Market movers today
- Tuesday marks another light day in terms of economic data releases. August retail sales will be released for both Sweden and Norway, while Richmond Fed Manufacturing Index is due for release from the US.
- ECB’s annual Forum begins today, and while the agenda is not focused on the near-term monetary policy outlook, markets will follow Lagarde’s opening speech at 14:00 CET. A number of Fed speakers are also on the wires in the evening.
The 60 second overview
US yields jump: US treasuries came under renewed pressure yesterday. Ten-year yields hit 1.51% and five-year yields traded as high as 0.99%, the highest level since February 2020. The fixed income sell-off accelerated last week as Fed pointed to tapering later this year, as Bank of England opened the door to early rates hikes and as Norges Bank hiked its policy rate as the first G10 central bank.
The jump in 5y UST yields came ahead of 2 and 5-year treasury auctions. They were both well received, but only after the run-up in yields ahead of the auctions. It seems that investors now demand a higher return to absorb the high supply as we are approaching the start of tapering later this year.
There is also a lot of focus in the market on whether the abrupt move higher in yields has triggered or will trigger convexity hedging (selling of US treasuries to bring to portfolio duration) as the duration in the mortgage market lengthens as refinancing by borrowers slows. These hedging dynamics can exaggerate any move higher in yields.
Finally, inflation expectations (break-evens) also moved higher as Brent oil surpassed USD 80 a barrel. All in all, it seems that the market no longer fully buys into the Fed narrative that the elevated inflation is ‘temporary’. For more on the outlook for European and US yields see Yield Outlook that we published 21 September. We have a 2022 target of 2% for 10Y US treasury yields.
Oil: Brent oil is trading above USD 80 a barrel this morning as the lack of natural gas is spreading across the globe triggering use of oil as an alternative for power generation. This ‘natural gas demand effect’ comes simultaneously with the economic recovery, and rising airline traffic is boosting demand and depleting global crude oil inventories. Note that later today OPEC will publish its World Oil Outlook. The outlook comes ahead of the OPEC+ meeting next week. There is a growing concern that the cartel will be reluctant or even unable to rise production enough to stop oil from going higher, as demand peaks during the winter season on the Northern hemisphere.
Debt ceiling: The vote in the Congress on the bill to extend the US debt limit until December next year failed to pass last night as Republicans rejected it. The rejection comes as the government shutdown deadline approaches on Friday. The log-rolling will continue the coming days, but a government shutdown cannot be ruled out. Yesterday, Fed’s John Williams warned of catastrophic consequences if the US defaults on its government debt and that investors might become ‘extremely nervous’, which could lead ‘extreme’ market reactions.
Fed resignation: The presidents of the Boston and Dallas Fed branches Rosengren and Kaplan steeped down yesterday after it was disclosed earlier this month that they had been involved in controversial personal trading activities during the height of the pandemic last year. It leaves no less than six seats to be filled over the coming months.
Powell: Fed President Powell will in his testimony in Congress today (released yesterday) repeat his message from last week that inflation should be elevated for months but that it should later moderate. We should expect a lot of questions on the outlook for inflation after the testimony.
Equities: Global equities traded lower yesterday but with huge regional and sector differences. The cyclical value trade continuing to perform as investors see higher yields lowering the value of future cash flows but they do not see yields as a constraint to the economic backdrop or equities in general. We need to see a more abrupt rise in yields of more than 50bp higher yields before it should have a material impact on risk appetite. In addition, before yields become a challenge to the TINA argument, we need to see at least the long end rising 100bp or more from current level. For now, the energy sector is benefiting from higher oil prices while banks are the biggest beneficiary of higher yields. Healthcare and tech the biggest losers in the current environment. In US yesterday, Dow +0.2%, S&P 500 -0.3%, Nasdaq -0.5% and Russell 2000 +1.5%. Asian equities are mixed this morning. Hang Seng outperforming as property developers rally following reassuring comments from major developer Sunac. US and European futures are flat.
FI: Global bond yields continue to rise and 10Y US government bond yields are testing the 1.5%-level on the back of more hawkish comments from Federal Reserve officials. Hence, the US yield curve 2-10Y is steepening but the 10Y-30Y curve continues to flatten. We see a similar move in the German and EUR swap curves. Furthermore, Bund ASW-spreads have been remarkably stable for the past weeks despite the rise in yields and the string of new syndicated deals and supply of EGBs, financial and corporate bonds during September.
FX: It’s been a fairly quiet start to the week for FX markets. EUR/USD remains little changed while oil exporting currencies have been the big winners in FX majors space. That said, NOK has been underperforming on a relative oil-FX basis with EUR/NOK erasing losses from early trading Monday. EUR/SEK has been one of the strongest performing crosses and now trades close to the 10.20 threshold.
Credit: Credit markets saw only small moves yesterday where the low-beta segment outperformed high-beta. iTraxx Xover widened marginally to 242bp while Main tightened 0.2bp to 48.9bp. HY bonds closed 1bp wider and IG was unchanged.