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The nice jump in the Japanese yen pulled the dollar index lower yesterday. Of course, the EURJPY, GBPJPY and AUDJPY all made a similar move. The US bonds, on the other hand, were little changed yesterday – for once – as traders sat on their hands ahead of this week's much-awaited US jobs data, while technology stocks were on fire yesterday. Alphabet jumped more than 5% after Google released Gemini – the largest and most capable AI model it has ever built, and AMD jumped nearly 10% after the company unveiled a chip that will run AI software faster than rival products. But rival Nvidia was little hit by the news, as its chips gained 2.40% yesterday. The AI demand is big enough for everyone to benefit amply from it.  

Today, all eyes are on the US jobs data. 

According to a consensus of analyst estimates on Bloomberg, the US economy may have added 180'000 new nonfarm jobs in November, the pay may have risen slightly faster on a monthly basis, and the unemployment

A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

Marc Chandler Marc Chandler 10.02.2022 14:33
February 10, 2022  $USD, Banxico, BOJ, China, Currency Movement, ECB, Inflation, Riksbank Overview: Equities in Asia extended their recovery and Europe's Stoxx 600 is up for the fourth consecutive session.  US futures, are, however, trading lower ahead of the January CPI figure.  Benchmark 10-year bond yields are mostly firmer, with the US 10-year hovering around 1.95%.  European yields are 2-4 bp higher, and peripheral-core spreads are widening a little.  The dovish hold by Sweden's Riksbank has the krona joining the yen as the laggards today, which have seen most major and emerging market currencies edge higher.  The JP Morgan Emerging Market Currency Index is posting small gains for the fourth consecutive session.   Gold made a new marginal high for the month, but met sellers around $1836, pushing it back toward $1830.  The unexpectedly large draw down in US oil stocks (4.75 mln barrels, the biggest decline since last September) had helped March WTI regain the $90 handle after a brief bout of profit-taking.  US natural gas prices are steadiest, while Europe's benchmark was a little softer.  Copper is up for a second day, while iron ore jumped by more than 5% after yesterday's 1.75% loss snapped a six-day advance.  Asia Pacific  The BOJ moved to defend its Yield Curve Control policy.  The yield on the 10-year JGB crept closer to the 0.25% cap as the market tested the central bank's resolve.  The BOJ announced it would buy an unlimited amount of 10-year bonds on Monday at a fixed rate of 0.25%.  Japanese markets are closed for a national holiday tomorrow.  It is the first such operation in 3.5 years.  With today's purchases, the Reserve Bank of Australia completed its QE.  It holds about 40% of the government's debt or around A$650 bln.  Last year, the RBA bought about three-times more bonds than the government issued.  Sequentially, the next issue is what to do with the maturing proceeds, and Governor Lowe said a decision will be made in May.  The Bloomberg survey finds most economists expect a hike in August, while the swaps market sees the hike a little earlier.  China's aggregate lending soared to record levels last month of CNY6.17 trillion.  Lending typically rises in January as new quota are tapped. However, the increase was well more than expected.  Bank lending was strong (CNY3.98 trillion), but so was shadow banking activity (the difference between bank lending and aggregate financing). Still, it seems to simply confirm what was already signaled, namely that officials have shifted their stance to support the economy.    The US dollar drew the closest to JPY116.00 in a month.  The high was made in the brief overlap of last Asia with early European activity.  There is an option for $750 mln that expires tomorrow at JPY115.75.  Support is seen a little lower, near JPY115.50. The Australian dollar is pushing toward $0.7200, a level it has not been above since January 21.  Above there, we have been looking for $0.7230.  The Aussie seems well supported, with over A$1 bln in options expiring today between $0.7150 and $0.7155, though the intraday momentum indicators are stretched.  The PBOC set the dollar's reference rate spot on the median forecast in the Bloomberg survey at CNY6.3599.  The dollar eased to a marginal new low for the week (slightly below CNY6.3540).  Note that India and Indonesia held policy rates steady.   Europe The European Commission published a new economic forecast today.  While it raised its CPI forecast this year and next, it still has the rate below 2% next year.  This year's projection was raised to 3.5% from the 2.2% forecast made last November.  Inflation next year now looks to be 1.7% rather than 1.4%.  Price pressures are anticipated to peak just shy of 5% this quarter (4.8%) and stay above 3% until Q4, when they fall to 2.1%.  The EC shaved its growth forecast for this year to 4.0% from 4.3% but sifts it into 2023 by raising its forecast by 0.3% to 2.7%.  The real interest is with the ECB forecasts in March, and some see the EC forecasts as a hint of what the central bank update may look like.   Sweden's Riksbank left policy steady as widely expected.  It now sees the H2 24 rather than in Q4 24.  The swaps market is less sanguine and has about 70 bp of tightening priced in over the next 12 months.  There were three dissents over its bond purchases and advocated a more pronounced tapering.  Governor Olsen cast the deciding vote to continue its QE.  With upward revisions in the Riksbank CPI forecasts, the decision appears to be a dovish hold.  This year's CPI forecast was raised to 2.9% from 2.3%.  Next year's CPI projection was tweaked to 2.0% from 1.9% and 2024 to 2.4% from 2.2%.  The Swedish krona is the weakest of the major currencies today, off about 0.65% against the dollar and 0.75% against the euro.   The euro remains in Tuesday's range, roughly $1.1395 to $1.1450.  It is near the upper end of the range in the European morning.  It is unlikely to make much more headway ahead of the US CPI figures.  The $1.1500 level is the important cap, and it appears to be protected in by two large option expirations there, with a 1.76 bln euro option today and a 1.9 bln euro option tomorrow.  Initial support is seen in the $1.1420-$1.1430 area.  For its part, sterling continues to chop between $1.35 and $1.36.  It reached the session high near $1.3580 in early European turnover and met a wall of sellers. Nearby support is seen at $1.3540, and then $1.3520.  The UK reports Q4 GDP and details for December tomorrow.   America Today's US January CPI may be a bit anti-climactic. Nearly everyone expects a small acceleration to 7.2%-7.3% from 7.0% at the end of last year.  The market has fully discounted a 25 bp hike next month and has about a 30% chance of a 50 bp move. Still, it may be near a peak, and at least one Fed official (Bostic) has said as much.  Remember that last year, the CPI surged from March through August.  As they drop out of the 12-month comparison, the year-over-year rate will likely ease.  Mexico reported slightly higher than expected January CPI yesterday and it reinforced expectations of a 50 bp hike today that would lift the overnight target rate to 6.0%.  It is the first meeting with the new governor, Victoria Rodrigues Ceja, at the helm.  Some observers expressed concerns that she was untested and likely dovish.  A 50 bp hike at her first meeting, especially given the fact that the economy contracted in Q3 21 and Q4 21 (a simple rule of thumb for a recession), would underscore the central bank's anti-inflation credentials.    Bank of Canada Governor Macklem sounded a hawkish note yesterday, warning that the policy rate may have to go over neutral (2.25%) in order to address the price pressures.  The swaps market has stopped just shy of this (almost 2% in 12 months and 2.25% in 24 months). Canada reports January CPI next week. It stood at 4.8% in December.    The US dollar continues to hold important support in the CAD1.2650-CAD1.2660 area.  There are options for $700 mln that expire today at CAD1.2670.  Tomorrow, the optionality is stronger.  Options for almost $4.5 bln struck between CAD1.2650-CAD1.2660 expire. Tomorrow, there is also another option for CAD1.22 bln at CAD1.2685.  Ahead of the Banxico meeting, the peso is bid.  The greenback is near three-week lows against the peso around MXN20.42-MXN20.43.  A break sets up a test on the 200-day moving average near MXN20.33.  Last month's low was near MXN20.28. Still, the North American session may be more cautious.  A bounce could lift the dollar toward MXN20.50.   Disclaimer
Many Of Us Are Into US Bonds. Let's Have A Look At The Inverted Curve

Many Of Us Are Into US Bonds. Let's Have A Look At The Inverted Curve

Chris Vermeulen Chris Vermeulen 04.04.2022 13:18
The worldwide bond market – including private and government debt -- currently represents about $120 trillion in outstanding obligations. The United States accounts for roughly $46 trillion (39%). The U.S. government finances its spending by collecting taxes and issuing debt. More specifically, the U.S. Treasury funds deficit spending by issuing debt instruments with a range of maturities. Treasury Bills have maturities from one month to one year. Treasury Notes have maturities from two to ten years. Very long-term debt is issued as Treasury Bonds with 20- and 30-year maturities. Treasury yields rise and fall depending on demand and expectations for the economy over various timeframes. Competitive bidders set yields in a “primary market” auction process with an inverse relationship between prices and yield. Note that market participants, not the U.S. Federal Reserve (a.k.a. Fed), determine these prices and yields. The Fed sets a target for a very short-term (overnight) Fed Funds Rate and a Discount Rate. Their policy of lowering or raising those rates holds significant influence but does not have direct control over the debt auctioning process. The yield curve plots the current yield of a range of government notes and bonds in the “primary market.” Here’s a U.S. yield curve plot showing both a normal and an inverted curve. The red line shows what is typically viewed as a “normal” curve where longer-term debt has a higher yield than shorter-term debt. That reflects a view that inflation will erode returns over a longer period, and therefore, a higher yield is expected. The blue line shows an inverted curve where shorter-term debt has a higher yield than longer-term. Why Does the Curve Invert? The yield curve is typically described as steepening, flattening, or inverting. A steep curve reflects expectations of higher inflation and interest rates that come with a more robust economy. The curve typically flattens or even inverts when Fed policy is in a tightening cycle of raising rates in the near term. That implies that investors have less confidence in the longer-term economic outlook and expect that the Fed may have to cut rates at some point in the future to stimulate the economy. What Does an Inverted Curve Mean? In the past 60 years, every U.S recession has been preceded by at least a partially inverted yield curve. That delay has ranged between 6 and 36 months with an average of 22 months. But every yield curve inversion has not been followed by a recession. As a predictor of a recession, an inverted yield curve suggests but does not guarantee a recession. Remember that a recession is technically defined as two successive quarters of negative GDP growth. There can undoubtedly be economic slowdowns that are shallow and temporary that do not qualify as a full-blown recession. Perhaps it’s more accurate to say that an inverted yield curve is a relatively reliable predictor of an economic slowdown but not necessarily a recession. Is it Different This Time? Maybe. Over the last two years, the Fed took a very unusual step of implementing “Quantitative Easing” to stimulate economic recovery after the “Covid Crash” in March 2020. The Fed has been adding to its balance sheet by buying longer-dated bonds. As the economy has strengthened, the Fed has announced that it will shift to selling bonds to reduce its balance sheet. Many observers think that this action by the Fed has kept the long-term yields -- in particular, the 10-year -- artificially low, and those yields are likely to rebound when the Fed stops selling its excess. If that were to happen, then the yield curve could suddenly steepen. There’s also debate over which parts of the yield curve to compare. Historically, comparing the 2- and 10- year yields (the “2/10”) has been a widely used benchmark. Some observers say comparing 3-month and 10-year yields is a better indicator. And without an inversion in the 3mo/10yr, there is much more doubt about an imminent recession. What Does This Mean for Stocks? We shouldn’t make investing decisions based just on the yield curve discussion. It’s certainly interesting. And it may well be a predictor of an economic slowdown if not a recession. But it is only one piece of a many-pieced puzzle. As a trader and investor, I focus more on technical indicators of stock price action and stock index valuations. Even in a recession, some sectors do well while others do poorly. Money is always moving. That’s the ball that I’m keeping my eye on.
Risks in the US Banking System: Potential Impacts and Contagion Concerns

How Are Markets Doing? US Bonds, EuroStoxx 600, CSI 300 And More

Marc Chandler Marc Chandler 06.04.2022 15:39
April 06, 2022  $USD, balance sheet, China, Currency Movement, Federal Reserve, Germany, Hungary, Japan, Poland Overview:  Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that is continuing today, rippling through the capital markets.  The US 10-year yield is rising for the fourth consecutive session.  The six-basis point gain today puts the yield near 2.62%, which represents a little more than a 25 bp increase since the jobs data on April 1.  European benchmark yields are 3-6 bp higher.  Japan's 10-year yield is poking above 0.23% to again challenge the BOJ's Yield Curve Control.  Equity markets are taking it on the chin.  The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%.  Europe's Stoxx 600 is off around 1.1% and US futures are about 0.75% weaker.  The dollar is mixed.  The Swiss franc, Norwegian krone, and Japanese yen are weaker.  The Swedish krona, sterling, and euro are posting small gains.  Among the emerging market complex, the South African rand leads the few currencies higher.  Poland, which is expected to lift rates 50-75 bp today has not prevented the zloty from softening.  The Hungarian forint and Indian rupee lead the decliners today.  Gold is edging higher within its consolidative range, after the $1915 area held.  May WTI is firm near $104, but within yesterday's range (~$99.90-$105.60).  US natgas is extending yesterday's 5.6% gain by another 2% today. It is up roughly 40% since mid-March.  Europe's benchmark is snapping a three-day 13% decline with a 2.75% gain today.  Iron ore is off around 1.3%, while copper is slipping lower for the first time this week.  May wheat is paring the two-day 6% rise.   Asia Pacific China's mainland markets re-opened after the two-day holiday.  The news was poor.  The Caixin service and composite PMI were weaker than expected.  The services PMI slumped to 42.0 from 50.2. The composite dropped to 43.9 from 50.1.  In some ways, the news confirms what the market already knew in broad strokes.  The world's second-largest economy is struggling mightily as the zero-Covid policy is disrupting activity.  The lockdown in Shanghai, for example, has been extended.  The economic disappointment will underscore expectations for additional policy support.   New Zealand is placing a 35% tariff on imports from Russia while extending its export prohibitions.  Australia reports February trade figures tomorrow.  Weaker exports and stronger imports are projected to translate into a smaller surplus.  The new pact between the US, UK, and Australia (AUKUS) is not just about the nuclear-powered submarines.  It was announced that they are also working on developing hypersonic weapons.  Meanwhile, a Quad (Australia, Japan, India, and the US) meeting slated for next month may be delayed until after the Australian election.  This also means that US President Biden's first trip to Japan will also be rescheduled.   Rising US yields have helped lift the greenback to JPY124.  The dollar's multiyear high set in late March was almost JPY125.10.  The market looks set to challenge it again and a marginal new high is possible.  Recent comments by the Minister of Finance and the BOJ Governor show continued sharp depreciation of the yen is not desirable.  A month ago, the dollar was near JPY115.  The Australian dollar surged yesterday as the central bank appeared to signal the likelihood of an earlier hike, but it is trading quietly today.  The Aussie is in around a 15-tick range on either side of $0.7575.  Although it reached $0.7660 yesterday, the $0.7600 area may offer a cap today.  China's mainland market re-opened today, and the dollar initially jumped to a five-session high near CNY6.3765.  It spent the local session drifting lower and is now near CNY6.3600, back within the April 1 range.  The PBOC set the dollar's reference rate at CNY6.3799.  The median projection (Bloomberg survey) was CNY6.3791.  Europe German factory orders slumped 2.2%. It was the first decline in four months.  The median forecast (Bloomberg) anticipated a 0.3% decline.  The January series was revised to 2.3% from 1.8%, offering a small consolation.  Domestic orders fell for the second consecutive month, while foreign orders slid 3.3%.  That said, foreign orders have been alternating between gains and losses since at least last August.  A group of economic advisers to the German Chancellor cut this year's growth forecast to 1.8% from 4.6%, while warning that a recession was possible.  Tomorrow, Germany is to report February industrial production figures.  The median forecast is for a 0.2% gain after the 2.7% surge in January.  The risks are on the downside.  Note that yesterday, France reported February industrial output fell by 0.9%, three-times the decline the median forecast anticipated.  The aggregate report is due next week.  Poland's central bank is expected to deliver its seventh consecutive rate hike today.  The reference rate stands at 3.5%.  The median forecast is for a 50 bp hike, while the average forecast leans toward a 75 bp move. Poland began the tightening cycle last October with a 40 bp move.  It was followed by 75 bp in November and then three 50 bp moves before a 75 bp hike last month.  Meanwhile, the EU has wasted no time since Hungary's Orban handily won the weekend election to begin pressing with the untested "conditionality mechanism" which can lead to the denial of EU assistance (~40 bln euros) for violating core values.   Since posting a key downside reversal last Thursday, the euro has been unable to sustain even modest upticks.  It had been turned back from around $1.1185 and tested $1.0875 today, its lowest level since March 8.  The low was recorded in Asia, and early European dealing squeezed it to about $1.0925 before it ran out of steam.  The single currency looks poised to re-test the $1.08 area seen on March 1.  Sterling posted an outside down day yesterday, trading on both sides of Monday's range and then settling below Monday's low.  Follow-through selling pushed it briefly below $1.3050 before it too bounced in the European morning to almost $1.3110.  There may be scope for additional minor gains, but we expect it to come off in the North American morning.   America Many observers seem confused.  They had the Fed's Brainard as a dove.  Yet her comments yesterday were as hawkish as they have come.  Reducing inflation was paramount.  She seems to be part of the growing consensus to hike 50 bp next month.  It was her comments about the balance sheet that may have done the most damage to stocks and bonds.  She referred to a "rapid" pace.  The previous exercise saw the unwind limited to $50 bln a month and it took several months to ramp up to the limit.  Brainard appeared to confirm a more aggressive unwind that could begin as early as next month.  The 2-10-year yield curve steepened back to a positive slope, but it is not because investors think that the balance sheet adjustment will take some pressure off the need to raise interest rates.   On the contrary, the implied yield on the December Fed funds futures contract rose to a new high and is now implying 220 bp of hikes this year.  Hawk and dove labels may be helpful for analytic purposes, but they are always contextual.  Bullard, the leading hawk now, may not have gotten what he wants, hence the dissent at the March meeting.  However, the rest of the FOMC is converging to his broad position.   Consider that in March, there were only two dots above 2.38% for the Fed funds target at year-end.  The December Fed funds futures contract implies a year-end rate of 2.54%.  Brainard did not steal all of the thunder from the FOMC minutes.  The market still wants to have a better idea of the pace of the unwind.  Anything more than around $100 bln would surprise.  The phase-in period likely begins next month and will quickly ramp-up toward the caps.     The US dollar rebounded off CAD1.24 yesterday and settled near the session high just below CAD1.25.  A bullish hammer candlestick pattern was left in its wake.  Follow-through buying today has been minimal and the greenback tested CAD1.2510.  It looks like the move in early March near CAD1.29 has been completed.  A consolidative/corrective phase looks likely from a technical perspective.  Initial resistance is seen near CAD1.2550, we suspect a move toward CAD1.2600 is likely.  The 200-day moving average is around CAD1.2620.  The greenback's slide against the Mexican peso appeared to have ended.  The move began on March 9 after peaking the day before near MXN21.4675.  At the start of this week, it fell to MXN19.7275.  That move ended with aplomb yesterday and the greenback raced above MXN20.00 for the first time since March 29. Momentum and trend-followers are caught leaning the wrong way.  A short-squeeze could lift the dollar toward MXN20.14 and then, possibly MXN20.35-MXN20.40.     Disclaimer
The US Has Again Benefited From Military Conflicts In Other Parts Of The World, The Capital From Europe And Other Regions Goes To The US

What A Plunge Of Japanese Yen (JPY)! US Dollar (USD) Is Really Strong! Will Bank Of Japan (BoJ) Raise The Interest Rate? USDJPY And More In Eyes Of Saxo Bank

Saxo Bank Saxo Bank 19.04.2022 12:06
Forex 2022-04-19 10:30 Summary:  The Japanese yen has seen a relentless decline over the last few weeks, underpinned by a widening yield differential between the US and the Japanese government bonds. As verbal interventions from the Bank of Japan and Ministry of Finance fail to be heard, we are looking at a subtle policy shift with the aim to manage volatility, or a real physical intervention. The JPY continues to run away to the downside, with USDJPY surging above 128.00 for the first time since 2002. The next major chart point is the early 2002 high near at 135.00. AUDJPY has also surged to fresh record highs of 94.50+ as the AUD was slightly firmer following the hawkish tilt in RBA minutes. Read next: (UKOIL) Brent Crude Oil Spikes to Highest Price For April, (NGAS) Natural Gas Hitting Pre-2008 Prices, Cotton Planting Has Begun The big why? US 10-year treasury yields have notched a new cycle peak and will soon threaten the 3.00% level if they continue to rise, widening the policy divergence with the Bank of Japan (BOJ), that continues to stick with its yield-curve-control (YCC) policy that caps 10-year Japanese government bond yields (JGB) yields at 0.25%. Both the BOJ and the Japanese Ministry of Finance (MoF) have stepped up their verbal interventions against JPY volatility as recently as overnight, but these have hardly had any effect. The BOJ conducted unprecedented four-day purchase plan into the end of its financial year on March 31 after the JGB yields had hit 0.25%, a ceiling the central bank had made clear in March last year. This further highlighted their commitment to capping yields. While the BoJ may be concerned about the volatility and the pace of JPY decline, the Bank is unlikely to be worried about its direction. In fact, BOJ rhetoric repeatedly suggests that it sees JPY weakness as good news for the economy and exports as well as a factor helping to spur imported inflation pressures. This is especially important if we note that GDP is still well below pre-COVID levels and core inflation is negative. Is inflation a concern? The rise in JGB yields has little to do with expectations that Japanese inflation is moving sustainably higher. CPI is expected to increase above the BOJ’s 2% (from 0.9% currently) target, but the central bank expects the move to be temporary. Much of the gains in inflation are on the back of base effects and higher energy prices, and underlying price pressures remain muted. Stripping out energy prices and fresh food clearly shows that core inflation is still very benign at multiyear lows at -1% y/y. Will the YCC be tweaked? We are probably starting to see the limit of the yield curve control program, as sustained BOJ purchases could be a problem for a central bank that already owns around half of government issues. Would the BOJ go Australia’s way that clumsily abandoned its peg in November? That would need more domestic demand for JGBs which is unlikely to be achieved. Historically, BoJ has been open to adjusting targeting range of bond yields. It widened the range to +/-0.25% from +/-0.20% in March 2021, which was changed in July 2018 from +/-0.10% before that. The BoJ could tweak its YCC policy to target 10-year yields form +/-25bps to +/-30bps to give itself more flexibility and manage volatility. This move, if effected, will be communicated as a measure to manage the increased volatility in bond markets, to ensure that it is not taken as a sign of any shift in policy thinking. Article on Crypto: Hot Topic - NEAR Protocol! Terra (LUNA) has been seeing a consistent downward price trend, DAI Should Stay Close To $1 What to watch next? Our sense is that until a policy shift is spotted, or real intervention is mobilized, the market is content to continue driving the JPY lower. Ironically, in the past, the MoF has mobilised intervention in the yen in the direction of avoiding further JPY strength, not weakness. These interventions may not achieve more than temporary success if the underlying policy and market dynamics don’t shift (i.e., the BOJ sticking to its current policy while inflationary pressures and yields elsewhere continue higher). But the risk of tremendous two-way, intraday volatility should be appreciated. Japan’s Finance Minister Suzuki is heading for a bilateral meeting with the US and comments would be on watch. Next BOJ meeting is scheduled for April 27-28, but focus will still be tilted more towards the Fed’s May meeting where a 50bps rate hike is expected along with the start of quantitative tightening. The only other way could be to hope that the yen would find a floor, and wait for BoJ governor Kuroda’s tenure to end in April 2023. This may then be followed up with rate hikes.
Oanda Podcast: US Jobs Report, SVB Financial Fallout And More

What are investors afraid of? | Conotoxia

Conotoxia Comments Conotoxia Comments 18.05.2022 15:42
As it does every month, Bank of America conducts a survey of fund managers with nearly $900 billion AUM. Its results in the May edition seem very interesting, indicating the risks and actions of institutional investors. According to the survey, investors appear to be hoarding cash as the outlook for global economic growth falls to an all-time low and fears of stagflation increase. Cash holdings among investors have reached their highest level since September 2001, according to the report. A survey this month of investors managing $872 billion also found that hawkish central banks are seen as the biggest risk to financial markets. A global recession came in second, and concerns about stagflation rose to their highest level since 2008. The findings could show an uninspiring outlook for global equities, which are already on track for their longest weekly losing streak since the global financial crisis, as central banks turn off the tap on money at a time of stubbornly high inflation. The BofA report said the stock market may be in a bear market, but the final lows have not yet been reached. More interest rate hikes by the Federal Reserve are still expected, and the market is not yet in full capitulation. The BofA survey also found that technology stocks are under the most pressure since 2006. Overall, investors were most attuned to holding cash, and are least inclined to go for: emerging market stocks, eurozone stocks and bonds at the moment. The report also found that the so-called most crowded trades at the moment are long positions on oil (28%), short positions on U.S. Treasury bonds (25%), long on technology stocks (14%), and long on bitcoin (8%). According to the respondents, the value to which the S&P 500 index would have to fall for the Fed to start refraining from further monetary policy tightening falls at the level of 3529, i.e. about 12% below the current level. Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service) Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
BRICS Summit's Expansion Discussion: Impact on De-dollarisation Speed

"Our view is that rates will go higher than markets anticipate and stay higher for longer." says Josh Lohmeier

Josh Lohmeier, CFA Josh Lohmeier, CFA 09.12.2022 14:28
The 10-year US Treasury (UST) yield has spent most of the last decade between 2.50% and 0.50% and investment grade (IG) credit spreads have certainly traded in a tight range as well.1  As a consequence of this incredibly low yield environment, investors were pushed to look for additional yield in lower-quality asset classes. This rationale is based on the fact that fixed income investors need and want income. Moreover, higher-quality, longer-duration assets had significant total return risk purely due to the potential for an eventual rise in interest rates. This is exactly what we have seen year-to-date in 2022.   Exhibit 1 below can help set the tone for how the US IG market has behaved over the course of 2022 and consider the range of outcomes we might expect in 2023. It shows how volatility in UST rates and credit spreads can impact the total return over a one-year investment horizon.   Below is a sample range of outcomes for 10-year US investment grade, and what happened is in orange 2.50% UST yield rise and 0.75% spread widening. (Most underperformance driven by 2.50% rise in US Treasury yields.) Exhibit 1: Hypothetical Forecasted Return MatrixAs of December 31, 2021 Source: Bloomberg; Bloomberg US Corporate Bond Investment Grade Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. There is no assurance any forecast, projection or estimate will be realized. At the start of 2022, the UST rate was 1.50% and IG credit spreads were 1%. The number in green, a total return of 2.50%, is the outcome if nothing had changed. In other words, if UST yields and credit spreads didn’t change, the hypothetical investor would earn 2.50% over the year. However, as we all know, over the course of 2022 UST yields rose by approximately 2.50% and spreads widened by approximately 0.75%. The orange highlights show that the result is a total return for 10-year IG of approximately -15%/-19%. If we look forward toward potentially less volatile UST rates and consider the much higher starting point for both yields and spreads, one could make the argument that there is a much more asymmetrically positive range of outcomes for US IG credit looking forward. See Exhibit 2 below. Today: Positive asymmetry to total return outcomes for investment grade given starting point for US Treasury yields of 4% and investment grade spreads of 1.75%, and potentially less rates volatility from here. Exhibit 2: Hypothetical Forecasted Return Matrix, Part 2As of November 2022 Source: Bloomberg; Bloomberg US Corporate Bond Investment Grade Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. There is no assurance any forecast, projection or estimate will be realized. Though there was certainly some weakness in widening credit spreads, rising UST yields drove most total return losses in fixed income year-to-date. We believe that this outcome has created a path for longer-term tailwinds for IG credit going forward. First and foremost, even if there is a recession, the probability of default for IG issuers is very low. What this means for higher-quality fixed income sectors, like IG, is that investors from this point forward will get the benefit of higher yields and duration as a potential defensive mitigator to any possible spread volatility if the US economy enters a recession. In a recession, UST yields will likely rally, which can provide a big positive boost to total returns. Moreover, it would help offset any potential weakness from widening credit spreads, as shown in the table above. The range of outcomes where IG credit investors could potentially lose money from today’s starting point has lowered considerably. This is not to say that spreads won’t widen; they can widen significantly if we enter a recession. But we have reached a point in time where investors can play both offense and defense through their allocations to US IG corporate bonds. We believe the defensive benefits of higher UST yields can materially offset credit spread weakness going forward. Fixed income is finally delivering income! Credit spreads have widened since the beginning of the year and remain above five- and ten-year averages after hovering near historically tight levels for most of 2021. In terms of fundamentals, muted consumer demand, higher input costs and a strong US dollar have negatively impacted corporate profitability. However, balance sheets remain generally robust, providing most IG corporates with more financial flexibility to navigate a period of slowing economic growth, in our view. Overall, we believe that yields in the asset class are better, and the risk-reward balance of current valuations has improved materially compared to the start of the year. This makes IG corporates a more attractive place for investors seeking relatively safe income. However, due to ongoing market uncertainty, slowing growth and deteriorating fundamentals, we acknowledge spreads can go wider and are certainly up in quality today within our US IG allocations to preserve liquidity and take advantage of any potential volatility in markets.  Interest rates likely to remain higher for longer Given a very uncertain environment, it is likely that volatility will remain high over the foreseeable future. Increased levels of volatility are driven by limited visibility into the Federal Reserve’s (Fed’s) policy tightening path, for one, as investors keep hoping for an earlier pause in policy rate hikes and some are expecting rate cuts in late 2023. Our view is that rates will go higher than markets anticipate and stay higher for longer. Secondly, since Fed Chair Jerome Powell appears more concerned about not tightening enough rather than overtightening, we do believe a shallow recession is likely over the medium-term. However, this doesn’t appear to be priced into earnings estimates. In times of increased volatility, higher-quality credits with strong fundamentals and less sensitive end-demand are likely to outperform. We are therefore pushing more of our portfolio risk into non-cyclical sectors and still believe the US financial sector has strong risk-adjusted return potential given elevated spreads and very strong capital levels.  Coping with challenges ahead Looking ahead, companies are going to face some challenges. Margins are likely to continue to feel the squeeze from elevated labor, financing and input costs. Corporates are already feeling the effects of significant wage increases as evidenced by the first layoff announcements from various technology companies. While companies are still benefiting from interest costs that have hovered near generational lows for more than a decade and have frontloaded borrowing, rising rates will certainly bite into the broader macro economy from both consumers to future corporate borrowing needs. Also, though we have seen improvements in supply chain issues, inflation will most likely stay higher, even if it stabilizes or retreats, and for longer than consumers or markets are accustomed to. This will continue to impact global growth. Considering our expectations for a potentially challenging market environment over the near to medium term, we believe that cyclical consumer-focused industries and companies with high levels of exposure and sales to weaker markets, such as Europe, will likely underperform. We are also less excited about commodity sectors; although fundamentals are decent and commodity prices may hold up, valuations are stretched to us. Weaker economic growth can and certainly should cause spread volatility in these sectors as aggregate demand slows.    Endnote Source: Bloomberg; Bloomberg US Corporate Bond Investment Grade Index. September 30,2011–September 30, 2022. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.  WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Source: Fixed income is finally delivering income! | Franklin Templeton
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage - 16.11.2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
FX Daily: Yen Bulls on Alert as Focus Shifts to US Payrolls and BoJ Speculation

"Rising Stars: Dutch Maintenance Contractors Emerge as M&A Favorites for Private Equity Firms

ING Economics ING Economics 12.12.2023 13:59
Elsewhere...  The nice jump in the Japanese yen pulled the dollar index lower yesterday. Of course, the EURJPY, GBPJPY and AUDJPY all made a similar move. The US bonds, on the other hand, were little changed yesterday – for once – as traders sat on their hands ahead of this week's much-awaited US jobs data, while technology stocks were on fire yesterday. Alphabet jumped more than 5% after Google released Gemini – the largest and most capable AI model it has ever built, and AMD jumped nearly 10% after the company unveiled a chip that will run AI software faster than rival products. But rival Nvidia was little hit by the news, as its chips gained 2.40% yesterday. The AI demand is big enough for everyone to benefit amply from it.   Today, all eyes are on the US jobs data.  According to a consensus of analyst estimates on Bloomberg, the US economy may have added 180'000 new nonfarm jobs in November, the pay may have risen slightly faster on a monthly basis, and the unemployment rate is seen steady at 3.9%. The fact that the data released earlier this week hinted at a clear loosening in the US jobs market makes many investors think that today's official data will also follow the loosening trend. If the data is soft enough, the rally in the US bonds could continue and the US 10-year yields could have a taste of the 4% psychological mark, while a stronger-than-expected figure could help scale back the dovish Federal Reserve (Fed) expectations but could hardly bring the hawks back to the market before next week's FOMC decision.      

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