U.S. Swap Spreads Widen, Three-Month Libor Rises as Risk Aversion Spreads

In another sign of concern brewing in money markets, analysts cited three-month Libor, which rose to 12.5 basis points, a four-week peak, according to Refinitiv data, which may reflect some stress in the banking system.

Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors. Regulators have warned that its $305 billion in liabilities could spark broader risks to China’s financial system if its debts are not stabilized.

Spreads of interest rate swaps are typically viewed as indicators of market risk, analysts said. A higher spread suggests market participants are willing to swap their risk exposures, suggesting overall risk aversion.

The spread on 10-year U.S. swaps over benchmark Treasuries rose to 5.25 basis points, from 4 basis points late on Friday. The spread was 3.25 basis point late Monday.

U.S. 10-year swaps measure the cost of swapping fixed rate cash flows for floating rate ones over a 10-year term.

“Wider swap spreads reflect an expectation that Libor is going to move higher,” said Dan Belton, fixed-income strategist, at BMO Capital in Chicago.

“And Libor is generally seen as the fear gauge. When there is financial market stress, Libor tends to widen and swap spreads tend to follow,” he added.

Libor has been on a downtrend this year given excess cash in the banking system as a result of the Federal Reserve’s asset purchases under its quantitative easing program. But Libor has perked up over the last week and a half.

That said, Belton clarified that wider spreads can also be attributed to technical factors.

“A lot of the moves has been technical in nature, a lot to do with the Libor transition. Interest rate swaps are still referencing Libor, but in two years, it will SOFR (secured overnight financing rates), plus a fixed spread,” Belton said.

For now, global banks still use Libor to price U.S. dollar-denominated derivatives and loans, but they will soon have to transition to using SOFR.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci)

World Shares Tumble as China Evergrande Contagion Fears Spread

MSCI’s gauge of stocks across the globe shed 2.09%, on pace for its biggest one-day fall since October 2020, as Wall Street’s major indexes sagged more than 2%.

Investors moved into safe havens, with U.S. Treasuries gaining in price, pulling down yields, and gold rising.

Shares in Evergrande, which has been scrambling to raise funds to pay its many lenders, suppliers and investors, closed down 10.2% at HK$2.28.

Regulators have warned that its $305 billion of liabilities could spark broader risks to China’s financial system if its debts are not stabilized.

“Investors are concerned that the Evergrande issue is going represent a domino,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Investors are tending to sell first and look into it to later.”

The Dow Jones Industrial Average fell 787.6 points, or 2.28%, to 33,797.28, the S&P 500 lost 101.41 points, or 2.29%, to 4,331.58 and the Nasdaq Composite dropped 408.25 points, or 2.71%, to 14,635.71.

Economically sensitive sectors, including financials and energy, were hit particularly hard.

The pan-European STOXX 600 index lost 1.67%, with mining stocks sliding.

The selloff on Monday has seen a cumulative $2.2 trillion of value wiped off the market capitalization of world equities from a record high of $97 trillion hit on Sept. 6, according to Refinitiv data.

Worries over Evergrande follow a pullback in equities recently as investors worry over the impact of coronavirus cases on the economy, and when central banks will ease back on monetary stimulus.

The U.S. Federal Reserve is due to meet on Tuesday and Wednesday as investors look for when it will begin pulling back on its bond purchases.

Investors were also keeping an eye on other central bank meetings spanning Brazil, Britain, Hungary, Indonesia, Japan, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and Turkey.

The dollar index rose 0.061%, with the euro unchanged at $1.1725.

The offshore Chinese yuan weakened versus the U.S. currency to its lowest level in nearly a month.

“We are seeing a classic flight to safety in the dollar until we get some sense of clarity on whether or not it is going to be an orderly or disorderly resolution to Evergrande,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, DC.

Benchmark 10-year notes last rose 22/32 in price to yield 1.2972%, from 1.37% late on Friday.

The iShares exchange-traded fund tracking high-yield corporate bonds edged down 0.5%.

Oil prices fell but drew support from signs that some U.S. Gulf output will stay offline for months due to storm damage.

U.S. crude fell 2.18% to $70.40 per barrel and Brent was at $73.99, down 1.79% on the day.

Spot gold added 0.4% to $1,761.29 an ounce, rising off of a one-month low.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Lewis Krauskopf in New York and Tom Arnold in London; Additional reporting by Anushka Trivedi in Bengaluru, Saikat Chatterjee in London, Karen Pierog and Chuck Mikolajczak in New York and Wayne Cole in Sydney; Graphic by Sujata Rao; Editing by Jane Merriman, Mark Potter and Jan Harvey)

Analysis: Why the Fed Might Welcome a Bond Market Tantrum

Persistently low yields are a feature of bond markets across the developed world, with central banks mostly in no hurry to raise interest rates and a global savings glut that keeps debt securities in constant demand.

But it is in the United States that the contradiction between economic recovery and bond yields is starkest.

Even with growth tipped to surpass 6% this year and a “taper” in sight for the Fed’s bond-buying programme at the end of this year, 10-year yields are still stuck at just above 1.3%..

The Fed probably rejoiced at low yields in the initial stages of the economic recovery, but now needs bonds to respond to the end of pandemic-linked recession, said Padhraic Garvey, head of research for the Americas at ING Bank.

Current pricing, analysts say, looks more consistent with heightened economic uncertainty, whereas higher yields would align markets more with the signals coming from central banks.

“To facilitate that, we argue that there needs to be a tantrum. If the Fed has a taper announcement … and there is no tantrum at all, that in fact is a problem for the Fed,” ING’s Garvey said.

Analysts say a bond market tantrum would involve yields rising 75-100 basis points (bps) within a couple of months.

The original “taper tantrum” in 2013 boosted U.S. yields just over 100 bps in the four months after then Fed boss Ben Bernanke hinted at an unwinding of stimulus measures.

But that kind of sudden jump in yields looks unlikely right now, given how clearly the Fed has telegraphed its plans to taper its bond-buying. And as 2013 showed, bond market tantrums carry nasty side-effects including equity sell-offs and higher borrowing costs worldwide.

A happy medium, analysts say, might be for benchmark yields to rise 30-40 bps to 1.6-1.8%

FED AND BANKS NEED AMMUNITION

Besides wanting higher yields to better reflect the pace of economic growth, the Fed also needs to recoup some ammunition to counter future economic reversals.

The Fed funds rate – the overnight rate which guides U.S. borrowing costs – is at zero to 0.25%, and U.S. policymakers, unlike the Bank of Japan and the European Central Bank, are disinclined to take interest rates negative.

The Fed won’t want to find itself in the position of the ECB and BOJ, whose stimulus options at the moment are limited to cutting rates further into negative territory or buying more bonds to underwrite government spending.

Jim Leaviss, chief investment officer at M&G Investments for public fixed income, said policymakers would probably like the Fed fund rate to be at 2%, “so, when we end up in the next downturn, the Fed will have some space to cut interest rates without hitting the lower bound of zero quickly”.

Another reason higher yields might be welcomed is because banks would like steeper yield curves to boost the attractiveness of making longer-term loans funded with short-term borrowing from depositors or markets.

Thomas Costerg, senior economist at Pictet Wealth Management, notes that the gap between the Fed funds rate and 10-year yields of about 125 bps now is well below the average 200 bps seen during previous peaks in economic expansion.

He believes the Fed would favour a 200 bps yield slope, “not only because it would validate their view that the economic cycle is fine but also because a slope of 200 bps is healthy for the banking sector’s maturity transformation.”

GRAVITATIONAL FORCE

But even a tantrum might not bring a lasting rise in yields.

First, while the Fed may look with envy at Norway and New Zealand where yields have risen in expectation of rate rises, it has stressed that its own official rates won’t rise for a while.

Structural factors are at play too, not least global demand for the only large AAA-rated bond market with positive yields.

The Fed also, in theory at least, guides rates towards the natural rate of interest, the level where full employment coincides with stable inflation.

But this rate has shrunk steadily. Adjusted for projected inflation, the “longer-run” funds rate – the Fed’s proxy for the natural rate – has fallen to 0.5% from 2.4% in 2007. If correct, it leaves the Fed with little leeway.

Demographics and slower trend growth are cited as reasons for the decline in the natural rate though a paper https://bit.ly/3nVMxMv presented last month at the Jackson Hole symposium also blamed a rise in income inequality since the 1980s.

The paper said the rich, who are more likely to save, were taking a bigger slice of overall income and the resulting savings glut was weighing on the natural rate of interest.

“One lesson from this year is that there is massive gravitational force, a price-insensitive demand which is pressing down on Treasury yields,” Pictet’s Costerg said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Stefano Rebaudo; Additional reporting by Dhara Ranasinghe in London and Dan Burns in New York; Editing by Sujata Rao and David Clarke)

 

China Evergrande Contagion Concerns Rile Global Markets

Shares in Evergrande, which has been scrambling to raise funds to pay its many lenders, suppliers and investors, closed down 10.2% at HK$2.28 on Monday, after earlier plummeting 19% to its weakest level since May 2010.

Regulators have warned that its $305 billion of liabilities could spark broader risks to China’s financial system if its debts are not stabilised.

World shares skidded and the dollar firmed as investors fretted about the spillover risk to the global economy. U.S. stocks were sharply lower, with the S&P 500 down nearly 2%.

A major test comes this week, with Evergrande due to pay $83.5 million in interest relating to its March 2022 bond on Thursday. It has another $47.5 million payment due on Sept. 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

Evergrande’s troubles also pressured the broader property sector, with Hong Kong-listed shares of small-sized Chinese developer Sinic Holdings down 87%, wiping $1.5 billion off its market value before trading was suspended.

Evergrande executives are working to salvage its business prospects, including by starting to repay investors in its wealth management products with real estate.

“(Evergrande’s) stock will continue to fall, because there’s not yet a solution that appears to be helping the company to ease its liquidity stress, and there are still so many uncertainties about what the company will do in case of a restructuring,” Kington Lin, managing director of Asset Management Department at Canfield Securities Limited, said.

Lin said Evergrande’s shares could fall to below HK$1 if it is forced to sell most of its assets in a restructuring.

“As of right now, I don’t see any systemic risk for the global economy from the Evergrande situation, but there doesn’t need to be any systemic risk in order for markets to be affected,” David Bahnsen, chief investment officer, The Bahnsen Group, a wealth management firm based in Newport Beach, Calif, said in emailed commentary.

There was some confidence, however, that the situation would be contained.

“Beijing has demonstrated in recent years that it is fully able and willing to step in to stem widespread contagion when major financial/corporate institutions fail,” Alvin Tan, FX Strategist at RBC Capital Markets, said in a research note.

DOLLAR BONDS

Despite mounting worries about the future of what was once the country’s top-selling property developer, analysts, however, have played down comparisons to the 2008 collapse of U.S. investment bank Lehman Brothers.

“First, the dollar bonds will likely get restructured, but most of the debt is in global mutual funds, ETFs, and some Chinese companies and not banks or other important financial institutions,” said LPL Financials’ Ryan Detrick.

“Lehman Brothers was held on nearly all other financial institution’s books,” he said. “Secondly, we think the odds do favor the Chinese communist government will get involved should there be a default.”

Policymakers in China have been telling Evergrande’s major lenders to extend interest payments or rollover loans, but market watchers are largely of the view that a direct bailout from the government is unlikely.

The People’s Bank of China, its central bank, and the nation’s banking watchdog summoned Evergrande’s executives in August in a rare move and warned that it needed to reduce its debt risks and prioritise stability.

Trading of the company’s bonds underscore just how dramatically investor expectations of its prospects have deteriorated this year.

The 8.25% March 2022 dollar bond was traded at 29.156 cents on Monday, yielding over 500%, compared to 13.7% at the start of year. The 9.5% March 2024 bond was at 26.4 cents, yielding over 80%, compared to 14.6% at the start of 2021.

PROPERTY PUNISHED

Goldman Sachs said last week that because Evergrande has dollar bonds issued by both the parent and a special purpose vehicle, recoveries in a potential restructuring could differ between the two sets of bonds, and the process may be prolonged.

Investors, meanwhile, are increasingly worried about the contagion risk, mainly in the debt-laden Chinese property sector, which along with the yuan came under pressure on Monday.

The yuan fell to a three-week low of 6.4831 per dollar in offshore trade.

Hong Kong-listed Sinic, which saw massive selling pressure, has nearly $700 million in offshore debts maturing before June 2022, including $246 million due in a month — a bond which has tumbled to around 89 cents on the dollar.

Sinic has a junk rating from Fitch, which downgraded its outlook to negative on Friday.

Other property stocks such as Sunac, China’s No.4 property developer, tumbled 10.5%, while state-backed Greentown China shed around 6.7%.

Guangzhou R&F Properties Co said on Monday it was raising as much as $2.5 billion by borrowing from major shareholders and selling a subsidiary, highlighting the scramble for cash as distress signals spread in the sector.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 7.7863 Hong Kong dollars)

(Reporting by Clare Jim; additional reporting by Tom Westbrook and Alun John; Writing by Sumeet Chatterjee; Editing by Shri Navaratnam; Mark Potter and Alexander Smith)

El Salvador Bonds Tumble as Investors Eye Bitcoin Use, IMF Talks

S&P Global said risks associated with the country’s adoption of bitcoin as parallel legal tender to the U.S. dollar “seem to outweigh its potential benefits” and there are “immediate negative implications for credit.”

S&P also said the use of bitcoin threatens a potential deal between El Salvador and the IMF.

Government bond spreads to comparable U.S. Treasuries rose to 986 basis points on Thursday, surpassing the previous record high spread hit in May 2020.

Bonds prices are near the lows hit last October, before rallying to record highs in mid April.

“These new price lows may encourage capitulation from core long positions that are forced to reassess their overweight positions without an IMF anchor,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, said in a client note.

“The economic agenda remains subordinated to the political agenda with no clear framework on budgetary financing, no apparent commitment to fiscal discipline and a political agenda that remains a drag on investment and growth.”

Thousands of Salvadorans marched on Wednesday to protest a perceived power grab by President Nayib Bukele, who is otherwise popular with the public. Bitcoin policy was also a target of the protest, and an ATM where the cryptocurrency can be exchanged for dollars was vandalized.

The swift firing of judges on the constitutional panel of the Supreme Court in May and the recent court ruling that the president can serve two consecutive terms, opening the door for Bukele to stand for re-election in 2024, have soured his relationship with the United States.

U.S. votes carry the largest weight for any decision regarding loans at the IMF.

The potential for an IMF program for El Salvador is “under discussion,” Fund spokesman Gerry Rice said in a news briefing earlier on Thursday, adding that anti-corruption measures and fiscal responsibility are high on the agenda.

The Fund did not immediately respond to a request for comment regarding S&P’s statement on risks to a potential deal.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Rodrigo Campos; Additional reporting by Nelson Rentería and Marc Jones; Editing by Paul Simao)

World Shares Slide on Wall Street Sell-Off, China Worries

International investors that have been piling into China in recent years are now bracing for one of its great falls as the troubles of over-indebted property giant China Evergrande come to a head.

The developer’s woes have been snowballing since May. Dwindling resources set against 2 trillion yuan ($305 billion) of liabilities have wiped nearly 80% off its stock and bond prices, and an $80 million bond coupon payment now looms next week.

Hong Kong’s Hang Seng index dropped to its lowest level so far this year.

A report from the U.S. Commerce Department showed retail sales unexpectedly rose in August, indicating America’s economic recovery is strengthening on positive trends in consumer spending. The strong data lifted the dollar and pushed up treasury yields, and sent safe-haven gold down nearly 3%.

However, the U.S. labor market remains under pressure, with initial jobless claims rising by slightly more than expected last week.

Losses on Wall Street were dominated by technology and energy stocks as oil retreated from recent highs now that the threat to U.S. Gulf production from Hurricane Nicholas has receded.

The MSCI world equity index was last down by 0.29%, off an all-time high on Sept. 7. MSCI’s broadest index of Asia-Pacific shares outside Japan closed down 0.87%.

European equities bucked the trend, and Europe’s STOXX 600 closed up 0.44%.

The Dow Jones Industrial Average fell 91.51 points, or 0.26%, to 34,722.88, the S&P 500 lost 11.6 points, or 0.26%, to 4,469.1 and the Nasdaq Composite dropped 15.52 points, or 0.1%, to 15,146.01.

“(Retail spending) categories that were strongest in August were in Covid-beneficiary categories,” wrote Ellen Zentner, chief U.S. economist at Morgan Stanley.

“Now incorporating today’s retail sales release, we lift our real (personal consumer expenditures) tracking to +1.9% and GDP to +5.0%.”

Markets remain focused on next week’s Federal Reserve meeting for clues as to when the U.S. central bank will start to taper stimulus, especially after the flurry of U.S. economic data out this week.

On Tuesday, data from the U.S. Labor Department showed inflation cooling and having possibly peaked, but inflation in Britain was the highest in years, according to data on Wednesday.

“We have an unusual situation where the overall market is sideways to lower but with a  risk-on trend underneath and that’s down to signs the Delta variant may be peaking in the U.S., which is driving people into reflation and recovery plays,” said Kiran Ganesh, head of cross assets at UBS Global Wealth Management.

U.S. crude recently fell 1.2% to $71.74 per barrel and Brent was at $74.69, down 1.02% on the day.

The dollar index rose 0.506%, with the euro down 0.51% to $1.1755.

Spot gold slid 2.1% to $1,755.75 per ounce, after hitting an over one-month low of $1,744.30. U.S. gold futures settled down 2.1% at $1,756.70.

Caught in gold’s slipstream, silver was last down 4.3% at $22.79.

The U.S. 10-year Treasury yield was 1.3327%, while core euro zone government bond yields were little changed.

(Reporting by Elizabeth Dilts Marshall; editing by David Evans and Steve Orlofsky)

Global Shares Rise on Strong U.S. Equities, Factory Data

U.S. factory production data showed that manufacturing remained strong despite a slowdown due to factory closures related to Hurricane Ida and the ongoing microchip shortage.

Also out of the U.S. import prices declined for the first time in 10 months in August. That followed Tuesday data from the U.S. Labor Department showing that inflation cooled last month and may have peaked.

The MSCI All Country World Index 0.21%. The S&P 500 rose from more than a three-week low and the Dow Jones index recovered from a near two-month trough hit on Tuesday.

“The Delta wave is likely receding in the U.S. and globally, and the pandemic recovery should restart,” JPMorgan Securities analyst Marko Kolanovic wrote, referring to the highly infectious coronavirus delta variant.

The Dow Jones Industrial Average rose 230.55 points, or 0.67%, to 34,808.12, the S&P 500 gained 33.31 points, or 0.75%, to 4,476.36 and the Nasdaq Composite added 94.48 points, or 0.63%, to 15,132.24.

The pan-European STOXX 600 index was down 0.80% after data showed that inflation in the U.K. hit a more than nine-year high last month. Economists believe it was largely due to a one-off boost that analysts said was likely to be temporary.

All eyes now are on next week’s U.S. Federal Open Market Committee’s monetary policy meeting. Expectations that the Fed will announce plans to taper its bond-buying program were lower after Tuesday’s softer-than-expected U.S. inflation data, especially as some expect inflation to remain high for months.

Possible increases to the U.S. corporate tax rate remain important in the background, and one bank estimated that raising the corporate tax to 25% could shave 5% off S&P500 earnings in 2022.

“We still have a very fragile market, especially if we get some type of tapering from the Federal Reserve,” said David Wagner, portfolio manager at Aptus Capital Advisors. “Any material change to tax policy can create a more volatile market.”

Data out of China showed that factory and retail output and sales growth hit one-year lows in August, as fresh COVID-19 outbreaks and supply disruptions pointed to a possible economic slowdown in the mainland.

The dollar was last down 0.122% mainly due to a sharp slide USD/JPY’s, which broke below important supports as safe-haven buying bolstered the yen in particular.

The yield on the U.S. government 10-year note was 1.3107%.

U.S. crude settled up 3.1% at $72.61 a barrel, and Brent ended 2.5% higher at $75.46 a barrel.

Spot gold dropped 0.8% to $1,790.56 an ounce. U.S. gold futures fell 0.68% to $1,792.40 an ounce.

(Reporting by Elizabeth Dilts Marshall in New York, Huw Jones in London; Editing by Will Dunham and Marguerita Choy)

U.S. Stocks Close Lower on Worries Over Recovery, Corporate Tax Hikes

Optimism faded throughout the session, reversing an initial rally following the Labor Department’s consumer price index report. All three major U.S. stock indexes ended in negative territory in a reminder that September is a historically rough month for stocks.

So far this month the S&P 500 is down nearly 1.8% even as the benchmark index has gained over 18% since the beginning of the year.

“There is a possibility that the market is simply ready to go through an overdue correction,” said Sam Stovall, chief investment strategist at CFRA Research in New York. “From a seasonality perspective, September tends to be the window dressing period for fund managers.”

The advent of the highly contagious Delta COVID variant has driven an increase in bearish sentiment regarding the recovery from the global health crisis, and many now expect a substantial correction in stock markets by the end of the year.

“We’re still in a corrective mode that people have been calling for months,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “Economic data points have been missing estimates, and that has coincided with the rise in the Delta variant.”

The CPI report delivered a lower-than-consensus August reading, a deceleration that supports Federal Reserve Chairman Jerome Powell’s assertion that spiking inflation is transitory and calms market fears that the central bank will begin tightening monetary policy sooner than expected.

U.S. Treasury yields dropped on the data, which pressured financial stocks, and investor favor pivoted back to growth at the expense of value. [US/]

The long expected corporate tax hikes, to 26.5% from 21% if Democrats prevail, are coming nearer to fruition with U.S. President Joe Biden’s $3.5 trillion budget package inching closer to passage.

The Dow Jones Industrial Average fell 292.06 points, or 0.84%, to 34,577.57; the S&P 500 lost 25.68 points, or 0.57%, at 4,443.05; and the Nasdaq Composite dropped 67.82 points, or 0.45%, to 15,037.76.

All 11 major sectors in the S&P 500 ended the session red, with energy and financials suffering the largest percentage drops.

Apple Inc unveiled its iPhone 13 and added new features to its iPad and Apple Watch gadgets in its biggest product launch event of the year as the company faces increased scrutiny in the courts over its business practices. Its shares closed down 1.0% and were the heaviest drag on the S&P 500 and the Nasdaq.

Intuit Inc gained 1.9% following the TurboTax maker’s announcement that it would acquire digital marketing company Mailchimp for $12 billion.

CureVac slid 8.0% after the German biotechnology company canceled manufacturing deals for its experimental COVID-19 vaccine.

Declining issues outnumbered advancing ones on the NYSE by a 2.25-to-1 ratio; on Nasdaq, a 2.40-to-1 ratio favored decliners.

The S&P 500 posted two new 52-week highs and two new lows; the Nasdaq Composite recorded 50 new highs and 107 new lows.

Volume on U.S. exchanges was 10.07 billion shares, compared with the 9.38 billion average over the last 20 trading days.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Stephen Culp; additional reporting by Krystal Hu in New York and Ambar Warrick in Bengaluru; Editing by Richard Chang)

 

Equities Fall as U.S. Inflation Data Raises More Questions

MSCI’s world stocks benchmark fell 0.23%, and all of the major U.S. stock indexes were down by mid-afternoon New York time. European shares closed 0.1% lower, dragged down by mining, banks and luxury stocks, which followed Asian luxury stocks in falling on a new spike in COVID-19 cases in Fujian, China.

The Labor Department said on Tuesday its Consumer Price Index (CPI) was up just 0.1% last month, compared to an expected increase of 0.3%. That was the smallest gain in six months, and it indicated that inflation has probably peaked.

However, concern that inflation could remain high for a prolonged period has pressured stocks in September, and the data included warning signs that some bottleneck issues have not entirely gone away.

“Today’s CPI data came in a bit weaker than expected, but (the Producer Price Index) is at a record high and inflation continues to be a key challenge for investors,” said David Petrosinelli, Senior Trader at InspereX.

The U.S. Federal Reserve will meet next week. The August CPI data lifts some of the pressure the Fed faced to announce it would begin tapering its massive bond-buying program.

Further delaying this key Fed announcement is “distorting” the economy and throwing off markets, said BlackRock’s Chief Investment Officer of Global Fixed Income Rick Rieder.

“Continuing to stimulate demand higher increases the risk of a severe supply/demand mismatch across economic as well as financial assets,” said Rieder, also the head of BlackRock’s global allocation team.

The Dow Jones Industrial Average fell 262.72 points, or 0.75%, the S&P 500 lost 20.69 points, or 0.46%, and the Nasdaq Composite dropped 33.25 points, or 0.22%.

The prospect of a corporate tax rise in the United States from 21% to 26.5% as part of a $3.5 trillion budget bill is also front and center for investors.

Investment bank Goldman Sachs Group Inc estimates that if Democrats succeed in raising the corporate tax rate increase to 25% and get half of the hike proposed in foreign income tax rates, it could shave 5% off S&P500 earnings in 2022.

In Asia, China’s tightening grip on its technology companies again kept investors on edge after authorities told tech giants to stop blocking each other’s links on their sites.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.43%.

The dollar index fell 0.161 points or 0.17%, to 92.514.The euro was last up 0.09%, at $1.1819 .

The yield on 10-year Treasury notes US10YT=RR was 1.282%.Bond yields in the euro area moved up, with Germany’s 10-year yield, the benchmark for the bloc, at -0.34%, hitting a two-month high.

Oil prices rose, extending gains as Nicholas weakened into a tropical storm and the International Energy Agency said demand would rebound in the remainder of the year.

Brent crude settled up $0.9, or up 0.12%, at $73.60 a barrel. U.S. crude settled up $0.1, or up 0.01%, at $70.46 per barrel. Spot gold prices rose $12.7509 or 0.71 percent, to $1,806.24 an ounce.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Elizabeth Dilts Marshall in New York; Tom Arnold in London and Scott Murdoch in Hong Kong; editing by Angus MacSwan and Nick Zieminski)

Marketmind: Pandeconomics Part 2

A look at the day ahead from Julien Ponthus.

The rise in inflation, for one, may persuade central banks to speed up their stimulus exit plans.

U.S. consumers’ expectations for inflation are at the highest since 2013 while a market gauge of future euro zone inflation has risen to mid-2015 highs.

The ECB has already decided to slow, at least temporarily, the pace of bond-buying while in the United States, the question is how soon the Federal will announce stimulus tapering plans. U.S. annual inflation data, due later in the day and forecast at 4.2%, may show the way.

Even Australia, where inflation is far below target, has not blinked while proceeding with bond-buying plans

Nor is fiscal tightening out of the question in the policy guide book. Britain is at the vanguard of announcing tax hikes to restore public finances while U.S. Democrats are mulling a rollback of Trump-era tax cuts that benefited wealthy companies and individuals.

Market impact? A U.S. corporate tax increase to 25% and the passage of about half of a proposed increase to tax rates on foreign income, reduce S&P 500 earnings by 5% in 2022, Goldman Sachs estimates.

Meanwhile, the competition landscape which allowed tech giants to thrive in the last decade is also shifting.

On Friday, a U.S. judge stopped short of labelling Apple an “illegal monopolist”, while a Dutch court’s ruling that Uber drivers are employees follows a similar judgement in Britain.

China too continues to clobber its tech firms, telling them to end their practice of blocking each other’s links on their sites.

Key developments that should provide more direction to markets on Tuesday:

— Evergrande warned of default risks amid plunging property sales; JD Sports Fashion reported record earnings in H1; British online supermarket Ocado reported a 10.6% revenue decline

— UK payrolled employment rises by record 241,000

— RBA committed to low rates

— Indonesia pledges to keep rates low

— Japan’s Q3 growth forecast more than halved

— G20 finance and central bank deputies meet

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Julien Ponthus; editing by Sujata Rao)

Global Stock Markets Slip on Inflation, Tax, Regulation Worries

Leading U.S. House of Representatives Democrats said they are seeking to raise the tax rate on corporations to 26.5%, up from the current 21%.

The U.S. consumer price data due out on Tuesday will give a broad picture of the economy’s progress ahead of the Federal Reserve’s meeting next week.

The MSCI world equity index, which tracks shares in 45 nations, shed 0.22%, while U.S. stocks were mixed.

The Dow Jones Industrial Average rose 0.4% and the S&P 500 fell 0.17%. The Nasdaq Composite dropped 0.4%, as investors pivoted away from major technology stocks to sectors more likely to benefit from an economic bounce later this year.

The dollar climbed to a two-week peak against a basket of major currencies as investors priced in the possibility that the Federal would reduce its asset purchases.

“Investors are grappling with an unusually wide range of potential economic outcomes beyond the post-pandemic restart, reflected in frequent shifts in equity market leadership and volatile bond yields,” said Vivek Paul, senior portfolio strategist at BlackRock Investment Institute.

The yield on 10-year Treasury notes was down 2 basis points to 1.321%.

European stocks ended higher for the first time in five days on hopes that a strong euro zone economic recovery can outweigh risks of a global slowdown. The pan-European STOXX 600 index was up 0.3% after hitting a three-week low last week.

Asian stocks fell earlier in the day following news of a fresh regulatory crackdown on Chinese firms.

China fired a fresh regulatory shot at its tech giants, telling them to end a long-standing practice of blocking each other’s links on their websites. The Financial Times also reported that China is aiming to break up the payments app Alipay.

The Chinese blue-chip index fell 0.5% and MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.78% lower. Japan’s Nikkei rose 0.22%.

The core reading of the U.S. consumer price index is expected to show a rise of 0.3% in August, down from 0.5% the previous month and 0.9% in June.

The U.S. Federal Reserve is paying close attention to price pressures as it mulls when to begin to reduce its massive bond holdings and how soon to begin lifting rates from near zero. It also remains on the lookout for any signs that price pressures may broaden.

The general air of risk aversion helped lift the dollar index to 92.69, up 0.12%.

Oil prices rose to six-week highs as U.S. output remains slow to return two weeks after Hurricane Ida slammed into the Gulf Coast and worries another storm could affect output in Texas this week.

Brent crude settled up $0.59, or up 0.81%, at $73.51 a barrel. U.S. crude settled up $0.73, or up 1.05%, at $70.45 per barrel.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sujata Rao in London and Elizabeth Dilts Marshall in New York; additional reporting by Wayne Cole in Sydney and Dhara Ranasinghe in London; editing by Emelia Sithole-Matarise, Will Dunham, Chizu Nomiyama and Dan Grebler)

Strained Supply Chains Keep U.S. Producer Prices Hot

Strong demand and supply constraints were underscored by other data on Friday showing the pace of inventory accumulation at wholesalers slowed in July. It is now taking wholesalers the fewest months in seven years to clear shelves.

“Supply chain bottlenecks have persisted longer and more intensely than most predicted at the beginning of this year, and widespread labor shortages are among the main input issues producers are dealing with,” said Will Compernolle, a senior economist at FHN Financial in New York. “This means consumer price inflation should remain elevated for a while.”

The producer price index for final demand rose 0.7% last month after two straight monthly increases of 1.0%, the Labor Department said. The gain was led by a 0.7% advance in services following a 1.1% jump in July.

A 1.5% increase in trade services, which measure changes in margins received by wholesalers and retailers, accounted for two-thirds of the broad rise in services. Goods prices jumped 1.0% after climbing 0.6% in July, with food rebounding 2.9%.

Transportation and warehousing prices shot up 2.8%.

The latest global wave of COVID-19 infections, driven by the Delta variant of the coronavirus, has disrupted production at factories in Southeast Asia, key raw materials suppliers for manufactures in the United States. Congestion at Chinese ports is also adding to the pressure on U.S. supply chains.

In the 12 months through August, the PPI accelerated 8.3%, the biggest year-on-year advance since November 2010 when the series was revamped, after surging 7.8% in July.

Economists polled by Reuters had forecast the PPI gaining 0.6% on a monthly basis and rising 8.2% year-on-year.

Stocks on Wall Street were lower. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.

LOGISTICS DELAYS

Though surveys from the Institute for Supply Management this month showed measures of prices paid by manufacturers and services industries fell significantly in August, they remained elevated. Factories and services providers still struggled to secure labor and raw materials, and faced logistics delays.

This was corroborated by the Federal Reserve’s Beige Book report on Wednesday compiled from information collected on or before Aug. 30 showing “contacts reported generally higher input prices but, as with labor, they were mostly concerned about getting the supplies they needed versus the price.”

The supply bottlenecks are making it harder for businesses to restock after running down inventories in the first half of the year. In a separate report on Friday, the Commerce Department said wholesale inventories rose 0.6% in July after surging 1.2% in June. Sales increased 2.0%. At July’s sales pace it would take wholesalers 1.20 months to clear shelves, the fewest since July 2014, from 1.22 in June.

“Producers are struggling to replenish their stockpiles against surging demand,” said Matt Colyar, an economist at Moody’s Analytics in West Chester, Pennsylvania.

With inventories tight, producers are easily passing on the higher costs to consumers. Federal Reserve Chair Jerome Powell has steadfastly maintained that high inflation is transitory.

Though most economists share this view, some argue that strong wage growth from a tightening labor market suggests inflation could be more persistent.

“Today’s data on wholesale prices should be eye-opening for the Fed, as inflation pressures still don’t appear to be easing and will likely continue to be felt by the consumer in the coming months,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

The Fed’s preferred inflation measure for its flexible 2% target, the core personal consumption expenditures price index, increased 3.6% in the 12 months through July after a similar gain in June. Data next week will likely show the consumer price index rising 0.4% in August and increasing 5.3% on a year-on-year basis, according to a Reuters survey.

High inflation and supply constraints, which tanked motor vehicle sales in August, have prompted economists to slash their third-quarter gross domestic product growth estimates to as low as a 3.5% annualized rate from as high as 8.25%. The economy grew at a 6.6% rate in the second quarter.

“The danger with inflation is once prices go up, they don’t go back down and the economy and producers and consumers all have to live in a costlier world where many don’t have the means to do more than just barely survive,” said Chris Rupkey, chief economist at FWDBONDS in New York.

There are, however, signs that inflation is likely nearing its peak. Excluding the volatile food, energy and trade services components, producer prices rose 0.3%, the smallest gain since last November. The so-called core PPI shot up 0.9% in July.

In the 12 months through August, the core PPI accelerated 6.3%. That was the largest rise since the government introduced the series in August 2014 and followed a 6.1% increase in July.

Details of the PPI components, which feed into the core PCE price index, were mixed. Healthcare costs fell 0.2%. Portfolio management fees rose 1.1% and airline tickets increased 8.9% after soaring 9.1% in July.

“Soft medical services suggest that evidence of persistently stronger inflation in PCE may be more limited,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

Stagflation: A Stagnation Breaker?

One of the greatest risks cited currently by the markets is stagflation. The term means a situation in which there is high inflation and stagnation at the same time. So far, we have only had high inflation (CPI annual rate has soared 5.4%, and almost 5% if we take the quarterly average), but some analysts believe that inflation has already peaked. However, the economic growth is fast (the GDP surged 12% in Q2 2021 year-over-year), as the chart below shows. So, why bother?

Well, although a recession is rather not lurking around the corner, slowing economic momentum quite clearly is. The GDP growth for the second quarter (although impressive) came below expectations, the consumer confidence declined, and, more generally, the index of US data surprises has recently turned negative.

Among negative surprises, we should point out the decline in retail sales by 1.1% in July, which was worse than expected (0.3%) and the drop in the New York Fed’s Empire Manufacturing Index from 43.0 in July to 18.3 in August, much below the expected 29.0. So, the recent decline in the bond yields may not be as nonsensical as it may seem.

I warned my readers a long time ago that the recovery from the pandemic would be spectacular but short-lived and caused mainly by the low last year’s base. If you lock the economy, it plunges; when you open it, it soars, simple as that. Now the harsh reality steps in, and it’s yet to be seen how the US economy will perform in a post-pandemic reality with the spreading Delta variant of the coronavirus, a slowdown in China’s economy, and without government stimulus.

When it comes to the price front, it’s also highly uncertain. Inflation has softened a bit in July, but it remains high, and I’m afraid that it could prove to be more persistent than it’s believed by the Fed and some analysts. The latest Empire Index, mentioned above, tells us: although the index of manufacturing activity fell more than expected, the inflationary pressure strengthened. As the report says, “input prices continued to rise sharply, and the pace of selling price increases set another record”.

What’s disturbing in all this – and this is why inflation may stay with us for longer – is that the Fed is downplaying the inflation risk. And even the monetary policy 101 says that the best way of preventing inflation is acting early as inflation pressure builds up. Friedrich Hayek, a great economist and a Nobel Laureate, once compared taming inflation to catching a tiger by the tail – it’s not an easy task when the cat has already escaped the cage. The problem is that when central bankers wait to see the whites of inflationary tiger’s eyes before acting, it’s already too late. If you stare at the tiger in the eyeballs, you are probably to be eaten soon – unless you hike interest rates abruptly, choking economic growth off.

Going into specifics, the Fed’s view that inflation is transitory mainly rests on the belief that price increases are caused by supply disruptions related to the epidemic. However, inflation is not limited to just a few feverish components — it’s broad-based. In particular, the cost for shelter, the largest component of the CPI, has also been gradually rising, even though the owner’s equivalent rent component doesn’t reflect properly the recent record surge in U.S. home prices (see the chart below). If this is not inflation, I don’t know what is!

The increase in house prices is important here, as Gita Gopinath, Chief Economist and Director of the Research Department, IMF, admitted at the end of July: “More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation”.

What does it all mean for the gold market? Well, stagflation should be negative for almost all assets. When we have a stagnant economy coupled with high inflation, stocks and bonds are selling off together. In such an environment gold shines, as it is a safe haven uncorrelated with other assets.

Stagflation is so terrifying because the Fed won’t be able to rescue Wall Street simply by cutting interest rates, as it could only add fuel to the inflation fire. The only viable solution would be to engineer another ‘Volcker moment’ and tighten monetary policy decisively to combat inflation. Given that debts are much higher than in the 1970s and some analysts even point to a debt trap, it could put the economy into a severe economic crisis. So far, investors seem not to worry about high inflation, but just as things go well until they don’t, investors are relaxed until they don’t. For all these reasons, it seems smart to own such portfolio diversifiers as gold.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Gold Back Below $1,800!

Ugh, the recent rally in gold prices was really short-lived. As the chart below shows, the price of gold increased after the publication of disappointing nonfarm payrolls on Friday. However, it declined as soon as on Tuesday, and on Wednesday it slid below $1,800.

I have to admit that I expected a more bullish performance. To be clear: I was far from opening champagne. For instance, I pointed out that the tapering of quantitative easing remained on the horizon, and I expressed some worries that gold’s rally was rather moderate despite the big disappointment of job gains:

Another caveat is that gold failed to rally above $1,835 despite softened expectations of the future path of the federal funds rate

However, I thought that the likely postponement of the Fed’s tightening cycle in the face of weak employment data would allow gold to catch its breath for a while. Well, it did, but only for a few days.

The quick reversal is clearly bearish for gold. Sure, without disappointing job numbers, the yellow metal could perform even worse. However, the inability to maintain gains indicates gold’s inherent weakness in the current environment.

Of course, the recent decline in gold prices was at least partially caused by new developments in the financial markets, namely: the strengthening in the US dollar and the rise in the bond yields. So, one could say that earlier bullish news was simply outweighed by later bearish factors.

However, please note that the US dollar strengthened and the interest rates rose amid an increase in risk aversion. The fact that gold, which is considered to be a safe-haven asset, drops when investors become more risk-averse, is really frustrating.

What’s more, some analysts pointed out that the dollar strength and higher yields were not enough to account for the plunge in gold prices – so, it seems that the momentum is simply negative and gold wants trade lower, no matter the fundamentals.

Indeed, neither the negative real interest rates, nor curbed dollar, nor high inflation were able to get gold to rise decisively this year. Nor the recent weak nonfarm payrolls that lifted the expectations of a more dovish Fed and the postponement of normalization of the monetary policy.

Implications for Gold

What does it all mean for the yellow metal? Well, the recent volatility in the gold market reminds us that in fundamental analyses it’s smart not to draw too far-reaching conclusions from the immediate price reactions and to look beyond the hustle and bustle of the trading pits. It also confirms that I was right, writing in the recent Fundamental Gold Report that “a long quiet summer has ended, and a more windy fall has started”.

Now, I have to point out that fundamental factors turned out in recent days to be more positive for the gold market than a few weeks ago. The announcement of the Fed’s tapering will be likely postponed from September to November 2021. Indeed, yesterday’s remarks of the New York Fed President John Williams at St. Lawrence University suggest that the FOMC may continue its wait-and-see approach this month and taper later in 2021:

There has also been very good progress toward maximum employment, but I will want to see more improvement before I am ready to declare the test of substantial further progress being met. Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year.

Meanwhile, the economic activity has slowed down, partially because of the spread of the Delta variant of the coronavirus. For example, the recent edition of the Beige Book says that:

Economic growth downshifted slightly to a moderate pace in early July through August (…) The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions.

Given that inflation remains high, the slowdown in economic growth will push the economy into stagflation, which should be a positive macroeconomic environment for gold.

Having said that, more bullish fundamentals without positive momentum could not be enough. As I’ve written earlier, gold has recently shrugged all the bullish factors off – it’s focused now on the economic normalization after the pandemic recession and the upcoming Fed’s tightening cycle. So, it seems to me that gold needs more than the postponement of tapering (think about next economic crises, the decline in economic confidence, or the abandonment of monetary policy normalization) to rally decisively. Until this happens, it is likely to continue its struggle.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Marketmind: Over to You, Christine

A look at the day ahead from Karin Strohecker.

September has already seen many major indexes, from the S&P 500 to STOXX 600, ease after multi-month winning streaks. Both European and U.S. equity futures point to more falls ahead on Thursday, while Treasury and Bund yields are off the mid-July highs hit earlier this week.

But there’s much more than an ECB meeting to fret about — Beijing’s regulatory crackdown shows no sign of a letup.

Chinese gaming and media stocks – including Tencent Holdings and NetEase – have suffered further sharp falls after regulators summoned gaming firms to ensure they implemented new rules for the sector.

The impact of the widening crackdown is being felt as far as Tencent shareholder Prosus in Amsterdam which is set to open 3.5% weaker.

Shares and bonds in the embattled Evergrande Group too slumped further after media reports the property developer would suspend interest payments due on some loans and all payments on its wealth management products.

And then there is the U.S. debt ceiling quagmire, with Treasury Secretary Janet Yellen warning again that cash and extraordinary measures might run out in October.

On the data front, China factory gate inflation jumping 9.5% to a 13-year-high in August shows no let up in price pressures. In Britain, a lack of new homes for sale boosted house prices again.

Corporate news a-plenty too. EasyJet will raise more than 1 billion pounds ($1.4 billion) through a share sale. Similar news elsewhere in the travel sector too, with Japan Airlines announcing $2.7 billion in borrowing to weather the prolonged COVID-19 impact.

Key developments that should provide more direction to markets on Thursday:

ECB holds monetary policy meeting and presser

-Lloyd’s of London swung to H1 pre-tax profit of 1.4 billion pounds, helped by rising premium rates

-Fed speakers: San Francisco Fed President Mary Daly 12:05 GMT; Chicago President Charles Evans 15:05 GMT

-Emerging markets: Malaysia, Peru, Serbia, Ukraine central bank meetings

Auctions: U.S. 30-year bonds, 4-week t-bills.

U.S. earnings: Oracle

For a look at all of today’s economic events, check out our economic calendar.

($1 = 0.7263 pounds)

(Reporting by Karin Strohecker; editing by Sujata Rao)

 

Worries Over Economic Recovery Shake World Stocks, Wall Street

Accommodative central bank policies and optimism about reopening economies have pushed equities to record levels but concerns are growing about the impact of rising coronavirus infections due to the Delta variant.

Markets are also still assessing data from last week which showed the U.S. economy created the fewest jobs in seven months in August, and wondering how the U.S. central bank will respond.

The Fed should move forward with a plan to taper its massive asset purchase programme despite the slowdown in job growth, St. Louis Federal Reserve Bank President James Bullard said in an interview with the Financial Times on Wednesday.

“Everything is tapering, tapering, tapering. We are looking at every single central bank – when is the next one?” said Eddie Cheng, head of international multi-asset portfolio management at Wells Fargo Asset Management, though he added: “The Delta variant impact is still running like a wild card”.

The Dow Jones Industrial Average fell 76.74 points, or 0.22 percent, to 35,023.26, the S&P 500 lost 7.8 points, or 0.17 percent, to 4,512.23 and the Nasdaq Composite dropped 87.96 points, or 0.57 percent, to 15,286.37 by 2:17 p.m. EST (18:17 GMT).

MSCI’s world equity index fell 0.41% by after seven consecutive days of gains.

European stocks fell 1% and hit their lowest in nearly three weeks. Britain’s FTSE 100 struck two-week lows, down 0.75%.

“September is the month investors confront reality,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, pointing to uncertainty over the Fed’s tapering plans and inflation fears as a reason investors are taking profits or reallocating funds.

The coronavirus Delta variant and concerns over the economic recovery were also weighing.

“What is likely ahead of us is a continued but temporary deceleration of economic activity of one to three months which likely started in August,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Federal official Robert Kaplan was due to speak later on Wednesday.

In Europe, markets are focused on whether the European Central Bank will this week begin to scale back its bond purchase programme.

The dollar paired some gains after jumping to a one-week high against a basket of other major currencies. It also hit a one-week peak against the the single currency and was trading at $1.1826.

The dollar’s strength offset investors’ risk aversion to pressure bullion to a two-week low. Spot gold prices fell 0.1%.

Longer-dated U.S. government bond yields slipped on Wednesday coming off a two-day climb after labor market data and ahead of an auction by the Treasury in 10-year notes. Yields on 10-year Treasury notes fell to 1.3495%, retreating from this week’s eight-week highs.

Germany’s 10-year Bund yield also hit eight-week highs before edging lower to -0.32% .

“Fears that central banks might start to taper their asset purchases seems to have knocked away a little confidence, particularly given tomorrow’s ECB decision where many expect we’ll begin to see the start of that process, not least with inflation there running at its highest levels in almost a decade,” Deutsche Bank analysts said in a note.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.77%, stemming an eight-session string of gains.

Chinese blue chips dropped 0.41%, weighed down by recent soft data in the world’s second-biggest economy.

But Japan’s Nikkei jumped 0.89% and hit a five-month high, helped by revised gross domestic product growth figures beating expectations.

Bitcoin continued its rout, down 1.1%.

Shares of Coinbase Global Inc dropped over 2% after the firm revealed it has received a legal notice from the top U.S. markets regulator.

U.S. crude oil jumped 1.39% to $69.32 a barrel and Brent crude rose 1.4% to $72.69 per barrel, with prices supported by a slow restart to production in the Gulf of Mexico after Hurricane Ida hit the region.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Alun John in Hong Kong; Editing by Kenneth Maxwell & Shri Navaratnam, Editing by William Maclean and Nick Tattersall)

Marketmind: Time to Join the Green Bond Gang

A look at the day ahead from Dhara Ranasinghe.

Germany on Wednesday will sell 10-year green bonds, a day after Spain’s debut green bond garnered an impressive 60 billion euros of demand.

Green debt issuance globally, recently passed $1 trillion for the first time, with 90% of sovereign issuance coming from Europe. Britain will sell its first green bond later this month while the European Union plans its first green issue in October.

A greenium index compiled by UniCredit, has risen to 4 basis points, its highest level, indicating that demand for green paper remains strong and investors are willing to pay a premium to buy green European government debt.

Back to Germany. The benchmark euro zone debt issuer wants to be the first to establish a green bond yield curve and Wednesday’s issuance takes it a step closer to that goal.

Another market that’s seen action this week is Bitcoin. It seems to have stabilised after a 17% plunge on Tuesday, the day it become legal lender for the first time in a sovereign state. However El Salvador’s bitcoin adoption was clouded by the price fall as well as technological glitches and protests by mistrustful citizens.

Global stock markets too have stablised after Tuesday’s wild swings but growth concerns are weighing, with Asian shares down, Europe falling also 1% and U.S. equity futures a touch higher.

Later in the day, watch for U.S. JOLTS job openings data and a raft of Fed speakers. And on Wall Street, GameStop, the original ‘meme stock,’ releases earnings.

Key developments that should provide more direction to markets on Wednesday:

– UK supermarket Morrisons is talking to its private equity suitors and the UK Takeover Panel regarding an auction to settle its future ownership.

– Deutsche Bank, Commerzbank CEOs attend Handelsblatt conference

– Japan upgrades Q2 GDP on stronger business spending

– PayPal heats up buy now, pay later race with $2.7 bln Japan deal

– Interest rate meetings in Canada, Poland, Croatia.

– Fed speakers: New York President John Williams 1710 GMT; Dallas President Robert Kaplan 2200 GMT; Boston Fed President Eric Rosengren, Minneapolis Fed President Neel Kashkari 1800 GMT

– U.S. auctions 10-year bonds.

– US JOLTS job openings, Initial jobless claims, consumer credit

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Dhara Ranasinghe)

 

World Equities Under Pressure as Economic Worries Mount

Key U.S. equity benchmarks were down and the MSCI world equity index retreated from a record hit overnight, following seven consecutive days of gains to all-time highs. Earlier in the session, hopes of extra stimulus in Japan and strong China trade data had boosted Asia shares.

The Dow Jones Industrial Average fell 209.2 points, or 0.59%, to 35,159.89 and the S&P 500 lost 9.96 points, or 0.22 percent, to 4,525.47 by 2:22 p.m. ET (18:22 GMT). The Nasdaq Composite bucked the trend, adding 0.18% to 15,391.26.

“The combination of exorbitant expectations, nosebleed valuations and slowing macro environment make the go-forward reward/risk outlook less attractive,” said Jeffrey Carbone, managing director at Cornerstone Wealth in Huntersville, North Carolina.

European stocks retraced ahead of an ECB policy meeting on Thursday. The STOXX 600 benchmark fell 0.5% but were not far from last month’s lifetime peak hit.

Data on Friday showed the U.S. economy created 235,000 jobs in August, the fewest in seven months as hiring in the leisure and hospitality sectors stalled, reducing expectations that the Fed will opt for an early tapering of its monthly bond purchases.

The market took the surprisingly soft U.S. payrolls report on Friday “in stride, with the assumption that the COVID-19 Delta variant had an impact on economic activity in August,” Arthur Hogan, chief market strategist at brokerage National Holdings in New York, said in a market note.

Speeches by a number of U.S. policymakers later this week will be closely watched for any indication about how the weak jobs report has impacted the Fed’s plans on tapering its bond purchases and keeping its expansive policy for the near-term.

The recent equity rally started after Fed Chair Jerome Powell’s dovish speech at the Jackson Hole Symposium in August.

“Given that before Jackson Hole many FOMC members had come out in favor of tapering on a tight timetable, we’ll see if they confirm, or align with Powell’s more moderate message,” said Giuseppe Sersale, fund manager at Anthilia.

U.S. government bond yields rose on Tuesday, continuing the climb seen on Friday in the wake of the jobs report and ahead of a fairly busy week of Treasury auctions.

Japanese shares rallied further on hopes the ruling Liberal Democratic Party will offer additional economic stimulus and easily win an upcoming general election after Prime Minister Yoshihide Suga said he would quit.

Tokyo’s Nikkei crossed the 30,000 mark for the first time since April, also helped by an announcement on its reshuffle, and the broader Topix index climbed 1.1% to a 31-year high.

Anthilia’s Sersale said investors had a defensive positioning on Japanese stocks that led to a short squeeze.

“I was positive on Tokyo (stocks) and remain so, but perhaps at this point it is better to look for a less overbought entry point,” he said.

Mainland Chinese shares extended gains, with the Shanghai Composite rising 1.5% to its highest since February, helped by Chinese trade data showing both exports and imports grew much more quickly than expected in August.

“The mood is improving on hopes the government will take measures to support the economy and that the monetary environment will be kept accommodative,” said Wang Shenshen, senior strategist at Mizuho Securities.

A rout in bonds and shares of China Evergrande Group deepened on Tuesday after new credit downgrades on the country’s No. 2 developer.

The euro retreated 0.16% at $1.1849, while Europe’s broad FTSEurofirst 300 index dropped 0.46% to 1,821.56.

The ECB is seen debating a cut in stimulus, with analysts expecting purchases under its Pandemic Emergency Purchase Programme (PEPP) falling, possibly as low as 60 billion euros a month from the current 80 billion euros.

Germany’s 10-year yield hit its highest since mid-July.

The Australian dollar briefly rose after the central bank went ahead with its planned tapering of bond purchases, but quickly gave up those gains after the bank reiterated its need to see sustainably higher inflation to raise interest rates.

The Aussie fell 0.6%, off its 1-1/2-month high set on Friday.

The U.S. dollar rose 0.3% against a basket of other major currencies, pressuring gold prices. Spot bullion prices were down 1.4%. U.S. gold futures settled 1.9% lower at $1,798.5 an ounce.

Elsewhere in commodities, oil prices slid on concerns over weak demand in the United States and Asia. Saudi Arabia’s sharp cuts to crude contract prices for Asia had earlier revived demand concerns.

Brent crude futures fell 1.02% to $71.46 per barrel, while U.S. crude futures declined 1.75% to $68.08.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chris Prentice in Washington, Danilo Masoni in Milan and Hideyuki Sano in Tokyo; Editing by Jane Merriman, Dan Grebler and Alex Richardson)

Marketmind: Transitory Faith in Transitory Inflation

Say your economy is growing at about 5% annually, it just hit a 10-year inflation high of 3% amid labour shortages and enjoys negative yields on benchmark government bonds.

Let’s add that junk-rated bonds have fallen below the economy’s inflation rate.

Does this economy really need more quantitative easing?

‘Yes’ will be the answer from Christine Lagarde and other European Central Bank policymakers when they meet on Thursday. The unknown quantity is whether the pace of bond buying should be slowed.

For its defence, the ECB argues that one-off factors related to economies reopening from COVID-19 lockdowns are driving the bulk of the inflation surge, and that price growth will moderate early next year.

The transitory inflation narrative has so far managed to soothe investors’ nerves but with expectations of inflation reaching 5% in Germany this year, the concerns of the ECB hawks might be increasingly hard to dismiss.

Markets’ faith in transitory inflation seems to be waning meanwhile, with German government borrowing costs hitting their highest level since mid-July on Friday after data showed robust business activity in the euro zone.

U.S. Treasury yields also rose on Friday after data showed fewer new jobs created in August but a sharp increase in wages and a continued drop in unemployment.

Yet stimulus, be it fiscal or monetary, will remain the name of the game for a while yet.

That belief and talk of more stimulus in Japan and China has lifted Asian shares to six-week peaks, European stocks are in striking distance of their August record highs, albeit in thin volumes given a U.S. public holiday.

Key developments that should provide more direction to markets on Monday:

–Aluminium prices hit the highest in more than 10 years due to political turmoil in bauxite mining hub Guinea

–Porsche and Puma among companies joining Germany’s DAX stock index, as it expands to 40 from 30 constituents.

— G20 health ministers summit ends in Rome

— German industrial orders surged in July to a post-reunification high

-Goldman Sachs unit Petershill Partners plans to raise at least $750 million in London listing

— UK new vehicles Aug

— European banks still booking profits in tax havens, says report

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Julien Ponthus; editing by Sujata Rao)

South African Rand Starts Week Stronger Following U.S. Jobs Report

At mid afternoon, the rand traded at 14.2350 against the dollar, around 0.7% firmer than its previous close.

The rand rallied on Friday after the U.S. jobs report came in below market expectations, as the Fed has made a labour market recovery a condition for paring back its pandemic-era asset purchases.

Along with other risk-sensitive currencies, the rand moves regularly on shifts in the outlook for U.S. monetary policy.

“September is typically a period for global financial markets where risk-off can subside, and while some churn is evident, risk-taking can start to pick up, and further dovish comments from the Fed would support this,” Investec chief economist Annabel Bishop said.

This week’s economic data releases include South Africa’s second-quarter gross domestic product (GDP) figures on Tuesday, as well as July manufacturing and second-quarter current account numbers on Thursday.

Analysts polled by Reuters predict that GDP expanded 0.7% quarter on quarter, seasonally adjusted but not annualised, in the April-June quarter – down from 1.1% in the prior three-month period.

That reflects expectations for a sluggish economic recovery from the COVID-19 pandemic.

The yield on the government’s benchmark 2030 bond was flat at 8.810%.

In the equities market, stocks declined, led by retail group Steinhoff after a court judge ruled that it has jurisdiction to hear a liquidation bid against the retailer. The proceedings will now continue from later this week.

The news overshadowed positive developments regarding its lawsuit settlement proposal, which was approved by majority creditors and claimants on Monday, moving the group closer to finalising a deal that has been a major headache since the company’s restructuring.

Steinhoff shares closed 21.62% weaker at 2.90 rand.

Overall, the Johannesburg All-Share index fell 0.18% to 66,253 points while the Top-40 index declined 0.12%.

Mining stocks were also in the red, with the mining index down 3.57% on weaker commodity prices.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Alexander Winning and Nqobile Dludla, Editing by Timothy Heritage and Jan Harvey)