Summary: Rising Treasury yields, reaching their highest levels since 2007, led to a 1.6% drop in the S&P 500, its largest single-day decline since April. The Nasdaq 100 fell 1.8%, with Amazon dropping 4.4%. The 10-year and 30-year Treasury yields climbed to 4.49% and 4.57%, respectively. The Bank of England surprised markets by keeping rates unchanged and increasing quantitative tightening, causing yields on long-dated Gilts to rise. The dollar remained strong post-FOMC but retreated slightly. Japan's August CPI exceeded expectations. Attention shifted to the Bank of Japan's policy announcement today.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: Rising Treasury yields, which reached new highs since 2007, continued to weigh on stocks. The S&P 500 plunged 1.6% to 4,330, marking a decrease of more than 1.5% in a single day for the first time since April. All sectors declined, with the rate-sensitive real estate sector being hit the hardest. Magacap Tech names dragged down the Nasdaq 100, which tumbled 1.8% to 14,694. Amazon plummeted 4.4%, while Nvidia declined by 2.9%.
Fixed income: Yields from the belly (5-year) onward to the long end extended their post-FOMC march higher following the surge in long-end UK Gilts after the Bank of England held rates unchanged across the pond and a surprise drop in the initial jobless claims to 201K, signifying a still-hot US labor market. The USD15 billion 10-year TIPS action registered robust demand. Selling concentrated on the long end, with the 10-year and 30-year yields rising by 9bps to 4.49% and 13bps to 4.57%, respectively, while the 2-year yield ended the session 3bps lower at 5.14%.
China/HK Equities: Following the post-FOMC selloff in the US equity market, the Hang Seng Index slid by 1.3% to 17,655, while the Hang Seng Tech Index plunged by 1.9%. Healthcare, materials, and information technology were the top laggards. Alibaba Health tumbled by 4.9%, and XPeng plummeted for the second day, down by 6.9%, after lowering the selling price of the new version of its G9 model. The CSI300 shed 0.9%.
FX: Dollar strength continued in the post-Fed reaction, although some of the gains were reversed. High event risk from the Bank of Japan meeting ahead and USDJPY hit fresh near 11-month highs of 148.46 but fell subsequently to ~147-.50 levels. AUDUSD plummeted from highs of 0.6511 to drop back towards 0.64 amid risk-off although NZDUSD did better and stayed above 0.59 on Q2 GDP surprise. GBPUSD broke below key 1.23 support with BOE holding rates but rebounded to the big figure later. EURUSD stays below 1.07.
Commodities: Crude oil prices remained soft earlier in the session on Fed’s higher-for-longer message offsetting concerns of tighter supplies, but Russia’s announcement to temporarily ban diesel and gasoline exports brought some gains again. Macro theme continued to be of a risk-off, which is capping the move in oil towards $100 for now. Copper was down over 2% along with declines in other base metals amid risk-off and lack of China stimulus announcements.
Macro:
In the news:
Macro events:
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Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
