Summary: The risk off tone continued with Fed official Kashkari warning ‘there’s a lot of tightening in the pipeline’. Meanwhile, BOE’s Chief Economist Pill further deterred expectations of an inter-meeting action. Oil prices recovered amid Russia’s push for the OPEC+ to cut production and worries over supply curbs in Gulf of Mexico, while European energy situation worsened with likely sabotaged leaks detected on Nord Stream pipelines and Gazprom issuing sanction warnings on Ukraine’s Naftogaz.
The bond sell-off extended, pushing up the 10-year Treasury yield to 3.95%, while the US dollar index extended its run-up hitting a new 20-year high after Fed officials continued to warn of higher rates to come. That pressured stocks lower once more with the S&P500 down 0.2%, marking its 6th daily drop, with the latest round of selling taking the index to levels not seen since November 2020. The Nasdaq 100 ended about 0.2% higher. The next technical major level of support for the S&P500 is around 3,500. If that level is taken out, there is a probability of perhaps hitting the 3,100 level (which is 15% lower than the current level). In terms of sectors, consumer staples and utilities, were each down about 1.7%, claiming the worst performing spot among the 11 sectors of the S&P 500, while energy outperformed with a 1.2% gain.
Tesla shares rose as much as 4.4% before settling 2.5% higher on a report saying that Tesla’s management told its staff in an email that a “very high volume of vehicles to eagerly waiting customers during the final days” of the Q3.
The U.S. treasury yield curve twisted and steepened on Tuesday as 30-year bond yields surged 9bps higher to a new high at 3.83%, following a dramatic 45bps jump across the pond in the U.K. Gilts. Lack of investor interest in the 5-year auction added to the bearishness of the U.S. bond market sentiment. 10-year yields surged to 3.99% during the day before paring slightly to settle at 3.95%, up by 2bps from Monday. 2-year yields took a pause in their march higher to finish the session bps lower at 4.28%.
Hang Seng Index finished the session on Tuesday little changed following a late afternoon rally, bouncing off its lowest level since 2011. Meituan (03690:xhkg), up by 4%, outperformed other China internet names. The China property services industry gained. Jinke Smart Services (09666:xhkg) jumped 32.6% following a general offer at about a 33% price premium from shareholders holding 53% of the company. Shimao Services (0873:xhkg) surged 8.3%. CIFI Ever Sunshine Services (01995:xhkg) and A-Living (03319:xhkg) rose around 6%. Macao casino shares continued their charge higher for the second day in a row, rising from 3% to 9% across the board. China Healthcare Services names surges, Hygeia Healthcare (06078:xhkg) surged over 8%. China catering stocks also rose for the second day, gaining from 3% to 6% among the leading names. In mainland bourses, CSI300 gained 1.5% with catering, tourism, and Chinese liquor stocks leading the charge higher ahead of the National Day long holiday. Reuters ran a story saying that China’s security regulators were asking some funds not to sell large amounts of stocks.
Bank of Japan released the meeting minutes from the July meeting, understandably stale, but continuing to signal that easing intentions remain prevalent. Despite a further run higher in US Treasury yields with the 10-year touching the 4% mark, USDJPY has still remained capped below 145. More importantly, the weakness in the yen has now become more isolated against the USD. The yen is stronger against the EUR, GBP and AUD since the intervention on 22 September.
Crude oil shifted focus back on supply worries with curbs in the U.S. Gulf of Mexico ahead of Hurricane Ian and with reports that Russia is pushing for the OPEC+ alliance to cut production. The group of oil producing nations is due to meet early next month to discuss its production plans. They already announced a cut to output for October by 100kb/d and have warned of further reductions amid falling prices. There has been reports that Russia is pushing for a cut to output of at least 1mb/d. Meanwhile, a pause in USD rally also helped to put a floor to the declines in commodity prices. WTI futures rose but still remained below $80/barrel while Brent futures were above $86.
European natural gas rallied as risks to further supply disruptions rattled an already fragile market. Dutch front month futures jumped more than 22% with reports of supply leaks in Nordstream followed by Gazprom issuing sanction warnings for Ukraine’s Naftogaz (read below).
Huw Pill said the UK’s government’s fiscal announcement and the market reaction that followed it requires a significant monetary policy response, but the best time to assess and react to their impact is at the institution’s next meeting in November. He acknowledged the challenge to the bank’s inflation goal arising from the loose fiscal policy, while also saying that the bank’s program of government bond sales should go ahead as planned next week if the market repricing stays orderly, as has been the case in recent days. However, worth noting that BOE’s November 3 meeting is still before the medium-term fiscal strategy is announced, and if that contains significant spending cuts, the budget may prove contractionary, especially given the rise in yields.
Danish and Swedish authorities have attributed the major gas leaks on the Nord Stream 1 and 2 pipelines to large explosions, coming amid claims it was sabotage. With the pipelines not being used currently, there is likely to be minimal impact but it still signals an escalation of geopolitical tensions. In addition, Gazprom warned there’s a risk Moscow will sanction Ukraine’s Naftogaz, which would prevent it from being able to pay transit fees, and therefore put at risk whatever little gas is still flowing to Europe via Ukraine.
While inflation and higher-for-longer interest rates remain a key theme in all Fed commentary these days, there is also another common theme emerging. All three officials on the wires yesterday – Kashkari, Bullard and Evans – suggested that the US may avoid a recession. Kashkari (2023 voter), in an interview with WSJ, said he’s unsure if the policy is tight enough suggesting more rate hikes will be needed to bring down inflation. Bullard (2022 voter) said the US has a serious inflation problem and the credibility of the inflation targeting regime is at risk. Evans (non-voter) is optimistic the terminal rate the Fed has set out (4.6% median in Dot Plot) will be restrictive enough.
US consumer confidence for September rose to 108.0, above the expected 104.5 and the prior, revised higher, 103.6. The Present Situation and Expectations indices both rose to 149.6 (prev. 145.3) and 80.3 (prev. 75.8), respectively. Lower pump prices and a tight labor market possibly aided a rebound in sentiment, but high inflation and interest rates will continue to constrain consumer spending in the fourth quarter. Meanwhile, 1yr consumer inflation expectations declined to 6.8% (prev. 7.0%), but still remaining significantly higher than the Fed’s 2% goal. Meanwhile, durable goods order fell 0.2% in August, still coming in better than expected while new home sales rose to the strong pace of sales since March to 685k in August, above the expected 500K and prior, revised higher, 532k.
The World Bank published its latest economic forecasts on Tuesday, cutting the 2022 growth rate of China to 2.8% from its previous forecast of 5%, and the 2023 growth rate to 4.5% from 4.8%. On the other hand, the supra-national bank raised Vietnam’s growth rate in 2022 to 7.2% from the 5.3% forecast released in April. It also raised the 2022 growth forecasts for the Philippines to 6.5% from 5.7% and Malaysia to 6.4% from 5.5%. Excluding China, the East Asia, Pacific region is forecasted to grow 5.3% in 2022 and 6.0% in 2023, which are higher than the growth rates expected in China.
In the first eight months of 2022, China’s industrial profits contracted 2.1% Y/Y. For the month of August, industrial profits declined 9.5% Y/Y, a slower contraction than July’s -14.5% Y/Y. The National Bureau of Statistics noted that the slower pace of year-over-year contraction in August was helped by stronger auto, electrical equipment, electricity generation, and consumer product industries.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
