Markets in “risk-free” mode
Market players today
Another calm day on the data front, Eurozone economic sentiment indicators will be released for September while the Business and Consumer Confidence Surveys (NIER) are expected to be released in Sweden.
The ECB’s annual forum continues with several speeches today, while Daly and Bostic are on the Fed’s threads.
The 60-second preview
Sentiment in global financial markets turned to a risk averse mode as equity markets retreated and credit spreads widened due to rising inflation prospects, rising rates, more hawkish comments from the Federal Reserve combined with fiscal uncertainty in the United States as the increase in the debt ceiling has yet to be passed in the United States Congress. One of our favorite measures of risk aversion sentiment, the VIX Volatility Index, also jumped yesterday.
However, this is a risk with a ‘twist’ as the yield on 10-year Treasuries as well as 10-year German government bonds rose yesterday rather than seeing the traditional flight to quality in a risk scenario.
This morning, Asian equity markets track negative US sentiment as uncertainty continues to dominate sentiment combined with the above factors. In addition, the price of oil stabilized this morning after a recent rally, but uncertainty remains high.
Actions: Global equity markets fell sharply yesterday as the energy sector went against the grain. A very big change from the moves we saw on Monday is that risk appetite took a hit yesterday and cyclical value trading turned into defensive value trading as yields continued to climb. The VIX index also rose to 23. The US complex FANMAG fell significantly, but European tech companies were beaten the most yesterday. Dow -1.6%, S&P 500 -2.0%, Nasdaq -2.8% and Russell 2000 -2.3%.
The negative tone continued in Asia this docking with most indices down 1 to 2%. Futures in Europe are flat this morning while optimism returns to the US, with futures up about 0.5%.
FI: Global bond yields continue to rise and 10-year Treasuries have crossed 1.5% while 30-year US Treasuries have crossed 2%. The US curve steepened for the first time since early August against the backdrop of hawkish statements from the Federal Reserve. There was a strong ripple effect in the European bond market, where the German 10-year government bond yield tested the -20bp level and there was a modest widening of the BTPS-Bund spread by a few. pb.
FX: Yesterday, widespread sentiment of risk aversion and spike in market volatility weighed heavily on risk-sensitive currencies, commodities and the USD rate. The GBP was hit the hardest in the G10 space, but the NZD, NOK and AUD also suffered heavy losses. In the rest of the majors space, ZAR and MXN were the most underperforming in a session where everything lost ground to the greenback.
Credit: The high beta segment of the credit markets sold off strongly yesterday. iTraxx Xover widened by 7bp (bringing it to 249bp) while Main widened by 1bp more modest (to 50bp). HY bonds widened 8bp, but IG closed less than 0.5bp wider.
Sweden. Today, the September Business and Consumer Confidence Surveys (NIERs) are released. To date, overall business confidence in all sectors has held up very well, with confidence in manufacturing reaching an all-time high. However, given that there are several signs of a slowdown in the global manufacturing cycle, it is reasonable to expect something similar in the Swedish confidence numbers. The situation is however particular, since it is not necessarily the demand which weakens but rather the shortages of supply which affect the companies. At this point, therefore, it is particularly important to monitor what companies are saying about changing demand on the one hand and delivery times on the other.
Two speeches by Riksbank board members on the agenda (Breman and Flodén), neither of them is likely to say the same about current monetary policy given that the September board is released tomorrow.