move across the gilt curve, after Bank of England announced it would step into the market and buy long-dated government bonds, financed with new reserves. The Treasury curve remains steeper on the day however, with front-end yields richer by 7bp and long-end slightly cheaper. US session focus on 7-year note auction and a barrage of Fed speakers scheduled. Treasury 10-year yields around 3.93%, richer by 1.5bp on the day and underperforming gilts by around 25bp in the sector -- gilts curve richer by 3bp to 50bp on the day from front-end out to long-end following Bank of England announcement. US auctions conclude with $36b 7-year note sale at 1pm, follows soft 2- and 5-year auctions so far this week
In commodities, WTI trades within Tuesday’s range, falling 0.5% to around $78.14. Spot gold falls roughly $11 to trade near $1,618/oz.
Looking to the day ahead, there are an array of central bank speakers including Fed Chair Powell, the Fed’s Bostic, Bullard, Bowman, Barkin and Evans, ECB President Lagarde, the ECB’s Kazimir, Holzmann and Elderson, as well as BoE Deputy Governor Cunliffe and the BoE’s Dhingra. In the meantime, data releases include pending home sales for August.
- S&P 500 futures down 0.6% to 3,637
- MXAP down 1.9% to 139.41
- MXAPJ down 2.3% to 452.49
- Nikkei down 1.5% to 26,173.98
- Topix down 1.0% to 1,855.15
- Hang Seng Index down 3.4% to 17,250.88
- Shanghai Composite down 1.6% to 3,045.07
- Sensex down 0.3% to 56,939.09
- Australia S&P/ASX 200 down 0.5% to 6,462.03
- Kospi down 2.5% to 2,169.29
- STOXX Europe 600 down 1.4% to 382.97
- German 10Y yield little changed at 2.31%
- Euro down 0.3% to $0.9561
- Brent Futures down 0.4% to $85.94/bbl
- Brent Futures down 0.4% to $85.94/bbl
- Gold spot down 0.6% to $1,619.74
- U.S. Dollar Index up 0.36% to 114.52
Top Overnight News from Bloomberg
- ECB President Christine Lagarde said borrowing costs will be raised at the next “several meetings” to ensure inflation expectations remain anchored and price gains return to the 2% target over the medium term
- The ECB is on track to take interest rates to a level that no longer stimulates the economy by December, Governing Council member Olli Rehn told Reuters
- Germany’s federal government will increase debt sales by €22.5 billion ($21.5 billion) in the fourth quarter compared with an original plan to help fund generous spending to offset the impact of the energy crisis
- The cost of protection against European corporate debt has surpassed the pandemic peak as investors fret over the effect of central bank tightening at a time of mounting recession risk
- The Federal Reserve’s delicate balance between curbing demand enough to slow inflation without causing a recession is a “struggle,” said San Francisco Fed President Mary Daly
- This week a gauge of one-month volatility in the majors hit its strongest level since the pandemic mayhem of March 2020, as wide price swings in the pound lifted hedging costs across the G-10 space
- Moscow declared landslide victories in the hastily organized “referendums” it held in the territories currently occupied by its forces and prepared to absorb them within days. The United Nations has condemned the voting as illegal with people at times forced at gunpoint.
US Event Calendar
- 07:00: Sept. MBA Mortgage Applications, prior 3.8%
- 08:30: Aug. Retail Inventories MoM, est. 1.0%, prior 1.1%
- Wholesale Inventories MoM, est. 0.4%, prior 0.6%
- 08:30: Aug. Advance Goods Trade Balance, est. -$89b, prior -$89.1b, revised - $90.2b
- 10:00: Aug. Pending Home Sales (MoM), est. -1.5%, prior -1.0%
- Pending Home Sales YoY, est. -24.5%, prior -22.5%
Central Bank Speakers
- 08:35: Fed’s Bostic Takes Part in Moderated Q&A
- 10:10: Fed’s Bullard Makes Welcome Remarks at Community Banking...
- 10:15: Powell Gives Welcoming Remarks at Community Banking Conference
- 11:00: Fed’s Bowman Speaks at Community Banking Conference
- 11:30: Fed’s Barkin Speaks at Chamber of Commerce Lunch
- 14:00: Fed’s Evans Speaks at the London School of Economics
DB's Jim Reid concludes the overnight wrap
I had my worst nightmare yesterday. One of my wife's friends, who vaguely knows I work in financial markets, urgently contacted me for mortgage advise. She needed to make a decision within hours on what mortgage to take out from a selection of unpalatable options here in the UK. I'll be honest, when I speak to you dear readers and give advice I know you're all big and brave enough to either ignore it or consider it. However it felt very dangerous to be giving my wife's friend my opinion. Hopefully they'll be no fall out at the end of the period I advised on!
After the tumultuous events of recent days, market volatility has remained very high over the last 24 hours, with plenty of negative headlines to keep investors alert. In Europe, we got a fresh reminder about the energy situation after leaks in the Nord Stream 1 and 2 pipelines, whilst Gazprom warned that sanctions on Ukraine’s Naftogaz could put flows from Russia at risk. In the meantime, investors’ jitters surrounding the UK showed few signs of abating, with 30yr gilt yields surpassing 5% in trading for the first time since 2002 and a level it hasn't consistently been above since 1998. And even though we got some better-than-expected data releases from the US, they were also seen as giving the Fed more space to keep hiking rates over months ahead, adding to fears that they still had plenty of hawkish medicine left to deliver.
We’ll start here in the UK, since it was gilts once again that were at the epicentre of the ongoing repricing in rates, with plenty of signs that investors remain very nervous about the current economic situation. Gilt yields rose to fresh highs across the curve, with the selloff accelerating late in the session to leave the 10yr yield up by +26.1bps at a post-2008 high of 4.50%. Furthermore, the 30yr yield surged +44.8bps to a post-2007 high of 4.97%, closing just beneath the 5% mark that it had exceeded at one point right before the close. This for me is a fascinating development as recently as last December we were at 0.83% and then 2.28% in early August. For many many years the demand for long end gilts were seen as one of the most price insensitive assets in the fixed income world with huge regulatory and asset/liability buying. So the fact that even this has cracked shows the deep trouble the UK market is in at the moment. The moves have been so drastic that even the IMF announced yesterday they were closely monitoring developments in Britain and were engaged with UK authorities. Their rebuke was quite scathing.
Staying in the UK, there was an even more significant repricing of real yields, with the 10yr real yield surging by another +52.9bps on the day to 0.77%, having been at -0.84% only a week earlier, so a massive turnaround. Sterling ended a run of 5 consecutive daily losses to strengthen by +0.41% against the US Dollar, taking it back up to $1.073. However it was higher before the IMF statement and is at $1.065 this morning with their rebuke reverberating around markets.
Whilst UK assets continued to struggle, we did hear from BoE Chief Economist Pill yesterday, who sits on the 9-member Monetary Policy Committee. The main headline from his remarks was the comment that “this will require a significant monetary policy response”. Investors are still pricing in over +155bps worth of hikes by the next meeting on November 3, as well as a terminal rate above 6% next year. However, investors also continued to lower the chances of an emergency inter-meeting hike, particularly after Pill said that it was better to take a “considered” and “low-frequency” approach to monetary policy.
Elsewhere in Europe, the question of energy remained top of the agenda yesterday, with a fresh surge in natural gas futures (+19.65%) that marked a reversal to the declines over the last month. That followed the news of leaks from the Nord Stream 1 and 2 pipelines, which officials across multiple countries said could be the result of sabotage. Danish PM Frederiksen said that it was” hard to imagine that these are coincidences” and the FT reported German officials who said there was concern that a “targeted attack” had caused the sudden loss of pressure. A real nightmare scenario is if the sabotage attempts extended to other pipelines. Indeed Bloomberg reported that Norway was looking to increase security around its own infrastructure. However these pipes are long so it would take a lot of effort to protect them all.
On top of the leaks, we also heard from Gazprom, who said that there was a risk that Moscow would sanction Ukraine’s Naftogaz. That would stop them from paying transit fees, which in turn would put gas flows to Europe at risk, and led to a significant jump in prices after the news came through later in the session.
Against that unfavourable backdrop, European assets continued to suffer over the last 24 hours across multiple asset classes. Sovereign bonds didn’t do quite as badly as gilts, but it was still a very poor performance by any normal day’s standards, with yields on 10yr bunds (+11.3bps) reaching a post-2010 high of 2.22%. Peripheral spreads continued to widen as well, with the gap between 10yr Italian yields over bunds closing above 250bps for the first time since April 2020. In the meantime, equities lost ground thanks to a late session reversal, leaving the STOXX 600 (-0.13%) at its lowest level since December 2020. And there was little respite for credit either, with the iTraxx Crossover widening +15.2bps to 670bps, which is a closing level we haven’t seen since March 2020.
On top of sour risk sentiment, results from Russia’s referendum in four Ukrainian territories unsurprisingly revealed lopsided votes in favour of Russian annexation, topping 85% in each of the regions. That stoked fears that Russia will move to officially annex the territories as soon as this week, thereby claiming any attack on those territories is an attack on sovereign Russia itself and enabling yet further escalation. President Putin is scheduled to address both houses of the Russian Parliament this Friday, which British intelligence reports may be used as a venue to push through an official annexation ratification.
Over in the US, there was some better news on the data side that helped to allay fears about an imminent slide into recession. First, the Conference Board’s consumer confidence reading for September rose to 108.0 (vs. 104.6 expected), which is its highest level since April. Second, new home sales in August unexpectedly rebounded to an annualised pace of 685k (vs. 500k expected), which is their highest level since March. Third, the preliminary durable goods orders for August were roughly in line with expectations at -0.2% (vs. -0.3% expected), and core capital goods orders exceeded them with +1.3% growth (vs. +0.2% expected) and a positive revision to the previous month. Finally, the Richmond Fed’s manufacturing index for September came in at 0 (vs. -10 expected), adding to that theme of stronger-than-expected releases. A word of caution, the housing data is typically noisy and subject to revision, so despite the bounce in sales, we don’t think this marks a sea-change in housing markets, which have been battered by tightening financial conditions to date.
In the end however, those data releases didn’t manage to stop the S&P 500 (-0.21%) losing ground for a 6th consecutive session, which takes the index back to its lowest closing level since November 2020. In fact for the Dow Jones (-0.43%), yesterday’s losses left it at its lowest closing level since 6 November 2020. That was the last trading session before the news on Monday 9 November from Pfizer that their late-stage vaccine trials had been successful, thus triggering a massive global surge as the way out of the pandemic became much clearer. All-in-all though, equities were a side show to fixed income yesterday.
When it came to Treasuries, there was a notable steepening in both the nominal and real yield curves yesterday, and 10yr yields ended the session up +2.1bps at 3.95%. This morning in Asia 10yr yields did trade at 4% for the first time since 2010 before dipping to around 3.98% as I type. In terms of Fed speak yesterday, we heard from Chicago Fed President Evans, who implied that the Fed might take stock of the impact of rate hikes in the spring, saying that “By spring of next year we are going to get to a funds rate that we can sort of sit and watch how things are behaving,” In the meantime, St Louis Fed President Bullard (one of the most hawkish members of the FOMC) said that inflation was a serious problem and that the credibility of the Fed’s inflation target was at risk.
This morning Asian equity markets are extending their downtrend. As I type, The Kospi (-3.01%) is sharply lower in early trade with the Hang Seng (-2.40%), the Nikkei (-2.21%), the CSI (-0.77%) and the Shanghai Composite (-0.75%) all trading in negative territory.
After a steady start, US stock futures got caught up in the bearish mood with contracts on the S&P 500 (-0.71%) and NASDAQ 100 (-0.98%) both moving lower.Apple reversing plans for an iPhone production boost on waning demand seemed to be a catalyst. The US dollar index (+0.43%) has hit a fresh two-decade high of 114.69 this morning.
Early morning data showed that Australia’s August retail sales advanced for the eighth consecutive month, rising +0.6% m/m, faster than the +0.4% increase expected although the pace of growth slowed from the +1.3% rise seen in July.
To the day ahead now, and there are an array of central bank speakers including Fed Chair Powell, the Fed’s Bostic, Bullard, Bowman, Barkin and Evans, ECB President Lagarde, the ECB’s Kazimir, Holzmann and Elderson, as well as BoE Deputy Governor Cunliffe and the BoE’s Dhingra. In the meantime, data releases include Germany’s GfK consumer confidence reading for October, and France and Italy’s consumer confidence reading for September. In the US, there’s also pending home sales data for August.
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