Summary: Equity markets rallied yesterday after the Bank of England announced an emergency QE action to calm a dysfunctional long maturity gilt market, a move that smashed UK gilt yields lower and took major global sovereign yields lower as well. The market’s inference is perhaps that central bank tightening in general has been taken too far and the Bank of England is perhaps the canary in the coal mine. The US dollar also traded weaker yesterday before rebounding slightly overnight.
US equities rose sharply after posting new intraday lows for the cycle as the Bank of England QE announcement pushed US treasury yields sharply lower, offering the hope of a pivot in the brutal cycle of rising yields. The rally encourages the technical idea that we have created a double bottom as long as these new marginal cycle lows continue to support the price action. The next area of resistance is around 12,000 in the Nasdaq 100 index.
Following the rally in global equity markets overnight, Hong Kong and mainland China stocks gained, with Hang Seng Index up by 1% and CSI300 0.3% higher. HSBC (00005:xhkg) rose 2.8% on the temporary calm of the U.K. bond market and currency. China internet stocks and the new energy space were among the top gainers. China property developers failed to participate in the rally, with leading names falling from 1.5% to 9%. In the mainland bourses, medical equipment, healthcare, precious metal, coal mining and chemical stocks outperformed while property developers, shipping, tourism, lodging declined.
The sharp reversal in bond yields yesterday after yields had ground higher in a seemingly inexorable and increasingly rapid pace over the last few weeks saw the USD trading sharply lower, suggesting that the USD and yields will continue to trade in tightly correlated fashion and as important indicators for global risk sentiment. So far, the move has only reversed a portion of the greenback’s recent gains. A more notable reversal would require, for example EURUSD trading back above 0.9900, GBPUSD back above what looks an impossible 1.1250 or higher, and AUDUSD above 0.6700.
The initial reaction to the BoE emergency QE move (more below) was to sell sterling, as all other things equal, an easing move for a central bank in an otherwise tightening world is a negative for the currency. But perhaps as the market saw the move as the start of a possible trend that might spread elsewhere, sterling actually rose sharply later in the session on the improvement in global sentiment after the BoE’s move helped not only UK yields to sharply reverse, but other yields to do likewise, if less so. GBPUSD rose back to above 1.0900 late yesterday after trading 1.0540 earlier in the session. The gains were reversed in early European trading to below 1.0800 as of this writing. Sterling will remain extremely volatile, with EURGBP worth tracking around the pivotal 0.9000 area.
Gold rebounded reflexively as the pressure from rising yields and a rising US dollar suddenly faded yesterday. After trading near 1,615 yesterday, the price action ripped all the way back to 1,660+, short of the critical resistance zone into 1,680-1,700 that is the departure point for this latest bear market move. It is clear that global bond yields and the USD will continue to lead the way as coincident indicators.
... as suggested by the first drop in US crude inventories in a month. EIA data showed stockpiles fell 215k bbl last week, while West Coast gasoline stockpiles fell to their lowest level in 10 years. Disruption to supplies due to Hurricane Ian are also causing some concerns, with US president Joe Biden warning oil companies not to hike prices for the second time this week. Furthermore, the geopolitical situation has turned more fragile once again with the European Union announcing a new round of sanctions against Russia including a ban on European companies from shipping Russian oil to third countries above an internationally set price cap. Brent futures rose close to $90/barrel while WTI futures got in close sights of $82/barrel.
US treasury yields fell sharply in sympathy with UK gilt yields on the surprise announcement of an emergency QE programme from the Bank of England that erased most of the enormous spike in yields there that had developed since the UK government announced its new tax cut package late last week. The price action for the 10-year US treasury benchmark settled near 3.75% after trading slightly above the 4.00% mark yesterday. The Bank of England move brings hope that other central banks may ease off the tightening accelerator. The next important yield level to the downside is the cycle top of 3.50% from June. A 7-year treasury auction yesterday
The Bank of England on Wednesday announced that it would purchase long-dated UK gilts to stabilize the market in a “temporary operation”. The move forced UK yields sharply lower, reversing most of the recent spike that had developed after UK Chancellor Kwasi Kwarteng announced tax cuts late last week. The 30-year UK Gilt yield fell over 100 basis points after the announcement to below 4.0%, although it was trading 3.50% a week ago. While this may be touted as yield curve control of some sort, the BoE claimed that it is a time limited event until October 14 with the intention of restoring orderly market conditions. Pressure is building on the Truss government to reverse the planned tax cuts and shore up fiscal credibility.
Apple announced that it would not move forward with plans for additional iPhone production as the demand for the new phone was not living up to expectations. The increase would have been on the order of 6 million iPhones in the second half of this year, suggesting that the running demand for iPhones in the period is on the order of 90 million, about the same as last year. Demand for higher end new iPhone 14 has been stronger than for the entry-level models. Apple fell 1.3% yesterday after trading as much as 4.5% lower intraday. Key chipmakers were also impacted, including Taiwan Semiconductor, which fell 2.2% and Apple’s biggest iPhone assembler, Hon Hai Precision Industry, lost 2.9% amid the electronics supplier selloff, on fears demand will slow.
Fed’s Bostic suggested year-end rates of 4.25-4.50% while the market pricing is still at 4.2% suggesting more room for upward pricing. Although not a voter this or next year, he said that his baseline is a 75bps increase at November meeting and 50bps in December. Meanwhile, he remained optimistic on US economic momentum and ruled out any contagion risks from systemic global events (possibly referring to the UK crisis). Meanwhile, Bostic noted no evidence of dysfunction in the Treasury market at this point. Another Fed speaker, Charles Evans, vouched for a further move into restrictive territory, saying that the FOMC’s current target range is “not nearly restrictive enough”.
At this rate it doesn’t appear CPI will peak at just shy of the 8% the RBA forecasts, given price pressures have resumed this month from the largest inflation contributors. Based on the ABS’s new monthly CPI print, some of the largest price jumps year-on-year to July were in fuel (+29.2%) and fruit & vegetables (+14.5%). The concern is that, with La Nina set to hit Australia and population growth continuing, food and housing (rent) prices will continue to rise apace. In September alone, contributors to food prices have risen markedly, as the global supply outlook has weakened amid poor crop conditions. This could tilt the RBA back toward a more hawkish stance.
Yesterday as the onshore and offshore renminbi weakened below 7.20 versus the dollar, the China Foreign Exchange Market Self-Regulatory Body, attended by PBoC Vice Governor Liu Guoquiang, told banks in a meeting to “safeguard the stability of the market and prevent volatile movements in the exchange rate”, in particular not to make one-way bets on the weakening of the renminbi.
We have seen aggressive moves across markets this quarter, to say the least, which brings the question of whether significant rebalancing flows are set for the quarter end this Friday. The relative bond performance has been perhaps worse than that for equities, while in FX the focus may be on possible rebalancing after a tremendous USD upsurge in Q3.
Volkswagen set the listing price for Porsche’s shares at €82.50, which would value the company at €75 billion. The shares will begin trading today for the company and this will be the largest IPO in over a decade.
The chief action this week is up with today’s earnings reports from H&M (this morning before market open at 0700 GMT), Nike (after US market close today at 2100 GMT), and Micron Technology (after market at 2030 GMT). The earnings from Micron the most interesting to watch as we already know H&M and Nike are seeing weak demand. Micron has exposure to the consumer electronics industry and manufactures memory chips in Asia which means that the company sits in at the intersection of many interesting trends.
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