The Market Week – November – Week 2
Movements in Treasury yields and the perceived differential in the rate paths remain a key driver for the markets. A record high China PPI, came at the heels of an equally hot Japan PPI inflation to 8.0% y/y, and a big spike on US CPI reminded markets of inflation pressures again, while central bankers maintain that the key factors driving the rise in prices are transitory.
In the mid of the week, the Asian equities were pulled down amid the lingering concerns over the country’s property developers, Evergrande and Fantasia, as the shares of developer Fantasia plunged 50% after it said there is no guarantee that it will be able to meet its other financial obligations.
The USDIndex spiked to 95.80 on the hotter than expected US October CPI which put upward pressure on Treasury yields. EURUSD has slipped to 1.1530 on strong USD and as ECB officials continue to try and squash any speculation of rate hikes. Likewise, USDJPY lifted at 113.48 amid higher Treasury yields that are boosting the US Dollar.
Cable has dropped below 1.3400 after US inflation but also following, UK Q3 GDP which disappointed with a growth rate of 1.3% q/q. The BoE’s failure to deliver on the flagged rate hike last week has put pressure on Sterling, even as the central bank remains set to lift rates in coming months. The UK continues to threaten to trigger Article 16 in a bid to rewrite the Northern Ireland protocol, which would escalate lingering trade tensions between the UK and the EU, and wreak further havoc on the UK’s already broken supply chain. As a result of uncertainties, Sterling is liable to remain choppy for the time being.
The US stock markets pulled back from record highs with the three majors tracking their 2nd losing day this week in 10 sessions. The spike in inflation with y/y CPI accelerating to the fastest clip in 3-decades knocked Treasuries and Wall Street sharply lower and saw financials under pressure, with #PayPal lagging, and down over 11%, and #Tesla slide 11.99%. The inflation threat, with the surge in rates weighing sharply on the USA100 which plunged about -2% yesterday.
Gold has been knocked off the 4-month high of $1,834 and extended gains to $1863.79. The bounce in USD had initially prompted a round of profit taking prior to the US CPI report, but after the data the inflation sensitive yellow metal skyrocketed.
USOil saw a session high of $83.28 per barrel, but has since dropped back to $80.00. A US government report forecast oversupply next year, which dampened hopes that the US will tap its emergency stock, while reports that Russian gas flows to Europe have finally increased are helping to put a lid on gas prices as well.
Yields surged sharply higher with rates up double digits in the belly, with the long end catching up to the selloff after a very poor 30-year auction. The 3- and 5-year paced the early selloff as the market fretted about Fed rate hikes, rising to highs of 0.834% and 1.22%. The long end reacted more slowly but the selloff was extended following the auction. The 10-year rate jumped to 1.587%. It is currently back to 1.563% as demand for yield and curve flattening dynamics continue to underpin the move as the longer term inflation expectations remain subdued.
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