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Risk Off: Futures, Oil And Yields Slide, Hong Kong In Bear Market; Dollar Surges

Risk Off: Futures, Oil And Yields Slide, Hong Kong In Bear Market; Dollar Surges

Another ugly day for risk assets with US equity-index futures dropping alongside global stocks, as faltering growth and China’s regulatory curbs compounded…

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Risk Off: Futures, Oil And Yields Slide, Hong Kong In Bear Market; Dollar Surges

Another ugly day for risk assets with US equity-index futures dropping alongside global stocks, as faltering growth and China’s regulatory curbs compounded risks before the Federal Reserve’s Jackson Hole symposium next week. Fears about economy-linked sectors put the Dow and the S&P 500 on course for their worst week since mid-June. The dollar extended its rally to a fresh 10 month high, oil slumped and bitcoin surged after Coinbase announced it bought $500 million in crypto would reinvest some of its profits in digital currencies. At 745 a.m. ET, Dow e-minis were down 125 points, or 0.36%, S&P 500 e-minis were down 15 points, or 0.34%, and Nasdaq 100 e-minis were down 19 points, or 0.13%.

For the week, the Dow and the S&P 500 are down about 1.7% and 1.4% respectively, while the Nasdaq has fallen 1.9%, its worst since mid-May. FAAMG stocks slid between 0.2% and 0.7% despite a continued decline in bond yields. Deere rose 1% after it beat Wall Street estimates for third-quarter revenue and lifted its full-year earnings forecast on strong demand for farm and construction equipment. The biggest pain again was spread among the oil majors as Chevron and Exxon Mobil slipped another 0.8% each, tracking steep losses in crude prices. The S&P 500 energy sector is down about 7.6% this week, the most among all the 11 major S&P sectors.

Moderna fell after The Washington Post reported that health officials were investigating reports the company’s vaccine may be linked to higher risk of a heart condition than previously thought. Ross Stores Inc. slid 4.4% after its guidance disappointed Wall Street. Here are some of the other biggest U.S. movers today:

  • Blend Labs (BLND) falls 14% after the provider of cloud-based banking software reported second-quarter revenue that missed the lowest analyst estimate.
  • Deere & Co. (DE) gains 2% after raising its full-year fiscal outlook as surging crop prices boosted farmers’ demand for new equipment.
  • FibroGen (FGEN) rises 6% after Raymond James upgraded the stock to market perform as the EU approval of roxadustat removes any remaining regulatory risk.
  • Foot Locker (FL) shares rise 7% after the athletic footwear and apparel retailer reported second-quarter results that topped the highest analyst estimates.
  • GeoVax Labs (GOVX) rallies 76% after the biotech company presented data on its Covid vaccine candidate.
  • Mudrick Capital Acquisition Corporation II (MUDS) falls 2% after saying the the merger pact with Topps Intermediate Holdco and Tornante-MDP Joe Holding has been terminated by mutual agreement.
  • Naked Brand Group (NAKD) soars 13% as message volume on the intimate apparel company increases on Stocktwits.
  • Ross Stores (ROST) shares fall 4% after the off- price retailer’s guidance disappointed Wall Street.
  • Tesla (TSLA) shares are up 1.8% after the company on Thursday said it planned to build a humanoid robot, and expects to make a prototype sometime next year.

In a now daily event, there were fireworks out of China where the passage of a new privacy law sent tech names plunging to record lows and sent Hong Kong's Hang Seng index into a bear market.

Internet bellwether Alibaba’s shares hit a record low in Hong Kong this week and Tencent Holdings Ltd. warned the industry to prepare for more regulations including substantial changes to how companies use data for advertising. The Golden Dragon China ETF was set for its eighth straight weekly loss - its longest losing streak in a decade - on concerns over China’s widening crackdown on sectors ranging from technology to luxury goods makers. E-commerce giant Alibaba Holdings has lost about $76 billion of its market value in the past four days and is headed for its worst week ever.

Investors remained concerned about Covid: "The Delta variant remains the biggest worry for investors right now, and along with the question of waning vaccine efficacy has made the risks to the outlook much more pronounced relative to just a few months ago," Deutsche Bank analyst Henry Allen said in a note to clients. "However, nervousness about possible tapering by the Fed ahead of next week’s Jackson Hole speech by Chair (Jerome) Powell, along with a potential Chinese growth slowdown have further played on investors’ minds, and brought the narrative a long way from the reflation hopes many had back in Q1."

With virus cases surging around the world, there’s speculation that economic growth could lose momentum just as central banks pare back their support measures. U.K. retail sales fell unexpectedly last month and major employers are delaying plans to bring workers back into the office.

“The delta variant of Covid is significantly more serious than anyone is really even pricing into the market,” Hilary Kramer, chief investment officer at Kramer Capital Research, said on Bloomberg Television. “We know that tapering is coming. We know that the market is getting tired.”

The Fed also looms: minutes from the Federal Reserve’s last policy meeting showed officials largely expect to reduce the central bank’s emergency monthly purchases of $120 billion of Treasury bonds and mortgage-backed securities later this year, amid a recovery in the jobs market. Focus is now on the Fed’s annual research conference in Jackson Hole, Wyoming, next week for any read about the central bank’s next steps.

Investors are bracing for an eventual phase-out of Fed stimulus that has driven record stock prices, according to Swissquote analyst Ipek Ozkardeskaya. But the worsening of the pandemic and soft economic data could ease tapering expectations in the coming months, she said by email.  “The threat of a taper tantrum is real and will likely keep the Fed reasonably dovish when it comes to a concrete action,” Ozkardeskaya wrote.

Despite the market weakness, Mark Dowding, chief investment officer at BlueBay Asset Management, said abundant liquidity meant there was "plenty of cash that can buy the dip, so we doubt any correction in risk assets will run too far. Once we can look beyond the crest of the Delta wave, there may be calmer waters ahead and so this seems like a good time to be building and holding positions, with an eye towards the medium-term rather than playing for the vagaries of shorter-term price action."

The MSCI World Index was last down 0.3%, on course for its biggest weekly fall since February.

Europe’s Stoxx 600 Index slid 0.1%, with retailers and utilities being the only industry groups with meaningful gains. Marks & Spencer surged 11% after the British retailer improved its profit forecast. Europe is on track for the biggest weekly loss since February. European auto stocks extended declines, following a fall on Thursday, as Japan’s Toyota continued to drop after it announced it would cut September production by 40% owing to the global chip shortage. The Stoxx 600 Automobiles & Parts index fell as much as 1.4%, having closed 2.8% lower on Thursday. Volkswagen, BMW and Stellantis the biggest drags on the sub-index; all stocks in the red in the sub-group. Here are some of the biggest European movers today:

  • Marks & Spencer shares jump as much as 12% with analysts saying the U.K. retailer’s raised guidance is welcome and that the progress it is making on its strategic turnaround is positive.
  • Wm Morrison shares rise as much as 4.8%, surpassing the raised takeover bid pricefor the U.K. grocer from private equity firm CD&R. Analysts say it’s possible that rival bidder Fortress may come back with a higher offer.
  • Norway Royal Salmon shares jump as much as 15% after fisheries peer SalMar launched a rival offer for the company to the one made by NTS. Kepler said SalMar is a better fit for Norway Royal Salmon. SalMar shares rose as much as 3.4%.
  • Kingspan shares rose as much as 4.2%, hitting a record high, with analysts saying the Irish insulation supplier’s results look “solid” and it’s working well to offset higher raw material costs.
  • Dino Polska shares drop as much as 7.5% after the Polish supermarket operator’c, with analysts saying pressure on its margins is likely to drive some profit-taking.
  • Remy Cointreau shares fall as much as 3.3% and distilling peer Pernod Ricard slips as much as 2.7% amid signs of a potential regulatory crackdown on the liquor industry in China.

Asian stocks declined, heading for their worst week since February, as ongoing concerns over the delta virus and China’s regulatory clampdown hurt sentiment. The MSCI Asia Pacific Index fell as much as 1.3%, with Alibaba and Toyota leading a selloff in consumer shares. Hong Kong’s benchmark stock index entered a technical bear market, amid a deepening rout triggered by investor concerns over China’s regulatory crackdown across a swathe of industries, after dropping about 20% from a February peak.  Asia’s stock benchmark is down more than 4% this week as investors face a range of issues including the impact of the pandemic’s resurgence on growth, the outlook for tapering at the Federal Reserve and Beijing’s continued crackdown on private industry. The S&P 500 Index and Stoxx 600 Europe Index have both fallen less than 2.5%.  “The Chinese authorities aren’t looking to regulate everything all of sudden, but rather following the policy in accordance to the push for ‘common prosperity’,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management in Tokyo. “That said, it’s hard for investors to see what actions the government will actually take. It may discourage foreign investors away from Chinese equities for some time.”  Vietnam’s VN Index was the worst performer in the region, dropping as much as 4.2% on concerns of stricter restrictions as the government tackles the country’s worst outbreak. Philippine stocks also declined for the first time in five sessions, even as the government eased a lockdown in the capital region.

Japanese stocks slid, as automakers weighed on the Topix which capped its worst weekly drop since July 2020, after a report that Toyota is set to slash its output due to the chip shortage and the spread of the delta variant. Electronics makers and trading houses were also among the biggest drags on benchmark, which fell 0.9% Friday, pushing its weekly loss to 3.9%. SoftBank Group and Fast Retailing were the largest contributors to a 1% slide in the Nikkei 225, which closed at a fresh low for the year. Japan’s inflation slid for a 12th month in July, extending the longest losing streak in a decade after data revisions showed weakness during the pandemic was worse than previously reported

In Australia, the S&P/ASX 200 index gave back early gains to slip 0.1% to 7,460.90 at the close, pulled lower by miners as commodities headed for their worst week in two months. The benchmark lost 2.2% this week, the most since Jan. 29. Sentiment remained weak as a lockdown in Sydney was extended until the end of September.  On Friday, the best performing stock was Redbubble after it was raised to add at Morgans. Cochlear was the worst performer after analysts said the company’s FY22 guidance missed expectations. In New Zealand, the S&P/NZX 50 index fell 0.1% to 12,940.49. The government announced its nationwide lockdown would last until at least Tuesday.

In rates, Treasuries held small gains led by the long end, flattening the 5s30s curve for a fourth straight day as traders look ahead to next week’s auctions and month-end index rebalancing. Yields were are lower across the curve led by the 10 Year, down 1.5bp at 1.228% and 4.8bp lower on the week; 30-year is 7.2bp lower on the week, including 1.5bp Friday. Ten- and 30-year yields have declined every day this week, and 5s30s spread breached 110bp, approaching lowest level in nearly a year.  5s30s at ~110bp is flatter for a third straight week; it collapsed to under 110bp from ~140bp over four days in June after hawkish changes in the Fed’s dot plot led traders to price in a more aggressive path of rate hikes. German bunds rose for a sixth day, the longest run of gains since October

In FX, with Delta cases rising across the globe from the United States to Australia, New Zealand and Japan, safety was key and the dollar a chief beneficiary: the Bloomberg Dollar Spot Index advanced a fifth consecutive day as the greenback gained against all of its Group-of-10 peers apart from the franc and the yen. The Dollar DXY index rose, hitting the highest level since November.

Commodity currencies extended their slide, led by the Canadian dollar and Norwegian krone, while the euro hovered around the weakest level this year. The Australian and New Zealand dollars both fell to nine-month lows due to a fresh round of lockdowns. The euro was flat. The pound fell to its lowest level against the dollar in a month and wasn’t helped by U.K. retail sales falling unexpectedly at the sharpest pace since the economy was in lockdown in January. Japanese government bond futures edged higher as uncertainties about the global outlook fueled demand for havens; the 10-year yield hovered above zero.


Oil prices continued to edge lower, building on sharp falls earlier in the week, with U.S. crude down 0.8% at $63.17 a barrel and Brent crude down 0.6% at $66.04 per barrel. WTI futures headed for the longest losing streak since 2019, as concerns mounted about global demand. Bitcoin rose above $47,000 and gold also rose, up 0.3% and heading for its second straight week of gains.

To the day ahead now, and it’s a fairly quiet one on the calendar with data releases including German PPI and UK retail sales for July. Otherwise, Dallas Fed President Kaplan will be speaking, and there’s an earnings release from Deere & Co.

Market Snapshot

  • S&P 500 futures down 0.5% to 4,378.25
  • STOXX Europe 600 down 0.3% to 465.74
  • MXAP down 1.0% to 190.83
  • MXAPJ down 1.2% to 623.86
  • Nikkei down 1.0% to 27,013.25
  • Topix down 0.9% to 1,880.68
  • Hang Seng Index down 1.8% to 24,849.72
  • Shanghai Composite down 1.1% to 3,427.33
  • Sensex down 0.5% to 55,344.86
  • Australia S&P/ASX 200 little changed at 7,460.87
  • Kospi down 1.2% to 3,060.51
  • German 10Y yield down 0.4 bps to -0.493%
  • Euro little changed at $1.1673
  • Brent Futures down 0.1% to $66.37/bbl
  • Gold spot up 0.2% to $1,784.31
  • U.S. Dollar Index little changed at 93.65

Top Overnight News from Bloomberg

  • Reserve Bank of Australia board member Ian Harper said he expects the jobless rate to climb back above 5% and to see a “much bigger” fall in participation as renewed lockdowns along the nation’s east coast flow through to the labor market
  • Money managers who scooped up an unprecedented amount of Japanese government bonds in July appear to be well placed for a surge in risk aversion this month
  • Germany’s financial markets watchdog says tough regulations it’s preparing to prevent greenwashing in investment funds will help shape the next chapter of Europe’s efforts to make capitalism more sustainable
  • China’s rolling regulatory crackdown on unfair markets found more targets Friday among liquor makers, cosmetics firms and online pharmacies
  • Norway’s economy returned to its pre-pandemic level in the second quarter as the reopening of the richest Nordic nation triggered a surge in consumption

A more detailed breakdown of global markets courtesy of Newsquawk

The mood in Asia was mostly subdued following on from the losses in European bourses and indecision stateside where energy was the worst performing sector once again as oil retreated for a 6th consecutive day and cyclicals lagged. Nonetheless, ASX 200 (-0.1%) weathered the risk aversion despite the extension of the Sydney lockdown to end-September and curfew announcement, with participants digesting another influx of earnings results and as strength in defensives kept the index afloat. Nikkei 225 (-1.0%) retreated towards the 27k level amid a choppy currency and with notable losses seen in automakers after Toyota announced to reduce domestic capacity by 40% as the worsening COVID-19 situation in the region impacts auto parts supplies. Hang Seng (-1.8%) and Shanghai Comp. (-1.1%) were pressured by Beijing’s tightening regulatory grip on the private sector with the market regulator to hold discussions with relevant enterprises today regarding the spirit industry and China's legislature passed personal information protection law, while the PBoC provided no surprises on its benchmark rates in which it maintained the 1-Year and 5-Year Loan Prime Rates at 3.85% and 4.65%, respectively. Finally, the gains in JGBs were only minimal despite the risk aversion with prices subdued after the whipsawing in T-notes and with the BoJ also refraining from JGB purchases, while Aussie yields were slightly softer following relatively firm demand at the Australian government 2025 bond auction.

Top Asian News

  • Hong Kong’s Benchmark Stock Index Slumps Into Bear Market
  • Asian Stocks Extend This Week’s Rout on Growth, China Tech Woes
  • China’s Slow Bond Sales Will Delay Infrastructure Boost
  • Record Binge on Japanese Bonds Looks Prescient in Risk-Off Lurch

After a relatively flat open, European equities (Stoxx 600 Unch) have initially drifted lower in quiet trade with the Stoxx 600 on track to close the week out with losses of around 1.8%, however the mild losses diminished in the run-up to the US entrance. The Asia-Pac handover was a negative one once again with notable losses in Chinese bourses after China's legislature passed its Personal Information Protection Law and reports noted that the domestic market regulator is to hold discussions with relevant enterprises today regarding the spirit industry. Futures in the US are also succumbing to the selling pressure with the ES showing losses of 0.2%. From a regional perspective in Europe, French and Italian equities have been downgraded to underweight versus neutral at UBS. Sectoral performance is mostly softer with Retail the only outlier to the upside with Inditex (+1.5%) the largest contributor to the gains. Autos are lagging once again as investors digest the continued fallout from chip shortages which saw Toyota announce that it will have to cut production at several plants next month. Marks & Spencer (+11.4%) sit at the top of the FTSE 100 with the Co. now expecting profits to be at the upper end of its prior GBP 300-500mln range following encouraging trading. Morrisons (+4.4%) is another notable gainer after CD&R boosted its offer for the Co. to GBP 2.85/shr from 2.30/shr; Morrisons said CD&R's offer has been recommended unanimously by the board.

Top European News

  • Marks & Spencer Surges as Lockdown Rebound Lifts Profit Forecast
  • Kingspan Jumps to Record; Morgan Stanley Notes ‘Solid Update’
  • U-Blox Falls Most Since March; Analysts Flag 1H Earnings Miss
  • Genel Says KRG Plans to Terminate Bina Bawi, Miran Contracts

In FX, the index continues to extend on the upside seen post-FOMC as the risk tone remains tilted towards caution/risk aversion. Overnight, the DXY found a floor at 93.500 before rising to 93.684 at best as sentiment in Europe is tainted in early trade. From a technical standpoint, the index eyes resistance around the 93.900 mark - which acted as a ceiling on several occasions during Q3 and Q4 2020. Above that, a breach of the psychological 94.000 mark could open the door to resistance around 94.300 (4th Nov 2020 high), 94.500 and thereafter the 100 and 200 WMAs at 94.650 and 94.807 - although these are still some way off. To the downside, yesterday’s low was at 93.214, the psychological 93.000, whilst the 21 DMA (92.674) and the 50 DMA (92.377) reside just below. Ahead, an empty state-side calendar but price action will likely be dictated by the risk tone. As a side note Fed Chair Powell is to speak on the economic outlook at the Jackson Hole Symposium on August 27th at 15:00BST/10:00EDT.

  • AUD, CAD, NZD - The non-US high betas are again at the bottom of the bunch in early European trade - subdued by the overall risk tone. The Loonie is the notable laggard - but seemingly more so on technical as opposed to crude dynamics. USD/CAD found support at 1.2800 overnight and tests 1.2900 to the upside at the time of writing, following the CAD's crude-drive demise during the week. As a reminder, SocGen earlier this week suggested that USD/CAD above its 200 DMA (1.2560) opens the door for a rise closer towards 1.3000 - with the CAD-WTI correlation also strengthening over the past month to 0.5 from 0.25. Participants look ahead to today's Canadian Retail Sales for an impulse. If the pair mounts 1.3000, then the 100 and 200 WMAs overlapping around 1.3077. Meanwhile, the AUD and NZD are pressured by the worsening domestic cases prompting an extension of the Kiwi nationwide lockdown alongside Australia's Sydney's curbs extended until the end of September. NZD/USD threatens a breach of 0.6800 to the downside from a 0.6852 overnight high. The AUD/USD similarly threatens a downside breach of 0.7100 after finding a current base close to the psychological level. Meanwhile, the AUD/NZD cross remains in favour of the Kiwi - likely on the RBA/RBNZ differential, with the latter still on course aggressively tighten before the former.
  • JPY, CHF - The safe-havens FX trade flat/firmer amid the cautious risk tone and amid a lack of fresh catalysts. USD/JPY remains sandwiched between its 21 DMA (109.84) and 100 DMA (109.63), with the next downside level being interim support around 109.47 (Wed and Thu lows). USD/CHF is similarly contained just under 0.9200 but north of its 50 DMA (0.9160).
  • EUR, GBP - The European majors are relatively uneventful, but the EUR has been drifting lower in recent trade against the Buck and Sterling. EUR/USD trades within a tight 1.1670-89 range, with 1.1650 the next real support point. It's worth noting that the pair sees some EUR 1.1bln in OpEx between strikes 1.1700-1.1710 for today's NY cut. Sterling, meanwhile, was unreactive to sub-par July retail sales – amid the dissipating effects from the Euro 2020 Championship. GBP/USD trades just off session lows in its current 1.3610-48 parameter. A breach of 1.3600 could open the door to support at 1.3589 and 1.3570 (21st and 20th July lows). EUR/GBP trades in a current 0.8556-82 band, with the 100 DMA seen at 0.8591.

In commodities, WTI and Brent front-month futures are once again on a softer footing amid the continuing COVID concerns coupled with the cautious tone around the market. On the former, the overnight session saw an extension of the Kiwi nationwide lockdown alongside Australia's Sydney's curbs extended until the end of September. Aside from that news flow has been quiet for the complex and the market in general - with sentiment and Delta woes likely to take precedence in the absence of catalysts. WTI makes its way back towards UD 63/bbl (vs high 64.04/bbl) and Brent towards USD 66/bbl (vs 66.93 high). Elsewhere, spot gold and silver vary but remain flat in the grander scheme above USD 1,775/oz and north of USD 23/oz respectively. Base metals meanwhile see a mild rebound from yesterday's violent selloff, but benchmark LME copper remains sub-9,000/t after finding a ceiling at the mark.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

I’ve never been a massive TV watcher, but I’m worried I’m stuck in one of those science fiction time loops writing the EMR this week. I almost feel like a broken record. Every day (broadly speaking) it’s been equities down, commodities down, 10yr Treasury yields down, US dollar up. At this rate, perhaps I should start writing Monday’s edition already.

Anyway, if you hadn’t worked out this week’s script by now, risk appetite continued to evaporate in yesterday’s session as an array of concerns gathered pace, which served to reinforce the moves we’d already seen this week. The delta variant remains the biggest worry for investors right now, and along with the question of waning vaccine efficacy has made the risks to the outlook much more pronounced relative to just a few months ago. However, nervousness about possible tapering by the Fed ahead of next week’s Jackson Hole speech by Chair Powell, along with a potential Chinese growth slowdown have further played on investors’ minds, and brought the narrative a long way from the reflation hopes many had back in Q1.

Looking at yesterday’s moves in more depth, the selloff gathered pace as European markets opened, with the STOXX 600 falling -1.51% in its worst performance for a month. Energy stocks were among the biggest underperformers against the backdrop of continued falls in oil prices, but luxury goods stocks slumped as well, which follows a speech from Chinese President Xi earlier in the week about growing wealth inequality. That’s prompted concerns about whether the super-rich could have to pay higher taxes, and saw brands such as LVMH (-6.38%) and Kering (-9.47%) lose significant ground, meaning that the CAC 40 (-2.43%) noticeably underperformed other European indices. In the US, the S&P 500 (+0.13%) did manage to pare back its earlier losses to move into positive territory by the close, but other indices including the Dow Jones (-0.19%) and the small-cap Russell 2000 (-1.22%) similarly moved lower on the day. In fact, the small-cap index has underperformed all week as cyclicals have lagged behind, down -4.08%.

That selloff in equity markets was also witnessed among commodities, with Bloomberg’s Commodity Spot Index (-1.69%) seeing its biggest decline in a month as investors moved to price in the more negative outlook. Oil prices continued their slump, with WTI (-2.70%) and Brent Crude (-2.61%) having fallen for 6 successive days now, which is the longest run of declines for both in over a year. That said, even with the recent poor run for oil, it’s worth noting that they’re still one of the best-performing major assets on a YTD basis, with WTI up +31.27%. But that’s also a far cry from its closing peak last month when it’d been up +55.1% on a YTD basis.

On the plus side, core sovereign bonds continued to do well amidst the flight to safety, with yields on 10yr Treasuries (-1.5bps) and bunds (-0.7bps) declining further, whilst the 30yr bund yield (-1.7bps) fell to its lowest level in 6 months. Gold (-0.42%) did move lower, though that was a relative outperformance compared to other commodities, whilst the dollar index (+0.46%) strengthened to its highest level since last November.

Overnight in Asia, concerns about the outlook have accelerated, particularly in New Zealand where a further 11 community cases were reported, which brings the total in this outbreak to 31. In turn, that’s seen Prime Minister Ardern extend the national lockdown by a further 4 days to August 24. But given what occurred in Australia, where lockdowns were designed around a similar zero tolerance policy framework, there remains a very real risk that the lockdowns could be extended much further, for weeks if not months. Nevertheless, RBNZ Governor Adrian Orr said that policy makers planned to raise the official cash rate at their next meeting, even if there are still cases of Covid-19 in the community. He said “What we’ve learned through time is that incomes remain strong, demand bounces back very quickly, and that these rolling lockdowns will continue for a while,” and added, we cannot lose focus on inflation so “Of course October is a live meeting.”

As well as New Zealand, there’s been bad news on Covid from elsewhere in the Asia-Pacific region over the last 24 hours. In Australia, New South Wales reported a further 642 cases, whilst Victoria state reported 57, and has Sydney’s lockdown is now set to last until the end of September. Furthermore, New South Wales is set to make mask wearing compulsory outdoors except when exercising, and a curfew will be placed on areas of western Sydney hardest hit by the outbreak. Separately in Japan, the country reported a record number of new daily cases, at 25,156, which is a tenfold rise in the daily count relative to a month earlier.

Against this backdrop, markets in Asia have taken yet another leg lower overnight, with the Nikkei (-0.79%), Hang Seng (-2.28%), Shanghai Comp (-1.66%) and Kospi (-0.69%) all losing ground this morning, and futures on the S&P 500 are down -0.15%. On the data side, Japan’s CPI reading for July came in slightly weaker than expected at -0.3% yoy (vs. -0.4% expected), although the previous month’s reading was revised sharply lower to -0.5% (vs. +0.2% previously).

Elsewhere on the pandemic, cases are continuing to rise rapidly in the US with schools remaining in focus. A stark divide is forming between states led by Democratic and Republican Governors, with some of the former – namely Washington, New Jersey, and Oregon – enacting mask mandates and calling all on teachers and school personnel to be vaccinated. On the other hand, Florida and Georgia have seen their Governors speak out against mask and vaccine mandates both in schools and to enter indoor social settings. Otherwise, daily vaccinations in the US rose above 1 million for the first time since 3 July yesterday. The number receiving jabs have been picking up for the past few weeks now as the delta variant spreads and state and local governments push new incentives and restrictions for the unvaccinated. Separately in the UK, the ONS estimated that 94% of the adult population in England would have tested positive for Covid antibodies in the week commencing July 26, which is the highest number yet. That said, on the topic of waning immunity, the weekly data show that there’s been a small but noticeable decline among antibody rates among the elderly, albeit they’re still above 90%.

In Germany, it’s only 5 weeks on Sunday until they hold their federal election, and another couple of polls out yesterday showed the centre-left SPD moving ahead of the Greens into second place, which suggests this shift is more than just an outlier poll. The first from Kantar showed the top 3 parties within an incredibly tight 3 percentage points of each other, with the CDU/CSU on 22%, the SPD on 21% and the Greens on 19%. But another from Allensbach for the FAZ newspaper yesterday gave Chancellor Merkel’s CDU/CSU bloc a more decisive lead, with 27.5% of the vote, ahead of the SPD on 19.5% and the Greens on 17.5%, which would put them in a much stronger position in the next Bundestag and in coalition negotiations.

On the data front, the weekly initial jobless claims from the US for the week through August 14 fell to a post-pandemic low of 348k (vs. 364k expected), whilst the 4-week moving average was also at a post-pandemic low. That said, the Philadelphia Fed’s manufacturing business outlook survey saw the diffusion index for current activity fall to 19.4 (vs. 23.1 expected), marking a 4th consecutive decline. Furthermore, the current prices received index rose to 53.9, which was its highest level since May 1974.

To the day ahead now, and it’s a fairly quiet one on the calendar with data releases including German PPI and UK retail sales for July. Otherwise, Dallas Fed President Kaplan will be speaking, and there’s an earnings release from Deere & Co.

Tyler Durden Fri, 08/20/2021 - 08:17

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Is The Global Debt Bubble About To Burst?

Is The Global Debt Bubble About To Burst?

Authored by Gail Tverberg via Our Finite World blog,

Is the debt bubble supporting the world economy…

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Is The Global Debt Bubble About To Burst?

Authored by Gail Tverberg via Our Finite World blog,

Is the debt bubble supporting the world economy in danger of collapsing?

The years between 1981 and 2020 were very special years for the world economy because interest rates were generally falling:

Figure 1. Yields on 10-year and 3-month US Treasuries, in a chart made by the Federal Reserve of St. Louis, as of May 10, 2022.

In some sense, falling interest rates meant that debt was becoming increasingly affordable. The monthly out-of-pocket expense for a new $500,000 mortgage was falling lower and lower. Automobile payments for a new $30,000 vehicle could more easily be accommodated into a person’s budget. A business would find it more affordable to add $5,000,000 in new debt to open at an additional location. With these beneficial effects, it would be no surprise if a debt bubble were to form.

With an ever-lower cost of debt, the economy has had a hidden tailwind pushing it long between 1981 to 2020. Now that interest rates are again rising, the danger is that a substantial portion of this debt bubble may collapse. My concern is that the economy may be headed for an incredibly hard landing because of the inter-relationship between interest rates and energy prices (Figure 2), and the important role energy plays in powering the economy.

Figure 2. Chart showing the important role Quantitative Easing (QE) to lower interest rates plays in adjusting the level of “demand” (and thus the selling price) for oil. Lower interest rates make goods and services created with higher-priced oil more affordable. In addition to the items noted on the chart, US QE3 was discontinued in 2014, about the time of the 2014 oil price crash. Also, the debt bubble crash of 2008 seems to be the indirect result of the US raising short term interest rates (Figure 1) in the 2004 to 2007 period.

In this post, I will try to explain my concerns.

[1] Ever since civilization began, a combination of (a) energy consumption and (b) debt has been required to power the economy.

Under the laws of physics, energy is required to power the economy. This happens because it takes the “dissipation” of energy to perform any activity that contributes to GDP. The energy dissipated can be the food energy that a person eats, or it can be wood or coal or another material burned to provide energy. Sometimes the energy dissipated is in the form of electricity. Looking back, we can see the close relationship between total energy consumption and world total GDP.

Figure 3. World energy consumption for the period 1990 to 2020, based on energy data from BP’s 2021 Statistical Review of World Energy and world Purchasing Power Parity GDP in 2017 International Dollars, as published by the World Bank.

The need for debt or some other approach that acts as a funding mechanism for capital expenditures (sale of shares of stock, for example), comes from the fact that humans make investments that will not produce a return for many years. For example, ever since civilization began, people have been planting crops. In some cases, there is a delay of a few months before a crop is produced; in other cases, such as with fruit or nut trees, there can be a delay of years before the investment pays back. Even the purchase by an individual of a home or a vehicle is, in a sense, an investment that will offer a return over a period of years.

With all parts of the economy benefiting from the lower interest rates (except, perhaps, banks and others lending the funds, who are making less profit from the lower interest rates), it is easy to see why lower interest rates would tend to stimulate new investment and drive up demand for commodities.

Commodities are used in great quantity, but the supply available at any one time is tiny by comparison. A sudden increase in demand will tend to send the commodity price higher because the quantity of the commodity available will need to be rationed among more would-be purchasers. A sudden decrease in the demand for a commodity (for example, crude oil, or wheat) will tend to send prices lower. Therefore, we see the strange sharp corners in Figure 2 that seem to be related to changing debt levels and higher or lower interest rates.

[2] The current plan of central banks is to raise interest rates aggressively. My concern is that this approach will leave commodity prices too low for producers. They will be tempted to decrease or stop production.

Politicians are concerned about the price of food and fuel being too high for consumers. Lenders are concerned about interest rates being too low to properly compensate for the loss of value of their investments due to inflation. The plan, which is already being implemented in the United States, is to raise interest rates and to significantly reverse Quantitative Easing (QE). Some people call the latter Quantitative Tightening (QT).

The concern that I have is that aggressively raising interest rates and reversing QE will lead to commodity prices that are too low for producers. There are likely to be many other impacts as well, such as the following:

  • Lower energy supply, due to cutbacks in production and lack of new investment

  • Lower food supply, due to inadequate fertilizer and broken supply lines

  • Much defaulting debt

  • Pension plans that reduce or stop payments because of debt-related problems

  • Falling prices of stock

  • Defaults on derivatives

[3] My analysis shows how important increased energy consumption has been to economic growth over the last 200 years. Energy consumption per capita has been growing during this entire period, except during times of serious economic distress.

Figure 4. World energy consumption from 1820-2010, based on data from Appendix A of Vaclav Smil’s Energy Transitions: History, Requirements and Prospects and BP Statistical Review of World Energy for 1965 and subsequent. Wind and solar energy are included in “Biofuels.”

Figure 4 shows the amazing growth in world energy consumption between 1820 and 2010. In the early part of the period, the energy used was mostly wood burned as fuel. In some parts of the world, animal dung was also used as fuel. Gradually, other fuels were added to the mix.

Figure 5. Estimated average annual increase in world energy consumption over 10-year periods using the data underlying Figure 4, plus similar additional data through 2020.

Figure 5 takes the same information shown in Figure 4 and calculates the average approximate annual increase in world energy consumption over 10-year periods. A person can see from this chart that the periods from 1951-1960 and from 1961-1970 were outliers on the high side. This was the time of rebuilding after World War II. Many families were able to own a car for the first time. The US highway interstate system was begun. Many pipelines and electricity transmission lines were built. This building continued into the 1971-1980 period.

Figure 6. Same chart as Figure 5, except that the portion of economic growth that was devoted to population growth is shown in blue at the bottom of each 10-year period. The amount of growth in energy consumption “left over” for improvement in the standard of living is shown in red.

Figure 6 displays the same information as Figure 5, except that each column is divided into two pieces. The lower (blue) portion represents the average annual growth in population during each period. The part left over at the top (in red) represents the growth in energy consumption that was available for increases in standard of living.

Figure 7. The same information displayed in Figure 6, displayed as an area chart. Blue areas represent average annual population growth percentages during these 10-year periods. The red area is determined by subtraction. It represents the amount of energy consumption growth that is “left over” for growth in the standard of living. Captions show distressing events during periods of low increases in the portion available to raise standards of living.

Figure 7 shows the same information as Figure 6, displayed as an area chart. I have also shown some of the distressing events that happened when growth in population was, in effect, taking up essentially all of energy consumption growth. The world economy could not grow normally. There was a tendency toward conflict. Strange events would happen during these periods, including the collapse of the central government of the Soviet Union and the restrictions associated with the COVID pandemic.

The economy is a self-organizing system that behaves strangely when there is not enough inexpensive energy of the right types available to the system. Wars tend to start. Layers of government may disappear. Strange lockdowns may occur, such as the current restrictions in China.

[4] The energy situation at the time of rising interest rates in the 1960 to 1980 period was very different from today.

If we define years with high inflation rates as those with inflation rates of 5% or higher, Figure 8 shows that the period with high US inflation rates included nearly all the years from 1969 through 1982. Using a 5% inflation cutoff, the year 2021 would not qualify as a high inflation rate year.

Figure 8. US inflation rates, based on Table 1.1.4 Price Index for Gross Domestic Product, published by the US Bureau of Economic Analysis.

It is only when we look at annualized quarterly data that inflation rates start spiking to high levels. Inflation rates have been above 5% in each of the four quarters ended 2022-Q1. Trade problems related to the Ukraine Conflict have tended to add to price pressures recently.

Figure 9. US inflation rates, based on Table 1.1.4 Price Index for Gross Domestic Product, published by the US Bureau of Economic Analysis.

Underlying these price spikes are increases in the prices of many commodities. Some of this represents a bounce back from artificially low prices that began in late 2014, probably related to the discontinuation of US QE3 (See Figure 2). These prices were far too low for producers. Coal and natural gas prices have also needed to rise, as a result of depletion and prior low prices. Food prices are also rising rapidly, since food is grown and transported using considerable quantities of fossil fuels.

The main differences between that period leading up to 1980 and now are the following:

[a] The big problem in the 1970s was spiking crude oil prices. Now, our problems seem to be spiking crude oil, natural gas and coal prices. In fact, nuclear power may also be a problem because a significant portion of uranium processing is performed in Russia. Thus, we now seem to be verging on losing nearly all our energy supplies to conflict or high prices!

[b] In the 1970s, there were many solutions to the crude oil problem, practically right around the corner. Electricity production could be switched from crude oil to coal or nuclear, with little problem, apart from building the new infrastructure. US cars were very large and fuel inefficient in the early 1970s. These could be replaced with smaller, more fuel-efficient vehicles that were already being manufactured in Europe and Japan. Home heating could be transferred to natural gas or propane, to save crude oil for places where energy density was really needed.

Today, we are told that a transition to green energy is a solution. Unfortunately, this is mostly wishful thinking. At best, a transition to green energy will need a huge investment of fossil fuels (which are increasingly unavailable) over a period of at least 30 to 50 years if it is to be successful. See my article, Limits to Green Energy Are Becoming Much Clearer. Vaclav Smil, in his book Energy Transitions: History, Requirements and Prospects, discusses the need for very long transitions because energy supply needs to match the devices using it. Furthermore, new energy types are generally only add-ons to other supply, not replacements for those supplies.

[c] The types of economic growth in (a) the 1960 to 1980 period and (b) the period since 2008 are very different. In the earlier of these periods (especially prior to 1973), it was easy to extract oil, coal and natural gas inexpensively. Inflation-adjusted oil prices of less than $20 per barrel were typical. An ever-increasing supply of this oil seemed to be available. New machines (created with fossil fuels) made workers increasingly efficient. The economy tended to “overheat” if interest rates were not repeatedly raised (Figure 1). While higher interest rates could be expected to slow the economy, this was of little concern because rapid growth seemed to be inevitable. The supply of finished goods and services made by the economy was growing rapidly, even with headwinds from the higher interest rates.

On the other hand, in the 2008 to 2020 period, economic growth is largely the result of financial manipulation. The system has been flooded with increasing amounts of debt at ever lower interest rates. By the time of the lockdowns of 2020, would-be workers were being paid for doing nothing. World production of finished goods and services declined in 2020, and it has had difficulty rising since. In the first quarter of 2022, the US economy contracted by -1.4%. If headwinds from higher interest rates and QT are added, the economic system is likely to encounter substantial debt defaults and increasing breakdowns of supply lines.

[5] Today’s spiking energy prices appear to be much more closely related to the problems of the 1913 to 1945 era than they are to the problems of the late 1970s.

Looking back at Figure 7, our current period is more like the period between the two world wars than the period in the 1970s that we often associate with high inflation. In both periods, the “red” portion of the chart (the portion I identify with rising standard of living), has pretty much disappeared. In both the 1913 to 1945 period and today, it is nearly all the energy supplies other than biofuels that are disappearing.

In the 1913 to 1945 period, the problem was coal. Mines were becoming increasingly depleted, but raising coal prices to pay for the higher cost of extracting coal from depleted mines tended to make the coal prohibitively expensive. Mine operators tried to reduce wages, but this was not a solution either. Fighting broke out among countries, almost certainly related to inadequate coal supplies. Countries wanted coal to supply to their citizens so that industry could continue, and so that citizens could continue heating their homes.

Figure 10. Slide prepared by Gail Tverberg showing peak coal estimates for the UK and for Germany.

As stated at the beginning of this section, today’s problem is that nearly all our energy supplies are becoming unaffordable. In some sense, wind and solar may look better, but this is because of mandates and subsidies. They are not suitable for operating the world economy within any reasonable time frame.

There are other parallels to the 1913 to 1945 period. One of the big problems of the 1930s was prices that would not rise high enough for farmers to make a profit. Oil prices in the United States were extraordinarily low then. BP 2021 Statistical Review of World Energy reports that the average oil price in 1931, in 2020 US$, was $11.08. This is the lowest inflation-adjusted price of any year back to 1865. Such a price was almost certainly too low for producers to make a profit. Low prices, relative to rising costs, have recently been problems for both farmer and oil producers.

Another major problem of the 1930s was huge income disparity. Wide income disparity is again an issue today, thanks increased specialization. Competition with unskilled workers in low wage countries is also an issue.

It is important to note that the big problem of the 1930s was deflation rather than inflation, as the debt bubble started popping in 1929.

[6] If a person looks only at the outcome of raising interest rates in the 1960s to 1980 timeframe, it is easy to get a misleading idea of the impact of increased interest rates now.

If people look only at what happened in the 1980s, the longer-term impact of the spike in interest rates doesn’t seem too severe. The world economy was growing well before the interest rates were raised. After the peak in interest rates, the world economy generally continued to grow. As a result of the high oil prices and the spiking interest rates, the world hastened its transition to using a bit less crude oil per person.

Figure 11. Per capita crude oil production from 1973 through 2021. Crude oil amounts are from international statistics of the US Energy Information Administration. Population estimates are from UN 2019 population estimates. The low population growth projection from the UN data is used for 2021.

At the same time, the world economy was able to expand the use of other energy products, at least through 2018.

Figure 12. World per capita total energy supply based on data from BP’s 2021 Statistical Review of World Energy. World per capita crude oil is based on international data of the EIA, together with UN 2019 population estimates. Note that crude oil data is through 2021, but total energy amounts are only through 2020.

Since 2019, our problem has been that the total energy supply has not been keeping up with the rising population. The cost of extraction of all kinds of oil, coal and natural gas keeps rising due to depletion, but the ability of customers to afford the higher prices of finished goods and services made with those energy products does not rise to match these higher costs. Energy prices probably would have spiked in 2020 if it were not for COVID-related restrictions. Production of oil, coal and natural gas has not been able to rise sufficiently after the lockdowns for economies to fully re-open. This is the primary reason for the recent spiking of energy prices.

Turning to inflation rates, the relationship between higher interest rates (Figure 1) and annual inflation rates (Figure 8) is surprisingly not very close. Inflation rates rose during the 1960 to 1973 period despite rising interest rates, mostly likely because of the rapid growth of the economy from an increased per-capita supply of inexpensive energy.

Figure 8 shows that inflation rates did not come down immediately after interest rates were raised to a high level in 1980, either. There was a decline in the inflation rate to 4% in 1983, but it was not until the collapse of the central government of the Soviet Union in 1991 that inflation rates have tended to stay close to 2% per year.

[7] A more relevant recent example with respect to the expected impact of rising interest rates is the impact of the increase in US short-term interest rates in the 2004 to 2007 period. This led to the subprime debt collapse in the US, associated with the Great Recession of 2008-2009.

Looking back at Figure 1, a person can see the effect of raising short-term interest rates in the 2004 to 2007 era. This eventually led to the Great Recession of 2008-2009. I wrote about this in my academic paper, Oil Supply Limits and the Continuing Financial Crisis, published in the journal Energy in 2010.

The situation we are facing today is much more severe than in 2008. The debt bubble is much larger. The shortage of energy products has spread beyond oil to coal and natural gas, as well. The idea of raising interest rates today is very much like going into the Great Depression and deciding to raise interest rates because bankers don’t feel like they are getting an adequate share of the goods and services produced by the economy. If there really aren’t enough goods and services for everyone, giving lenders a larger share of the total supply cannot work out well.

[8] The problems we are encountering have been hidden for many years by an outdated understanding of how the economy operates.

Because of the physics of the economy, it behaves very differently than most people assume. People almost invariably assume that all aspects of the economy can “stay together” regardless of whether there are shortages of energy or of other products. People also assume that shortages will be immediately become obvious through high prices, without realizing the huge role interest rates and debt levels play. People further assume that these spiking prices will somehow bring about greater supply, and the whole system will go on as before. Furthermore, they expect that whatever resources are in the ground, which we have the technical capability to extract, can be extracted.

It is important to note that prices are not necessarily a good indicator of shortages. Just as a fever can have many causes, high prices can have many causes.

The economy can only continue as long as all of its important parts continue. We cannot assume that reported reserves of anything can really be extracted, even if the reserves have been audited by a reliable auditor. What actually can be extracted depends on prices staying high enough to generate funds for additional investment as required. The amount that can be extracted also depends on the continuation of international supply lines providing goods such as steel pipe. The continued existence of governments that can keep order in the areas where extraction is to take place is important, as well.

What we should be most concerned about is a very rapidly shrinking economic system that cannot accommodate very many people. It seems that such a situation might occur if the debt bubble is popped and too many supply lines are broken. There may be a time lag between when interest rates are raised and when the adverse impacts on the economy are seen. This is a reason why central bankers should be very cautious about the increases in interest rates they make as well as QT. The situation may turn out much worse than planned!

Tyler Durden Thu, 05/19/2022 - 19:20

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Spread & Containment

TIPS Valuation Commentary

A quick glance at U.S. TIPS (inflation-linked bonds) shows that if we abstract past the thorny question of where inflation will be in the next few years, the market has largely reversed the relatively low inflation expectations that developed in the mi…

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A quick glance at U.S. TIPS (inflation-linked bonds) shows that if we abstract past the thorny question of where inflation will be in the next few years, the market has largely reversed the relatively low inflation expectations that developed in the mid-2010s. If one believes that the inflation overshoot seen in recent years will be reversed within a reasonable time span, valuations are near a “fair value” based on historical data. (Of course, past performance is not indicative of future results, yadda, yadda, yadda.) If one is convinced that the secular tide on inflation has turned, TIPS might still be cheap on a longer-term basis.

The top panel of the above figure shows the 5-year and 10-year inflation breakeven inflation rates. (The Treasury breakeven inflation rate for a given maturity is the nominal Treasury yield for that maturity minus the “real” (quoted) yield on the same maturity TIPS. I discuss breakevens at length in my book Breakeven Inflation Analysis. I have an online primer here.) Although not identical, the two breakevens move together.

Forward Breakeven

The correlation in breakevens means that trades that position for higher/lower breakevens (“directional trades”) will tend to move together. But from the point of view of valuation, we might want to apply a bit more finesse.

We can break up the 10-year breakeven inflation rate into two components:

  1. the spot 5-year breakeven, and

  2. the 5-year breakeven starting 5 years forward.

Conveniently, the 10-year breakeven can be approximated as the average of these two rates.

We want to do this decomposition if we either want to do some wacky relative value trades, or to make our life as an analyst easier. If you are doing relative value trades, you hopefully know more about the current conditions of the market than I do, so I will stick to the analysis angle.

What Will Happen to Inflation Over the Next Five Years?

From a directional perspective, whether or not inflation is higher or lower than the breakeven inflation rate is the most important question. I do not have a strong opinion on that subject. A recession triggered by the various shocks hitting in 2022 seems to provide the main downside risk to inflation over the next five years. Otherwise, it does seem that it will take time for inflation to cool.

If one violently disagrees with what is priced into the 5-year breakeven inflation rate (either way), that pretty much tells you how you want to position yourself. But, what if one does not hold strong convictions? We can then look at what the market is pricing in on a forward basis.

Forwards: Back to the (post-2004) Historical Average

I am using the data from the Federal Reserve H.15 release, which unfortunately cuts off the history of TIPS data to start in 2004. If we go back to the very early days of the TIPS markets, TIPS breakevens were quite a bit higher (following the example of Canadian Real Return Bonds, which were launched earlier than TIPS). (My first research report that attracted attention was a discussion of how darn cheap TIPS were.)

By 2004, valuations got to what were seen as “sensible” levels, and the 5-year/5-year forward traded in a range around 2.5%. The forward blew up courtesy of the forced unwinds during the Financial Crisis, and then bounced back to the average level. However, years of below (unofficial) target inflation finally led to forward inflation getting close to 1.5%. Afterwards, the pandemic excitement happened. We are now back into the middle of that range.

Since we certainly hope that corporate managements can get their supply chain act together, having inflation revert to its averages of the 1990s to early 2000s is not that implausible. Since we are in the middle of the historical range, one might argue that TIPS do not have a risk premium that they arguably should have priced in.

  • If one thinks that the various structural factors that dragged down in inflation in the 2010s will make their presence known again, one might not be too impressed with TIPS.

  • If one believes that the central banks have “let the inflation genie out of the bottle,” then I guess TIPS still look cheap. The problem with that view is that it has been a popular story in financial markets since the early 1980s.

Forward Versus Spot

The figure above shows us the spread between the 5-year/5-year forward and 5-year spot, cropped off to 2010 to eliminate the wild spikes that happened around the Financial Crisis.

Although headline inflation did have various jumps before 2020, the 5-year average was relatively stable and so we see that the spot and forward tended to move in parallel. There was a positive slope, which got compressed as the decade wore on. However, once 2020 hit, the spread spiked up to 100 basis points, dropped to -125 basis points, and is now recovering to a more mild negative level.

This demonstrates that the term structure will move around when something interesting is happening to inflation (which was not the case during the 2010s).

What About 30 Years?


The Fed H.15 data for the 30-year TIPS is even shorter, only starting in 2010. Given the very long maturity date, what happens in the first year is only 1/30th of the total, and so we should expect a more stable level. We are back at the 2.5% level seen in the early 2010s.

I normally do not pay too much attention to the 30-year maturity, as they are largely driven by the whims of liability-driven investors. (Another issue is that I am less sure about the data. The long end of fitted curves can be somewhat misleading with respect to what is happening with the actual traded bonds.) To be on top of that market segment, you need to be plugged in with the various regulatory pressures and investor fads — which I am not.

The valuation on the 30-years are at best mediocre, which is perhaps somewhat surprising given the rhetoric around inflation risks. (Importantly, I must emphasise that this is a relative valuation measure: do we want to own a nominal 30-year Treasury bond, or a 30-year TIPS. If the secular interest rate cycle has indeed turned, both might offer sub-standard returns versus waiting to invest at better levels, or just buying risk assets.)

No Real Yields In This Article!

An astute reader will have noted the complete absence of charts of the real yield on TIPS. Instead, I can discuss valuation — and how it has reverted to past trends — solely via looking at breakeven inflation. I can do this because breakeven inflation is a metric that is tied to a fundamental metric: the average of inflation over the lifetime of the bond. This is analogous to the nominal yield on a Treasury, which has the valuation metric of the average of the overnight risk-free rate over the lifetime of the bond.

Real yields are the residual between those two fundamental rates, and they have done all kinds of wacky things over the recent past — since the residual has no valuation metric of its own. Admittedly, the wackiness of real yields has provided fodder for finance articles, but one of the things one needs to learn is that certain genres of articles need to be filtered out as a waste of time.

(I discuss this point at greater length in my book.)


Email subscription: Go to https://bondeconomics.substack.com/ 

(c) Brian Romanchuk 2022

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Bonds

Market Rout Extends With Futures Tumbling To Verge Of Bear Market

Market Rout Extends With Futures Tumbling To Verge Of Bear Market

US stock futures slumped again, extending yesterday’s brutal selloff that…

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Market Rout Extends With Futures Tumbling To Verge Of Bear Market

US stock futures slumped again, extending yesterday’s brutal selloff that erased $1.5 trillion in market value on concerns about everything from slowing growth, to Chinese lockdowns, to soaring inflation and tightening monetary policy. Contracts on the S&P 500 were down 1.2% 7:30 a.m. in New York, having earlier dropped to 3,856, one point away sliding 20% from January's all time highs, and triggering a bear market. The underlying index tumbled 4% on Wednesday, the most since June 2020, as consumer shares cratered after Target slashed its profit forecast due to a surge in costs. Nasdaq 100 futures were down 1.2%. 10Y TSY Yields slumped about 7bps, dropping to 2.833, while the dollar also dropped after yesterday's surge; bitcoin was flat around $29K.

The retail rout continued on Thursday: shares of US retailers again tumbled in premarket trading amid growing worries over the impact of rising inflation and the ability of companies to pass on higher costs to consumers; with Bath & Body Works becoming the latest retailer to cut its guidance. Major technology and internet stocks were also down, pointing to further losses in major technology and internet stocks a day after the tech-heavy Nasdaq slumped to its lowest since November 2020. Apple (AAPL US) -1.2%, Microsoft (MSFT US) -1.2%, Meta Platforms (FB US) -1.1%, Netflix (NFLX US) -0.9% and Nvidia (NVDA US) -2.2% in premarket trading. US rail stocks may be in focus as Citi cuts ratings on Norfolk Southern (NSC US), Union Pacific (UNP US) and US Xpress Enterprises (USX US) to neutral from buy, while lowering 2023 estimates “across the board.”Here are some other notable movers:

  • Cisco Systems (CSCO US) plunged 13% in premarket trading after the network-gear maker spooked investors with a warning that Chinese lockdowns and other supply disruptions would wipe out sales growth in the current quarter. Shares of networking equipment makers drop after Cisco cuts outlook, with Broadcom (AVGO US) -3.6% and Juniper Networks (JNPR US) -5.9% in premarket trading.
  • Synopsys (SNPS US) rises 3.8% in premarket trading after the supplier of software used to design semiconductors boosted its profit and revenue guidance for the full year.
  • Target (TGT US) shares fall 2.2% in premarket trading, Walmart (WMT US) -0.3%; Kohl’s (KSS US) is in focus after two senior executives depart
  • Under Armour (UAA US) shares dropped as much as 6% in US premarket trading, with analysts saying that the departure of the sportswear maker’s CEO Patrik Frisk is a surprise and adds uncertainty.
  • Bath & Body Works’s (BBWI US) outlook cut was a little greater than expected, though analysts noted that it was due to higher costs and investment. The company’s shares fell almost 4% in premarket trading.
  • United Wholesale Mortgage (UWMC US) will struggle to main its 1Q earnings level in coming quarters, Piper Sandler says in a note downgrading the stock to underweight from neutral. Shares drop as much as 7% in US premarket trading.

The S&P 500 is on track for its longest weekly losing streak since 2001 as traders flee risk assets over fears that the Federal Reserve will push the economy into a recession as it tries to curb inflation. The benchmark is close to falling into a bear market, after dropping 18% from a record high in January.

"The US selloff was rather orderly and the market isn’t oversold, yet. That tells us that we are likely not at the bottom yet,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “Consumer sentiment remains depressed and we are seeing consumers retrenching on some discretionary spending.” 

Speaking on Tuesday in his most hawkish remarks to date, Fed Chair Jerome Powell said the US central bank will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat. JPMorgan's Marko Kolanovic, meanwhile, said - what else - that things can get better for US stocks. “There will be no recession this year, some summer increase in consumer activity on the back of reopening, China increasing monetary and fiscal measures,” he said.  Bolstering his opinion is a conviction that US inflation has probably peaked, or is about to do so, paving the way for a pullback in price pressures that will eventually allow the Federal Reserve to moderate the pace of monetary tightening. 

"Since we are pricing in a growth scare but not yet a recession, we could see further downside in the coming weeks, but we are starting to price in a very negative picture already, suggesting we should, at some point, be closer to the bottom,” said Esty Dwek, chief investment officer at Flowbank SA. US stock investors are pricing in stronger odds of a recession than are evident from positive macroeconomic indicators, according to Goldman Sachs strategists.

"A recession is not inevitable,” Goldman strategists led by David J. Kostin wrote in a note. “Rotations within the US equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data.”

Bets that robust earnings can help investors weather this year’s turbulence were thrown in doubt after US consumer titans signaled growing impact of high inflation on margins and consumer spending. Meanwhile, Federal Reserve officials reaffirmed that tighter monetary policy lies ahead, and investors fretted over stagflation risks.

“We are pricing in a growth scare,” Lori Calvasina, the head of US equity strategy at RBC Capital Markets, told Bloomberg TV. “There is a lot of uncertainty in this market right now about whether or not that recession is going to come through or if it’s going to be another near-death experience.”

There was some more good news on the China covid lockdown front: Shanghai Vice Mayor said Shanghai port throughput recovered to around 90% of the levels a year ago and that Shanghai will expand work resumption in areas with no COVID risk in early June. Furthermore, Shanghai is to gradually restore inter-district public transport from May 22nd and will require residents to show negative PCR tests taken within 48 hours before using public transport, while an economy official said Shanghai will reduce rents for small and medium-sized enterprises by more than CNY 10bln and the city extended CNY 72.3bln of loans to over 10,000 firms since March, according to Reuters.

In Europe, the Stoxx 600 retreated 1.8%, after sliding more than 2% earlier, with all industry sectors in the red and personal care and financial services leading the decline as Wednesday’s retailer trouble in the U.S. spills over into Europe. FTSE 100 lags regional peers, dropping 2%. Here are some of the biggest European movers today:

  • HomeServe shares jump as much as 12% after Brookfield agrees to buy the home emergency and repair services company for GBP4.1b.
  • Societe Generale shares rise as much as 1.5%, as it was raised to outperform from market perform at KBW, with the broker saying the sale of Russian activities removes a key overhang for the bank and should result in a re-rating.
  • Generali shares rose as much as 1.4% after 1Q profit beats analyst estimates as EU136m impairments on Russian investments were more than offset by higher operating income.
  • PGNiG shares rise as much as 6.2% after reporting 1Q results that, according to analysts, support Polish gas company’s outlook.
  • Nestle shares drop as much as 5.3% after Bernstein downgraded the stock to market perform from outperform, saying the shares will “struggle” if market sentiment improves and investors exit havens.
  • Royal Mail shares fall as much as 14% after the postal group’s FY results slightly missed estimates and analysts said its outlook is “disappointing.”
  • National Grid shares fall as much as 2.5%, erasing gains from yesterday’s record high, after the utility company reported full-year results.

Earlier in the session, shares of Asian retailers follow their US counterparts lower after Target became the second big retailer in two days to trim its profit forecast.

  • Australia: JB Hi-Fi retreats 6.6%, Wesfarmers -7.8%, Harvey Norman -5.5%, Woolworths -5.6%
  • South Korea: E-Mart - 3.4%; apparel makers Hansae -9.4%, F&F -4.2%, Youngone -8.2%
  • Japan: Fast Retailing - 3.1%, MatsukiyoCocokara -1.4%, Ryohin Keikaku -1.7%, Nitori -3%
  • Singapore: Grocery chain operator Sheng Siong slips as much as 1.3%
  • Hong Kong: Sun Art Retail down as much as 4.1%

In China, Tencent Holdings Ltd. plunged 6.6% after warning it will take time for Beijing to act on promises to prop up the Chinese tech sector. Cisco Systems Inc. slid in extended US trading on a disappointing revenue outlook.

Japan's Nikkei 225 suffered firm losses amid reports the ruling coalition is considering increasing the corporate tax rate and after several data releases in which Machinery Orders topped estimates but Exports missed as China-bound exports declined by the fastest pace since March 2020.

Indian stocks declined to a ten-month low, tracking a sell-off across Asia, on concerns the US Fed’s hawkish stance on inflation may cool economic activity and hurt consumer demand.  The S&P BSE Sensex plunged 2.6% to 52,792.23, its lowest level since July 30, in Mumbai, while the NSE Nifty 50 Index slipped 2.7% to 15,809.40  Software exporter Infosys Ltd. fell 5.4% to a 11-month low and was the biggest drag on the Sensex, which had 27 of 30 member stocks trading lower. All 19 sector indexes compiled by BSE Ltd. declined, led by S&P BSE Information Technology index, that dropped the most in over two years.   “Deteriorating macro sentiment such as soaring inflation, recession fears, and the prospect of the Federal Reserve getting even more hawkish will continue to keep benchmarks on the edge,” Prashanth Tapse, an analyst at Mehta Equities Ltd., wrote in a note.  In earnings, of the 36 Nifty 50 firms that have announced results so far, 21 have either met or exceeded analyst estimates, while 15 have missed forecasts.

In Australia, the S&P/ASX 200 index fell 1.7% to close at 7,064.50, tumbling with global shares as concerns over inflation, interest-rate hikes and Ukraine piled up. All sectors dropped, except for health. Consumer shares were among the worst performers, following their US peers lower after Target became the second big retailer in two days to trim its profit forecast. Aristocrat rose after it released its 1H results and unveiled buyback plans. In New Zealand, the S&P/NZX 50 index fell 0.5% to 11,206.93

And in emerging markets, Sri Lanka fell into default for the first time in its history as the government struggles to halt an economic meltdown that prompted mass protests and a political crisis. An index of developing-nation stocks slumped more than 2%.

In FX, the Bloomberg dollar spot index declines, with all G-10 majors rising against the greenback. CHF is the strongest G-10 performer with USD/CHF snapping lower on to a 0.97 handle and EUR/CHF slumping below 1.03. The Swiss franc diverged from Japanese yen and dollar after hawkish comments from SNB’s Thomas Jordan Wednesday, which assured traders CHF rates could follow EUR higher. Options trades may also be behind the latest move in the spot market.

In rates, Treasury yields dropped about seven basis points as investors sought insurance against further declines in risk assets. Treasury yields richer by up to 6bp across belly of the curve, richening the 2s5s30s fly by 2.2bp on the day; 10-year yields around 2.83% with German 10-year outperforming by 2.5bps. Treasuries extended Wednesday’s rally as stocks resume slide with S&P 500 futures dropping under 3,900 to lowest level in a year; on the curve, the belly led the advance while bunds outperform in a more aggressive bull-flattening move as European stocks tumble. US session highlights include 10-year TIPS reopening at 1pm ET. Flurry of block trades during London session follows a spate of trades Wednesday; five blocks worth a combined cash-equivalent $1.2m/DV01 between 3:38am and 5:35am similarly entailed price action consistent with sales. Most European bonds also gained, with the yield on German 10-year securities falling more than basis points.  German yield curve bull-flattens: 30-year yield drops ~9bps before stalling near 1.05% which has acted as support for much of May so far.

The Dollar issuance slate empty so far; eight borrowers priced $8.5b Wednesday, and new issue activity is expected to be muted during remainder of the week. Three-month dollar Libor +2.69bp to 1.50486%. Economic data slate includes May Philadelphia Fed business outlook and initial jobless claims (8:30am), April existing homes sales and leading index (10am).

In commodities, crude oil extended declines, while most industrial metals were in the red as global growth fears damped the demand outlook. WTI reverses Asia’s gains, dropping back below $110 but holding above Wednesday’s lows. Spot gold is comparatively quiet, holding above $1,810/oz. Most base metals trade in the green; LME tin rises 2.1%, outperforming peers while copper held near a seven-month low and zinc extended losses.

Bitcoin is modestly softer in a relatively contained range that lies just shy of the USD 30k mark. Crypto exchange FTX to start rollout of new stock-trading service on Thursday, WSJ reports; will not accept payment for order flow on stock trades.

Looking to the day ahead now, and data releases from the US include the weekly initial jobless claims, along with April’s existing home sales and the Philadelphia Fed’s business outlook survey for May. Central bank speakers include ECB Vice President de Guindos, the ECB’s Holzmann and the Fed’s Kashkari. Finally, the ECB will be publishing the minutes from their April meeting.

Market Snapshot

  • S&P 500 futures down 1.1% to 3,879.25
  • STOXX Europe 600 down 1.7% to 426.41
  • MXAP down 1.8% to 161.60
  • MXAPJ down 2.2% to 527.30
  • Nikkei down 1.9% to 26,402.84
  • Topix down 1.3% to 1,860.08
  • Hang Seng Index down 2.5% to 20,120.68
  • Shanghai Composite up 0.4% to 3,096.97
  • Sensex down 2.4% to 52,926.71
  • Australia S&P/ASX 200 down 1.6% to 7,064.46
  • Kospi down 1.3% to 2,592.34
  • Gold spot down 0.1% to $1,814.49
  • U.S. Dollar Index down 0.28% to 103.52
  • German 10Y yield little changed at 0.96%
  • Euro up 0.3% to $1.0496
  • Brent Futures down 0.1% to $109.00/bbl

Top Overnight News from Bloomberg

  • President Joe Biden is set to meet on Thursday with Finland’s President Sauli Niinisto and Swedish Prime Minister Magdalena Andersson at the White House to discuss the Nordic nations’ NATO bids.
  • China’s top diplomat again warned the US over its increased support for Taiwan, showing the island democracy remains a major sticking point between the world’s biggest economies as Beijing sent more military aircraft toward the island
  • Sri Lanka fell into default for the first time in its history as the government struggles to halt an economic meltdown that prompted mass protests and a political crisis
  • The yuan’s outlook is finally looking more balanced after a 6.5% dive versus its major trading partner currencies since March.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were pressured on spillover selling after the worst day on Wall St in almost two years. ASX 200 was led lower by consumer staples following the retailer woes stateside and mixed Australian jobs data. Nikkei 225 suffered firm losses amid reports the ruling coalition is considering increasing the corporate tax rate and after several data releases in which Machinery Orders topped estimates but Exports missed as China-bound exports declined by the fastest pace since March 2020. Hang Seng and Shanghai Comp initially weakened with the Hong Kong benchmark dragged lower by heavy losses in tech after Tencent’s profit declined by more than 50% and with the mainland pressured as Beijing conducts a fresh round of mass COVID testing, although the mainland bourse recovered most of its losses after Shanghai announced a further gradual easing of restrictions. Xiaomi (1810 HK) Q1 adj. net profit CNY 2.859bln (vs 6.069bln Y/Y), Q1 revenue CNY 73.4bln (vs. 76.9bln Y/Y); global smartphone shipments -10.5% Y/Y at 38.5mln units.

Top Asian News

  • Shanghai Vice Mayor said Shanghai port throughput recovered to around 90% of the levels a year ago and that Shanghai will expand work resumption in areas with no COVID risk in early June. Furthermore, Shanghai is to gradually restore inter-district public transport from May 22nd and will require residents to show negative PCR tests taken within 48 hours before using public transport, while an economy official said Shanghai will reduce rents for small and medium-sized enterprises by more than CNY 10bln and the city extended CNY 72.3bln of loans to over 10,000 firms since March, according to Reuters.
  • Japanese MOF official said China's COVID curbs are among the factors that caused a decline in China-bound exports from Japan which fell by the fastest pace since March 2020, while Japan's April imports reached the largest amount on record, according to Reuters.
  • Japan's ruling coalition is reportedly considering increasing the corporate tax rate, according to Jiji.
  • New Zealand sees 2021/22 OBEGAL at NZD -18.98bln (prev. forecast -20.44bln), 2021/22 net debt at 36.9% of GDP (prev. forecast 37.6%) and Cash Balance at NZD -31.78bln (prev. forecast -34.10bln), while Finance Minister Robertson said the economy is expected to be robust in the near term and they see a return to OBEGAL surplus in 2024/25, according to Reuters.

European bourses are pressured across the board in a broader risk-off moves after yesterday's Wall St. sell off, as European players look past the brief respite seen overnight on Shanghai's reopening; Euro Stoxx 50 -2.3%. Stateside, the magnitude of the downside is somewhat more contained given newsflow has been limited since Wednesday's downside commenced, ES -1.2%.

Top European News

  • EU is reportedly considering a targeted trade war on troublesome Brexiteer MPs and Tory ministers to force UK PM Johnson to do a U-turn on the Northern Ireland protocol, according to The Telegraph.
  • Top UK Economist Defends BOE’s Handling of Inflation Crisis
  • EasyJet Bookings Pick Up Ahead of Uncertain Summer Season
  • Apax-Owned Rodenstock Acquires Spanish Rival Indo
  • European Gas Slips With LNG Imports Helping Boost Stockpiles

In FX

  • Franc resurgence and re-emergence as a safe haven currency continues; USD/CHF touches 0.9750 vs 1.0060+ peak on Monday, EUR/CHF sub-1.0250 vs circa 1.0500 at one stage only yesterday.
  • Dollar loses momentum as US Treasury yields retreat further and curve re-flattens amidst ongoing risk rout, DXY ducks under 103.500 after peaking just shy of 104.000 on Wednesday.
  • Kiwi and Aussie find positives via fiscal and fundamental factors to evade aversion; NZD/USD back above 0.6300 after NZ budget and AUD/USD hovering around 0.7000 post- Aussie jobs data.
  • Yen retains underlying bid irrespective of mixed Japanese data, USD/JPY below 128.00 again.
  • Euro firmer beyond EUR/CHF cross ahead of ECB minutes and Sterling off UK inflation data lows awaiting retail sales on Friday, EUR/USD retains sight of 1.0500 and Cable near 1.2400.
  • Rand meandering ahead of SARB in anticipation of 50 bp rate hike, USD/ZAR around 16.0000, irrespective of Gold taking firmer hold of USD 1800/oz handle.

Fixed Income

  • Debt resumes safe-haven rally as market mood continues to sour.
  • Bunds top 154.00, Gilts get close to 120.00 and 10 year T-note even nearer the same psychological level.
  • BTPs lag amidst the ongoing aversion to risk, while OATs and Bonos reflect on somewhat mixed auction results.

Commodities

  • WTI and Brent are pressured in-fitting with broader sentiment as initial resilience on demand-side positives re. China/COVID were overpowered by the risk move.
  • However, the benchmarks are around USD 1.00/bbl off lows of USD 104.36/bbl and USD 106.76/bbl respectively, following reports that China is discussing the purchase of Russian crude.
  • China is said to be in talks with Russia to purchase oil for strategic reserves, according to Bloomberg sources; detailed on terms and volume reportedly not decided yet
  • Qatar Energy was reportedly selling July Al-Shaheen crude at premiums of USD 5.80-6.40/bbl above Dubai quotes which is the highest in 2 months, according to Reuters sources.
  • Spot gold is bid as it draws haven allure, with the yellow metal marginally surpassing USD 1830/oz.

US Event Calendar

  • 08:30: May Initial Jobless Claims, est. 200,000, prior 203,000; Continuing Claims, est. 1.32m, prior 1.34m
  • 08:30: May Philadelphia Fed Business Outl, est. 15.0, prior 17.6
  • 10:00: April Existing Home Sales MoM, est. -2.2%, prior -2.7%; Home Resales with Condos, est. 5.64m, prior 5.77m
  • 10:00: April Leading Index, est. 0%, prior 0.3%

DB's Jim Reid concludes the overnight wrap

Today is my last day at work this week before I head up to Cambridge tomorrow for my Masters’ graduation. Before you send in a flood of congratulations though, I didn’t actually do any work for this qualification, with not even a single hour of revision. Now at this point you’re probably thinking I’m either a genius or guilty of some serious academic malpractice. I’m hoping the former. But the truth is that I’m benefiting from a quirky tradition that somehow means Cambridge, Oxford and Dublin will upgrade your Bachelors into a Masters after a few years. With the wedding two months away, it appears as though I’m losing all my bachelor status at once.

Markets seem ready for a holiday too after the last 24 hours, with the selloff resuming at pace after the brief respite on Tuesday. In fact it was nothing short of a rout with the S&P 500 ending the day down -4.04%, marking its worst daily performance since June 2020, and leaving the index at a fresh one-year low. There wasn’t a single catalyst behind the slump, but weak housing data out of the US along with Target’s move to cut its profit outlook helped feed investor concern that the consumer might not be in as strong a position as previously thought. And that’s on top of all the other worries of late that the global economy is heading in a stagflationary direction amidst various supply-chain issues, alongside the prospect that tighter central bank policy is going to further dent growth and risks tipping various economies into recession.

In terms of the specific moves, the S&P 500 gradually tumbled as the day went on, with its -4.04% decline more than reversing its +2.02% bounceback on Tuesday. The decline was an incredibly broad-based one, with just 8 constituents in the index ending the day higher, which is the lowest number since November. That earnings report we mentioned at the top meant that Target (-24.93%) saw the worst performance in the entire S&P 500, after saying they now expected their full-year operating income margin rate to be around 6%. That follows a disappointing report from Walmart the previous day, and meant that consumer staples (-6.38%) and consumer discretionary (-6.60%) were the worst-performing sectors in the S&P yesterday. The latest declines also mean that the S&P is back on track for a 7th consecutive weekly decline, having shed -2.49% since the start of the week, and S&P 500 futures are only up by +0.18% this morning. If the S&P 500 does see a 7th week in negative territory, then that would be the longest run of weekly declines for the index since 2001. Other indices lost ground too given the risk-off move, with the Dow Jones (-3.57%), the NASDAQ (-4.73%), and the small-cap Russell 2000 (-3.56%) all experiencing sizeable declines of their own. European indices had a better performance after closing before the worst of the US declines, and the STOXX 600 was “only” down -1.14% to just remain in positive territory for the week.

With recessionary concerns back in focus, sovereign bonds rallied on both sides of the Atlantic as investors sought out safe havens. Yields on 10yr US Treasuries fell by -10.2bps to 2.88%, with the decline mostly led by a -9.6bps move lower in real yields, and nominal yields are only back up +2.5bps this morning. The yield curve also continued to flatten and the 2s10s slope (-6.9ps) fell to its lowest in over two weeks, at 21.0bps, although it’s been over 6 weeks now since the curve last traded in inversion territory. We did get some Fedspeak but to be honest there weren’t any major headlines relative to what we already knew, with Chicago Fed President Evans saying it was “quite likely” the Fed would be at a neutral setting by year-end, whilst Philadelphia Fed President Harker was making the case for more gradual rate hikes after the next few 50bp hikes are delivered. More important for the outlook was the release of various housing data yesterday, where housing starts fell to an annualised rate of 1.724m in April (vs. 1.756m expected), and that was from a downwardly revised 1.728m in March. That comes against the backdrop of rising mortgage rates, and the MBA reported that mortgage purchase applications fell -11.9% in the week ending May 13, leaving them at their lowest levels since May 2020 when the numbers were still recovering from the pandemic slump.

Over in Europe, sovereign bond curves also became flatter as investors became increasingly aggressive on the near-term ECB rate path. Indeed the amount of ECB rate hikes priced in by the December meeting hit a fresh high of 108bps, or equivalent to at least four rate hikes of 25bps by year-end. That came amidst further ECB speakers over the last 24 hours, including Finnish central bank governor Rehn, who had already endorsed a July hike and said yesterday that the initial hike was “likely to take place in the summer”. Furthermore, he said that it seemed “necessary that in our policy rates we move relatively quickly out of negative territory”. We also heard from Estonian central bank governor Muller, who also endorsed a July hike and said he “wouldn’t be surprised” if the deposit rate were in positive territory by year-end. However, Spanish central bank governor De Cos said that rate hikes should be gradual as he called for APP purchases to end at the start of Q3, with rate hikes to follow shortly afterwards.

Those growing expectations of tighter policy saw shorter-dated yields move higher in Europe once again, with 2yr German yields hitting their highest level since 2011 despite only a marginal +0.1bps move to 0.36%. However, the broader risk-off tone meant it was a different story for their longer-dated counterparts, and yields on 10yr bunds (-1.6bps) and OATs (-2.2bps) both moved lower on the day. Peripheral spreads widened as well, whilst iTraxx Crossover neared its recent highs with a +26.2bps move to 468bps.

In terms of the fight against inflation, there was a potential boost on the trade side yesterday as US Treasury Secretary Yellen confirmed ahead of a meeting of G7 finance ministers and central bank governments that the she favoured removing some tariffs on goods that are not considered strategic. Separately the risk-off move also saw oil prices move lower for a 2nd day running yesterday, with Brent crude down -2.52%, although it’s since taken back a decent chunk of that loss this morning with a +1.51% move higher to $110.76/bbl.

Over in Asia, equity markets have tracked those steep overnight losses on Wall Street to move sharply lower this morning. Among the key indices, the Hang Seng (-2.25%) is the largest underperformer amidst a broad weakness in tech stocks as the Hang Seng Tech index fell by an even larger -3.40%. Mainland Chinese stocks have performed relatively better however, even if the Shanghai Composite (-0.08%) and CSI (-0.25%) have both moved slightly lower, while the Nikkei (-1.91%) and the Kospi (-1.29%) have seen more substantial losses. Finally there was some important employment data out of Australia this morning ahead of their election on Saturday, with the unemployment rate falling to its lowest since 1974, at 3.9%. The employment gain was a bit softer than expected with just a +4.0k gain (vs. +30.0k expected), but that included a +92.4k gain in full-time employment, offset by a -88.4k decline in part-time employment.

Elsewhere on the data side, there were fresh signs of inflationary pressure in the UK after CPI inflation rose to a 40-year high of +9.0% in April. But in spite of the 40-year high, that was actually slightly beneath the +9.1% reading expected by the consensus, which marked the first time in over 6 months that the reading hasn’t been higher than expected. Gilts outperformed following the release as it was also beneath the BoE’s staff projection of +9.1%, and 10yr gilt yields closed down -1.6bps on the day, whilst sterling underperformed the other major currencies leave it -1.28% weaker against the US Dollar.

To the day ahead now, and data releases from the US include the weekly initial jobless claims, along with April’s existing home sales and the Philadelphia Fed’s business outlook survey for May. Central bank speakers include ECB Vice President de Guindos, the ECB’s Holzmann and the Fed’s Kashkari. Finally, the ECB will be publishing the minutes from their April meeting.

Tyler Durden Thu, 05/19/2022 - 08:02

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