Summary: Market sentiment continues to deteriorate as markets test the lows of this bear market on the surging US dollar and US treasury yields, although the latter came down sharply from the highs Friday as the equity market sell-off accelerated. The strong US dollar posted new highs for the cycle against many DM currencies, while sterling is in crisis mode, plunging to an all-time low at one point overnight below 1.0500 to the US dollar.
Last week was hectic with many central bank decisions, BoJ currency intervention and Russian military mobilisation. This morning US equities are not in a better mood with S&P 500 futures down 0.7% trading around the 3,680 level as the US 10-year yield continues to move trading at 3.76%. The VIX Index has also pushed to almost 30 and the VIX forward curve slipped into inversion on Friday signaling a potential panic selloff is in the making. We expect pressures to continue in equities, but with sentiment already historically low, there could be a short-term rebound if S&P 500 futures can hold the line around the June lows at around the 3,640 level.
Hang Seng Index fluctuated between modest gains and losses and was 0.4% lower as of writing. HSBC (00005:xhkg) and Standard Charted (02888:xhkg) tumbled around 8% as the Pound Sterling was in turmoil. The market however was supported by rallies in China internet stocks, the China catering space, EV names, and Macao casino stocks. In mainland bourses, tourism, catering, semiconductors, solar power and EV rebounded, CSI300 up by 0.3%.
The US dollar strength has continued to start this week, as the greenback posted new cycle highs versus most other G10 currencies, with the notable exception of USDJPY, which did trade back higher above 144.00, but continues to respect the threat of official intervention from Japan after last week’s episode. Most intense focus at the moment is on the collapsing pound sterling, which crashed to an all-time low below 1.0500 overnight, down more than 5% in a couple of trading sessions. More on whether sterling’s slide will lead to an emergency move from the Bank of England below. The EURUSD traded to new cycle lows below 0.9600 overnight. There are no real chart points for that exchange rate until the all-time low of 0.8230 from the year 2000.
A hawkish Fed and the continued rise in real rates and not least the surging US dollar has seen gold fall towards the lowest since April 2020. Last week’s 1.9% drop, however, was relatively muted given the +3% rally in the dollar index and a 24 basis points jump in the US ten-year nominal and real yield, but as long the dollar continues its relentless rise and until the market reaches peak hawkishness and yields start to top out, gold will struggle to act as a defense against stagflation. Ahead of last week's slump money managers had increased short bets on gold to become the most bearish in more than four years. Having dropped below $1654 on Friday, the market may now target the 50% retracement of the 2018 to 2020 rally at $1618. Focus being the dollar, US inflation data and Russia geopolitical developments.
Crude oil (CLX2 & LCOX2)
The unrelenting pressure on commodities, including crude oil, continues following Friday’s gloomy session which saw accelerated dollar strength and growth pessimism cause a ripple through markets. The result being a near 5% drop in crude on Friday and weakness remained the theme overnight in Asia as the dollar ripped higher against most major currencies, not least a collapsing sterling. WTI trades below $80 per barrel while a return to the mid-80's in Brent may soon see OPEC+ action to support prices. With Russia repeating its warning of not supplying commodities to nations that join any agreement to cap prices for its crude, and with the market increasingly having priced in a recession, the energy sector could be the first to find support once the dollar stabilises.
US treasuries (TLT, IEF)
US treasury yields pulled sharply higher on Friday, but treasuries finally found support later in the session before melting lower again to start the week in Asia – taking the 10-year treasury yield back toward the cycle high near 3.80%. The next focus higher for the US 10-year benchmark is 4.00% after the cycle high 3.50% level fell last week. This was the highest yield posted all the way back in the 2009-10 period.
What is going on?
The bloc will have at least 114 Senate seats, ten more than the level required for a majority. The three right-leaning parties Brothers of Italy, League and Forza Italia won about 43% of the popular vote, with 25% going to Brothers of Italy. The new government will have to scramble to put together a new budget for approval by the Italian parliament and the EU. Populist pressures could see the new government calling for large deficit spending that former PM Draghi refused to consider. Meloni has promised to roll back some of the reform measures introduced by Draghi, a move that could risk the EU withholding some portion of the EUR 200 billion of extraordinary EU pandemic budget funds targeted for Italy.
US flash PMIs for September surpassed expectations across the board, as manufacturing rose to 51.8 (prev. 51.5, exp. 51.1) and services, despite remaining in contractionary territory, printed 49.2 (prev. 43.7, exp. 45.0). The Composite lifted to 49.3 from 44.6. At the same time, the inflation components of the PMIs continue to show some relief, with the report showing that supplier shortages eased and both cost and selling prices for both goods and services were at fresh lows, while still high compared to the usual levels.
Both manufacturing and services PMIs for the Eurozone came in weaker-than-expected in a flash reading for September, with rising energy costs and decline in purchasing power weighing on manufacturing activity as well as the services sector. The headline reading fell to 48.2 in September from 48.9 in August. New orders disappointed, and the outlook was bleak as well. Manufacturing continues to be hit harder by elevated commodity prices. The reading slipped to 48.5 from 49.6. The services figure came in a bit higher at 48.9, but still fell from 49.8 in the previous reporting period. While supply bottlenecks eased, surging energy prices suggest these could reverse again.
According to initial surveys demand for the iPhone 14 is running below previous model instructions suggesting consumers are holding back due to lower disposable income. The lower initial sales figures are in contrast to the pre-orders of the iPhone 14, but these pre-orders do not come with an obligation to buy. It is also worth noting that Apple has begun assembling some of its iPhone 14 in India.
Over the weekend, the U.S. government has announced it will provide up to $50 million as a reward to private nuclear fusion firms. They will need to provide pre-conceptual nuclear fusion reactor designs within 18 months of receiving their award. Fusion is considered by experts as a clean energy source with less radioactive waste than existing nuclear power plants. If they succeed, this could help accelerate the transition towards a more sustainable and greener economy. At the same time, the United States is the developed country with the most conventional nuclear capacity under construction, according to the latest data of the World nuclear association. While many European countries are debating whether nuclear energy is safe or not, the reality is that it is one of the safer sources of energy. Radioactivity resulting from uranium use diminishes quickly with time. About 40 years after it is done making power, the radioactivity of the fuel bundle falls by over 99 %. Most of the industrial waste we manage never gets less toxic over time…not even in a million years.
During the last four weeks money managers have spent US$34 billion purchasing put options, which provides protection against a further fall in stock markets (according to the Financial Times). US$9.6 billion was spent in the last weeks alone on options protecting against downside risks, according to the Financial Times article ‘Investors pile into insurance against further market sell-offs'.
New UK Chancellor Kwasi Kwarteng announced a mini budget on Friday, which included wide-ranging tax cuts approximately GBP 45 billion, adding to an estimated cost of GBP 60bn for the energy plan. Instead of stabilizing markets, the announcement sparked mayhem as it promised even more inflation at a time when the UK is set to slide into a crippling stagflationary recession as prices soar. The Bank of England last week stuck with a 50bps rate hike as recession is likely on the cards. Bonds were sold off and the sterling dipped to 37-year lows, suggesting UK’s inflation-fighting credibility at stake and demands risk premia, in other words, the Bank of England may be forced to announce an emergency rate hike to stabilize the currency.
Will Japanese authorities intervene further to defend the yen?
The Japanese authorities intervened in the currency markets for the first time in two decades last Thursday. USDJPY’s move above 145 following a hawkish FOMC and a still-accommodative Bank of Japan prompted the intervention, and dragged the pair to sub-141 levels before some of the move was retraced. However, Japan was closed on Friday for a holiday, and returns to trading today. Bank of Japan Governor Kuroda has been out speaking this morning, with no new signals on offer. The yen could weaken further given the pressure from yield differentials between the US, which continues to rise to fresh highs, vs. the yields in Japan which continue to remain capped. Meanwhile, the intervention last week has been possibly unilateral, suggesting it may not be long-lasting. This continues to raise the possibility of further intervention from the Japanese authorities, especially if USDJPY rises back above 145.
Earnings calendar this week
The Q3 earnings season kicks off in three weeks but there are still earnings releases being released not following the traditional calendar. The action this week will be on Thursday with earnings from H&M, Nike, and Micron Technology, with earnings from Micron being 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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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
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Head of Commodity Strategy