A difficult session for the Gilts
US stocks were weaker on Monday, S&P down 0.7%. Fret not, but instead there was a painfully slow and steady downward drift into classic risky action. Still, stocks rebounded off the lows after a slightly dovish bias in remarks from the Fed’s Leal Brainard, who suggested the board sees “tentative evidence of some rebalancing” in the labor market, “paying particular attention to global risks”, “the household savings surplus” is lower than previous estimates.”
Markets have taken this dovish pivot path before, and investors have always been too quick to price a Fed pivot. Thus, traders will be more cautious before falling back into the bear trap. I suspect last week’s roller coaster, which saw the S&P 500’s biggest two-day rally since April 2020 before dropping to September lows, should keep investors on the defensive until it be a significant sign of inflation cooling feverish demand for goods relieves.
At this point in the rate hike cycle, the 1970s taught the Fed that there are huge risks of premature easing. But economic storm clouds are forming that could foreshadow a global recession and crush capital markets in the event.
It was another tough session for the Gilts. 10-year yields are up 24 basis points, 30-year yields up 29 basis points even as the BoE announced a new short-term funding facility to minimize volatility as its asset-buying program emergency bonds will expire later this week. The UK debt market is in absolute shambles with no mop in sight. The front-end needs to assess what will likely be a very hawkish outlook from the BoE on a combination of fiscal vision and Fed catch-up. The 3-5 year sector has to pay for the government’s deluge of paper to pay for its follies. At the same time, 30-year-olds are being jostled by pension funds, which are still selling to rebalance portfolios.
The missile attacks on Kyiv earlier Monday also contribute to the risky mood in the market.
In the wake of lackluster economic data in China, continued Covid-related restrictions in Shanghai and a high level of pessimism engulfing global risk assets, oil is trading lower as demand worries linger. temporarily prevailing in tight markets.
The US Dollar is rallying across the board as global risk sentiment deteriorates. Yet, one thing the forex market has going for it is that traders are extremely hedged long USD ahead of what will likely be a winter of desperation in the northern hemisphere. Dollar overbought conditions could certainly slow the rally
USDJPY is slowly moving higher given the pair’s strong beta against higher US yields which rose after the US payroll. And that should set up a good test of will between the market and the Japanese MoF if we press USDJPY 145.85, the level where the BoJ has recently physically intervened.
Overall, the streams are lighter as the United States celebrates Columbus Indigenous Peoples Day.