- 10-year US Treasury yields surged past 1.5%.
- Risk mood clouded by fears over US default, Evergrande, stagflation.
- US futures attempt to recover after S&P 500’s biggest drop since May.
- ECB Sintra forum to be monitored for inflation clues from central bank chiefs.
Markets appear to be sobering up to the looming prospects of the Fed’s tapering as the market reassesses the Fed tightening cycle. Bond yields on the 10-year US Treasury have spiked back above the psychologically important 1.50% mark and are hovering around their highest levels since June. That in turn extended declines in yield-sensitive assets such as tech stocks and gold.
Asian stocks are tracking the overnight declines on Wall Street although US futures and European benchmarks are attempting a rebound. After suffering its biggest single-day drop since May, the S&P 500’s key support level appears to have shifted from its 50-day moving average to its 100-day counterpart, amid creeping concerns that the blue-chip index may have crested in the near-term.
Still, it’s important to put the recent gyrations into broader context. The S&P 500 is just 4% below its all-time high, gold bugs still have some breathing space above spot’s year-to-date low, while 10-year yields are still a long way off from breaking out of their multi-decade downtrend.
Global investors are trying to find a clear narrative even as they grapple with the cross currents that are buffeting the broader market outlook. Investor sentiment is hunting for a clear signal amid the cacophony stemming from a multitude of fears. These include a potentially “catastrophic” default by the US Treasury, in Janet Yellen’s estimation, possible contagion out of the China Evergrande saga and even the risk of stagflation.
Skyrocketing prices for natural gas, oil, and cotton have only amplified the notion that inflationary pressures may decimate the Fed’s “transitory” view, which could in turn crimp global economic prospects. Such a darkening outlook has soured risk sentiment and may have prompted this shakeup in asset allocations ahead of the final quarter of the year. Perhaps more solemnly, recent price action could herald a potential end to the heady days of risk-taking activities that have been aided by the Fed’s ultra-accommodative stance.
Will central bankers soothe markets?
Clarity may be derived from today’s ECB symposium which features a panel comprising the chiefs of the Fed, BOE, ECB and the BOJ. Their collective outlook on global inflation and respective policy responses could prompt the next move across markets.
If “Team Transitory” remains with the oft-repeated narrative peddled by the likes of Lagarde and Powell, this might help unwind some of the recent losses in equities and bullion, while calming bond markets at least for a little while longer. However, should the hawkish drums grow louder, that could exacerbate recent declines seen in Treasuries, equities and bullion as markets brace harder for the eventual unwinding of the ultra- accommodative policies lavished upon global markets since the pandemic.