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Zero Hedge
ZeroHedge
3 Oct 2023


NextImg:It's Deja Vu All Over Again: Futures Tumble As Yields Surge

In a deja vu repeat of Monday's open, and really a carbon copy of most mornings in the past month, what was a modest attempt to push futures higher has crashed and burned with US equity futures sliding to session lows as yields resumed their surge once again, the 10Y rising up to a new 16 year high of 4.74%, with 30Ys also rising to the highest since 2007, hitting 4.856%.

As a result what was a modest 0.3% gain in spoos turned into a 0.4% loss as S&P futures dropped to session lows of 4,307 as of 7:35am with Nasdaq futures dragged 0.5% lower. The Bloomberg Dollar Spot Index followed yields tick for tick and rose to an 10-month high, pressuring most Group-of-10 currencies. The selloff rippled across equity and commodity markets, with Europe’s Stoxx 600 sliding to a six-month low as WTI traded near $89 a barrel and gold and Bitcoin fell.

In US premarket trading, HP gained after BofA double upgraded its rating on the PC maker to buy from underperform, with positive commentary expected at next week’s analyst day. MSP Recovery rose as much as 26% in premarket trading on Tuesday as its Chief Legal Officer Frank Carlos Quesada reported a purchase of stock to the US Securities and Exchange Commission. Here are some other notable premarket movers:

Wall Street strategists are warning about the impact that elevated interest rates on equities, with Goldman Sachs, Morgan Stanley and JPMorgan all saying there’s a risk of further stock-market declines. Currently, traders are pricing roughly a one-in-three chance of a rate hike in November.

“We had not anticipated such an increase in rates,” said Vincent Juvyns, global market strategist at JPMorgan Asset Management. “This is something which will at least slow down, or even reverse the progress of equity markets.”

And indeed all eyes are on rates this morning, as Treasury yields extend to fresh cycle highs in 5-year out to long-end of the curve, as the selloff gathers pace in early US session. Futures volumes pick up as 10-year tenor breaks through earlier session lows and through the 107-00 level. In the long-end of the curve 30-year yields breach 4.855% and onto highest levels since 2007.

This week’s Treasury selloff came after US lawmakers managed to avert a government shutdown, prompting traders to increase bets that the Fed could raise rates in November. Comments from two Fed policymakers reinforced that view, with Cleveland Fed president Loretta Mester saying on Monday that one more rate hike was likely needed and Governor Michelle Bowman urging multiple increases.

“The market is probably evenly split on whether central banks will need to continue raising rates or not so the bond marker is testing investors,” said Brian O’Reilly, head of market strategy at Mediolanum International Funds. “With 10-year yields around 4.6%, the asset allocation decision for equities is getting quite difficult.” 

European stocks were also lower, spooked by the surge in rates. The Stoxx 600 is down 0.7% at session lows, led by declines in the utility sector; retail stocks were dragged down on a warning from online retailer Boohoo Group Plc, which fell 10%. Here are the biggest European movers:

Earlier in the session, Asian stocks declined as hawkish signals from the Federal Reserve spurred risk-off sentiment, while losses in Hong Kong intensified as traders returned from a holiday. The MSCI Asia Pacific Index fell as much as 1.6% to reach its lowest since late December. The Hang Seng China Enterprises Index fell more than 3% in the region’s worst performance among major gauges, dragged lower by tech stocks Meituan and Alibaba. Mainland China remains shut for Golden Week holiday, while South Korean markets are also closed. The broad selloff came as the latest commentary from Fed officials stirred concerns that the central bank will continue to raise interest rates. Traders boosted bets on a November rate hike to a roughly one-in-three chance, up from the 25% likelihood priced on Friday. Positive Chinese travel data did little to lift sentiment as investors focus on uncertainties lingering in the world’s second-largest economy. 

In FX, the Bloomberg Dollar Spot Index rises 0.1%, hitting a fresh 10-month high and the euro falling to its lowest against the dollar since last December at 1.049.

In rates, Treasuries are trading at the lows of the day, with 10-year yields rising 6bps to 4.74%, while gilts outperform their German counterparts after data showed UK shop price-inflation fell to a one-year low in September. UK two-year yields fall 3bps to 4.95%. Treasury yields once again rose to session highs across the curve with futures under or near Monday’s lows; 10- to 30-year yields reached fresh multiyear highs. Gilts outperform Treasuries on the back of supportive food inflation data. US 10-year yields around 4.75%, cheaper by ~5bps on the day near session high; gilts outperform by nearly 5bp in the sector as they unwind a portion of Monday’s losses. US 2s10s curve steeper by 4bp on the day with front-end slightly outperforming; spread breached -41bp, least inverted since May 5. Fed-dated OIS continues to price around 35% odds of a 25bp rate hike for the November policy meeting; Cleveland Fed President Loretta Mester said late Monday that one more rate hike may be needed this year. Dollar IG issuance slate empty so far after five names priced $5b Monday; a slow week is expected with many companies entering earnings blackout periods. US session highlights include August JOLTS job openings data and comments from Fed’s Bostic.

In commodities, crude futures are little changed with WTI trading near $88.90. Spot gold falls 0.1%.

Bitcoin is under pressure after experiencing a marked upside in recent sessions, which took BTC to near USD 29k. Currently, residing around the USD 27.5k mark but well within recent ranges.

Looking to the day ahead now, and the main data highlight will be the US JOLTS release of job openings for August. Otherwise, central bank speakers include the ECB’s Simkus, Lane and Villeroy, along with the Fed’s Bostic.

Market Snapshot

 Top Overnight News

A more detailed look at global markets courtesy of Newsquawk

APAC stocks declined amid the rising global yield environment and the continued absence of some key markets, while the focus turned to central bank announcements beginning with the RBA. ASX 200 was dragged lower by underperformance in the mining-related sectors due to the recent declines in commodity prices and with headwinds from the rising yields after Australia’s 10yr yield rose to its highest since 2011, while the RBA decision to keep rates steady provided no major fireworks. Nikkei 225 weakened with all industries pressured and energy firms leading the broad declines. Hang Seng was the worst hit on return from holiday amid losses in property, tech and energy with developers suffering despite an early spike in Evergrande shares by around 35% on resumption of trade.

Top Asian News

European bourses have been mixed but are currently a touch softer, Euro Stoxx 50 -0.2%; newsflow is relatively light and markets remain focused on yields. Sectors are similarly mixed, featuring outperformance in Banks and Insurance names while Utilities and Basic Resources are the relative laggards. Stateside, futures are modestly firmer, ES +0.2%, with recent pressure being attributed to yields but action comparably more contained thus far in today's session ahead of JOLTS and Fed's Bostic & Mester. For reference, APAC trade remains limited given mass holiday closures though the return of the Hang Seng saw it experience marked pressure and close with downside of circa. 3.0%, with the move similarly attributed to recent yield action.

Top European News

FX

Fixed Income

Commodities

Geopolitics

US Event Calendar

Central bank speakers

DB's Jim Reid concludes the overnight wrap

It might have been a brand new quarter, but yesterday was another challenging day for markets, especially with the bond sell-off showing no sign of letting up. In fact, the 10yr Treasury yield (+10.8bps) closed at a post-2007 high of 4.68%, whilst the 10yr real yield (+9.7bps) closed at a post-GFC high of 2.33%. And despite some better-than-expected data, risk assets came under pressure alongside WTI crude (-2.17%) falling back beneath $90/bbl. Equities were weak in Europe and down for much of the day in the US but a late rally left the S&P 500 (+0.01%) flat by the close. Europe’s STOXX 600 (-1.03%) fell to a 6-month low, and the German 10yr real yield (+12.1bps) hit a post-2011 high of 0.58%. The main event today is the US JOLTS data as we see how tight the labour market still is under the surface.

Starting with markets and there were several factors driving the latest sell-off. First up, the lack of a US government shutdown over the weekend was seen in a more bearish light as the day progressed, as it removed a tangible risk for the economy and was seen as raising the likelihood of more rate hikes. For instance, futures raised the likelihood of a hike at the next meeting in November from 19% on Friday to 28% yesterday. And looking at the prospect of a hike by December, the likelihood rose from 39% last Friday to 51% by yesterday’s close.

Second, the sell-off then got added fuel from the latest ISM manufacturing print for September, which was notably better than expected. The headline print came in at 49.0 (vs. 47.6 expected), which was the highest since November 2022. And there was lots of good news at the component level as well, with new orders (49.2) at a 13-month high and employment (51.2) back in expansionary territory. That was echoed by the final manufacturing PMI as well, where the final reading was revised up to 49.8 (vs. flash 48.9). So there were several signs that the economy was proving more resilient than expected.

Third, comments from numerous Fed speakers reiterated the higher-for-longer narrative. Governor Bowman, one of the more hawkish FOMC members, suggested that multiple further rate hikes may be needed while Cleveland Fed President Mester saw another hike this year as likely. Comments from Vice Chair of Supervision Barr erred on the more cautious side, saying that the more important question was “how long we will need to hold rates at a sufficiently restrictive level”. Overall, despite the more encouraging recent inflation data, the latest Fed commentary shows no signs of a downshift from the September median dot plot view of another rate hike by year-end.

Speaking of US economic resilience, our own US economists have just released an updated set of forecasts overnight. Their baseline still sees a recession taking place, but they now see that starting a bit later in Q1 2024, and only lasting two quarters. Their view is that the soft landing case has strengthened over recent months, but there are still plenty of headwinds, including depleted savings, tightening credit conditions, and a return of student debt payments. For the Fed, they continue to see the tightening cycle as over now, albeit with the risk of another hike. And they now expect the Fed to start cutting rates from June 2024, with 175bps of cuts next year. See their full update here.

With some more positivity about the economy, bonds continued to sell off throughout the day, with yields on 10yr Treasuries up +10.8bps to a post-2007 high of 4.68%. The 30yr yield (+8.9bps) also pushed higher to close at 4.79%. It was real yields that drove the increase in rates, with the 2yr real yield (+7.3bps) at a new post-GFC high of 3.07%, and the 10yr real yield (+9.7bps) at 2.33%. At the same time, the 2s10s curve continued to steepen, with a +4.9bps increase to -42.8bps. On one level, that might be seen as a positive sign given the 2s10s is a classic recessionary indicator, but then again, the last 4 cycles saw it move out of inversion territory just before the recession began.

Over in Europe, there was a similarly strong bond sell-off, with yields on 10yr bunds (+8.2bps), OATs (+7.8bps) and BTPs (+2.6bps) all moving higher. But it was gilts that led the moves, with the 10yr yield up +12.7bps to 4.56%, whilst the 30yr gilt yield (+11.4bps) surpassed its mini-budget peak yesterday to close above 5% for the first time since 2002. Similarly to the US, it was real yields that led those moves, and the German 10yr real yield (+12.1bps) hit a post-2011 high of 0.58%.

The bond sell-off created a tough backdrop for equities. The S&P 500 traded around half a percent lower for most of the day, but a rally in the last hour of the US session left it flat on the day (+0.01%). Tech stocks were a big winner though, with the FANG+ Index (+1.38%) going against the broader trend to advance for a 4th consecutive session. The breadth of losses outside of tech was highlighted by the equal weight index declining -1.11% with only 22% of the S&P 500 constituents up on the day despite its flat headline performance. Small caps also underperformed with the Russell 2000 index down -1.58%. Back in Europe there were larger losses, leaving the STOXX 600 (-1.03%), the DAX (-0.91%), the CAC 40 (-0.94%) and FTSE 100 (-1.28%) lower on the day.

Across other asset classes, the dollar was a key beneficiary, with the broad index (+0.69%) rising to a 10-month high and the euro falling to its lowest against the dollar since last December at 1.049. Meanwhile, oil declined for third day in a row, with WTI crude falling back below $90/bl (-2.17% to $88.82/bl). Both WTI (-5%) and Brent (-6%) have seen their sharpest 3-day decline since the oil price rally started in June. So some evidence that uncertainty over the demand outlook is weighing on the strong recent oil rally.

Overnight in Asia, regional equities are also selling off with the Nikkei 225 down -1.43%. The Hang Seng is down -2.98% after reopening post Monday's holiday. Many other markets remain closed in this holiday week. There was also an RBA decision overnight, with the central bank keeping rates at 4.10% with much of the statement identical to the last one. S&P 500 futures are almost unchanged (-0.06%), with Treasury yields up less than a basis point across the curve.

Elsewhere yesterday, the main data highlight came from the final manufacturing PMIs, although they mostly echoed the initial impressions from the flash reading. Indeed, the Euro Area PMI was exactly in line with the flash print at 43.4, and Germany’s was revised down slightly to 39.6 (vs. flash 39.8). Otherwise, the Euro Area unemployment rate was back at its recent low of 6.4% in August, which is its joint-lowest level since the formation of the single currency.

To the day ahead now, and the main data highlight will be the US JOLTS release of job openings for August. Otherwise, central bank speakers include the ECB’s Simkus, Lane and Villeroy, along with the Fed’s Bostic.