North American News
US equities post a huge gain as bond yields retrace
- Closing changes
- S&P 500 +72 points, or 2.0%, to 3719
- Nasdaq Comp +2.1%
- Russell 2000 +3.3%
- DJIA +1.9%
- Toronto TSX Comp +2.1%
US treasury auctions off $36B of 7 year notes at a high yield of 3.898%
- WI level at 3.903%
The US treasury auctioned off $36B of 7 year notes. Below are the details of the auction:
- High yield 3.898
- WI level at the time of the auction 3.903%
- Tail -0.5 bps vs 6 month average of 0.0 basis points
- Bid to cover 2.57X vs 6 month average of 2.55X
- Directs (domestic demand) 24.7% vs 6 month average of 19.8%
- Indirects (international demand) 62.5% vs 6 month average of 68.7%
- Dealers (dealers take the rest) 12.9% vs. 6 month average of 11.5%
Commodities
Gold bulls bounce back to life as US dollar gets slammed
- Gold has rallied hard through the high of the week.
- The US dollar has sunk from 20-year highs and has tripped a cascade of market orders across the board.
The price of gold has soared on the back of a move by the bears in the US dollar on Wednesday. XAU/USD is rallying to $1,662.78 the high for the day so far after printing a fresh bear cycle low of $1,614.92 in mid-London morning trade.
The jump in the gold price came about when the US dollar fell sharply from a 20-year high, easing pressure on gold. There are still plenty of fundamentally sound reasons for a recovery in gold as it is seen as a safe haven at times of geopolitical tensions. Additionally, the US treasury yield also fell after climbing to the highest since January 2008. The yield on the US 10-year note was last seen down 24.2 basis points to 3.705%, after earlier touching 4.01%, the first rise above 4% in nearly 15 years while money markets girded for higher interest rates that could possibly remain for longer than anticipated.
However, in recent trade on Wednesday, US traders piled into the stock market as the yield on US Treasuries came off decade highs that in recent sessions made interest rate-sensitive companies less attractive to investors. The tumble in yields followed the Bank of England’s intervention into the UK’s gilt market when it said it would buy long-dated British bonds in a move aimed at restoring financial stability in the wake of the new UK Government’s mini-budget, which had triggered a sharp sell-off in UK gilts.
In turn, the greenback has crumbled from a fresh 20-year high scored ahead of the New York open at 114.778 before falling to the current low of 112.561. The move has dug into a lot of long positioning into other currencies vs. the US dollar this week which has led to a cascade of market orders being triggered along the way, propelling gold and the pound higher.
”While this policy is under the umbrella of financial stability, it effectively amounts to undertaking temporary quantitative easing (ie policy easing), at a time when the Monetary Policy Committee is trying to contain rampant inflation,” analysts at ANZ Bank said, adding, ”it’s therefore difficult to see how the BoE can deliver anything less than a 100bp rate hike at their November meeting.”
Nonetheless, analysts at TD Securities argue, ”we still see the risk of capitulation growing for the yellow metal. With prices trading below pandemic-era levels, a small number of family offices and proprietary trading shops are increasingly feeling the pressure to finally capitulate on their massively bloated and complacent length in gold.”
”Rates markets are pricing the potential for higher interest rates to persist for some time, and a steady stream of Fedspeak is likely to hammer this point home.”
In this regard, we heard from Fed speakers Charles Evans again on Wednesday as well as Ralph Bostic. ”The Federal Reserve is raising interest rates expeditiously to address very high, persistent inflation, and will likely get US short-term borrowing costs to where they need to be by early next year,” Evans said. ”Most Fed policymakers are penciling in a top Fed policy rate of 4.5% to 4.75% by end of next year, based on their projections published last week, and “by March we will be at that point,” Evans added at an event on current economic conditions hosted by the London School of Economics. Meanwhile, Atlanta Fed President Raphael Bostic said on Wednesday that ”the lack of clear progress on inflation means the Federal Reserve needs “moderately restrictive” interest rates that should reach a level between 4.25% and 4.50% by the end of this year.”
The Federal Reserve has aggressively hiked interest rates by 3 percentage points this year, taking its target range to 3.00%-3.25%. It carried out its third consecutive 75 basis point increase last week and signaled that rates are likely to rise to the 4.25%-4.5% range by the end of the year.
Oil: RBC is forecasting the October 5 OPEC+ meeting may slash output by up to 1 mn bbl/day
Newswires with the headline from an RBC note, the gist is:
- OPEC+ meet October 5, may cut oil output in the range of 500K to 1mn barrels/day
“We certainly see a significant chance that the producer group will opt for a substantial cut (500 kb/d to 1 mb/d) to try to signal that there is indeed an effective circuit breaker in the market.”
US weekly oil inventories -215K vs +443K expected
- Weekly US oil inventory data
- Prior was +1142K
- Gasoline -2422K vs -430K expected
- Distillates -2892K vs -69K expected
- Refinery utilization -3.0% vs -0.8% expected
- SPR draw 4.6m vs 6.9m prior
- Implied gasoline demand 8.8m vs 8.33m last week
- Overall implied demand +1.832 mbpd
Oil rallies nearly 5% but it’s still not enough to erase the declines since Friday
- Big day for oil and commodities
There isn’t much to break down in terms of market moves today. The Bank of England emergency move was enough to turn the tide after days of ruthless bearishness in every market. Oil has been particularly hard hit lately and there’s the prospect of a cut from OPEC next week so the buyers piled back in.
But it’s all one trade right now and it’s steered by bonds and the dollar. Oil is just along for the ride unless (until?) something important happens in the energy market.
EU News
BOE’s bond buying was due to liability-driven investment and links to pensions – report
- More reports on unintended consequences
This is a headline from Reuters, citing a source familiar.
The pension stuff has been doing the rounds all day so there’s enough smoke here to imagine some fire. What it sounds like isn’t direct pension bond holdings but a pension (or pensions) with investments in a fund that would have blown up today without a BOE bailout.
Whatever it was, it was bad enough to send the BOE into action. Of course, this is also the kind of thing you’d leak if you were looking for cover — no one wants to see pensions hurt.
Reuters source: German economic institute expects recession due to lackluster consumer
- Expects -0.2% GDP in Q3
Reuters is reporting that a German economic research Inst. is expected to announce that lackluster consumer sentiment will lead to a recession in Germany.
- Forecast calls for GDP to dip to -0.2% in Q3 and -0.4% in Q4 and -0.4% in Q1 2023
- expects modest growth thereafter in 2023
- consumption will only start to recover next summer
Other News
US says to expect new measures in coming days in response to Ukraine referendums
- US says it won’t accept sham referendums
Earlier, the EU also said it is planning for a new package of measures.
What worries me — and many others — is a Russian escalation. The bombing of both Nord Stream pipelines is bizarre but that, Putin’s rhetoric and the referendums/annexation point to some kind of new stance in the war. Obviously, we’ve all heard the warnings about nuclear weapons and that’s the nightmare scenario but maybe it means an asymmetric energy war? Who really knows but there’s a sense out there that there is another shoe to drop.
Cryptocurrency News
Ethereum project Ribbon Finance launches crypto options exchange to boost growth
Singapore – Decentralized finance (DeFi) protocol Ribbon Finance, known for its on-chain structured products, said it is launching an options exchange to boost demand for its services among savvy crypto traders.
Announced at Token 2049 in Singapore, Aevo will allow users to initially trade ether (ETH) options, with plans to launch options for Bitcoin (BTC) and other tokens in the coming months. Ribbon founder Julian Koh said he expected the options exchange to see over $100 million in daily trading volume in the next few months, adding that the Ethereum ecosystem had “gained momentum” after the Merge event earlier this month.