while we slept; CMDI = all is well; 5yy 2nd biggest MONTHLY spike since; JNK bonds selloff; "Deteriorating Liquidity"
Good morning … As China’s Chengdu metropolis goes into lockdown amid mass Covid testing I’m, well, at a loss for words.
Well, ok, not really BUT nothing here to add TO this news and so … Please excuse my lane departure and have a look at a longer-term visual of the German 2yy (aka Schatz)
While pictures are said to be worth a thousand words, I’ve read that,
yields on 2yr German debt haven’t risen this much in a month since 1981 …
Ok, back to my (not ECBs Philip) LANE where at months end, the data dust settling and ZeroHedge notes,
August Hawk-nado Hammers Stocks, Bonds, Commodities, & Crypto
I mention this for one specific visual, ZH
The 5Y yield saw its 2nd biggest monthly spike since Nov 2009, closing the month at its highest since May 2008..
AND for our inner stock-jockey, attempting to play along here at home, via @soberlook,
Equities: The S&P 500 is down 5% over the past three days.
Past 3 days and the past 30d — a German banks Monthly Performance Review notes
… Which assets saw the biggest losses in August?
Sovereign Bonds: Faster-than-expected inflation in Europe, as well as more hawkish central banks meant that sovereign bonds lost significant ground over August. In Europe, the -5.1% decline was actually the largest since the Iboxx series we use began back in the late 1990s, and it was the same for gilts (-8.2%) as well. Treasuries were a relative outperformer, although even they fell -2.6%, as the inflation picture became more promising in the US relative to Europe.
… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action …
… WHILE YOU SLEPT
Treasuries are mixed with the curve pivoting steeper around a little changed 10yr point. 2's finally took out their mid-June rate high at the close yesterday, hitting 3.51% twice before rallying into the NY open. DXY is higher (+0.35%) while front WTI futures have extender their recent losses (-2.1%). Asian stocks were solidly red (NKY -1.5%, SHCOMP -0.5%, KOSDAQ -2.3%), EU and UK share markets are all lower too and ES futures are showing -0.5% here at 7:20am. Our overnight US rates flows saw good buying from Asian real$ (7's to 10's) into the early weakness there and London's AM hours were 'surprisingly active' with solid 2-way flows. Most of our flow was in the 0-5yr sector with a common theme being curve extensions (1y->3y). We discuss this below. Overnight Treasury volume was ~135% of average with 7's and 30's seeing the highest relative average turnover at ~145% each.
… and for some MORE of the news you can use head over TO Finviz and to help weed thru the noise, kindly check out Harkster.com
For those of us now attempting to ‘play along at home’, a few items which are still being delivered to my former ‘Global Wall St Inbox’ and other items which may be of interest,
First from The NY Fed, an update on corporate bonds
Research Update: Corporate Bond Market Distress Index, August 2022
Corporate bond market functioning appears healthy, with the overall market-level CMDI below its historical 53rd percentile.
Market functioning continues to be somewhat more strained in the investment-grade segment of the market.
FRBNY to markets, Remain calm, all is well. Sorry. Not sorry. Moving on and to the point attempting to make re EZ front-end (Schatz)
ZH helps with some detail on ECB f’casts
Goldman, BofA Now Expect 75bps ECB Rate Hike After European Inflation Comes Record Hot
Apparently it’s pig-pile-on-ECB day as JPM joins the chorus, too. But whatever THESE to US based banks have to say pales in comparison TO large German bank, amIright?
Updated ECB Call: 75bp hike in September
At the start of this week we announced a change to our ECB call, namely a higher and earlier terminal rate of 2.5% in mid-2023. We held our 50bp hike call for September pending this week's key data. Following the upside surprise on the flash August HICP report today and the growing number of Governing Council members calling for stronger action we have decided to adjust our call. We now expect a 75bp hike at the next ECB Governing Council meeting on 8 September. This is a short note to announce the change in call. There will be more details in our ECB Preview before the end of the week.
Okie dokie. 75bps it is, then … putting PAID to THIS ONE from ABNAmro
… And then there’s this eye candy from Chris Kimble and the CHARTS department
Important and cannot overstate the obvious as we all know the math,
JUNK = CREDIT RISK = STOCKS
Right ok, got it.
Also from the bowels of the CHARTS department, Hedgopia notes
10-Year T-Yield At Risk Of Forming Potentially Bearish Technical Pattern …
Amidst all this push-and-pull, the 10-year treasury yield finds itself at a crucial juncture. If bond bulls, such as foreigners, had their way, yields could be forming a potentially bearish technical pattern.
On June 14, the 10-year retreated after tagging 3.48 percent. Before that, rates ticked 3.17 percent on May 9. These two can represent the left shoulder and the head of a head-and-shoulders formation. Bond bulls have an opportunity here to forge the right shoulder (Chart 5).
On Tuesday, the 10-year yielded 3.15 percent, before weakening a tad, with Wednesday closing at 3.13 percent.
The daily is extended and, in the right circumstances for bond bulls, can begin to unwind its overbought condition. In this scenario, the neckline lies at low-2.70s, a decisive break of which can act as a self-fulfilling prophecy, leading the likes of non-commercials to cover their short bets…
For somewhat more, techAmentalists noted,
US2YR: Closed above 3.45% (June 2022 high) and set a new 2022 high at 3.49%. This close strengthens the suggestion for a test of the double bottom target at 3.75% (neckline at 3.27%). Detailed more in our note, US 2 year Yield- Is Tomorrow The Day?
US5YR: Completed a bullish outside month with a close above 3.21%, suggesting an acceleration toward horizontal resistance at 3.62% (2022 high). Additionally, price action achieved a monthly close above 3.10% (2018 high), marking it as the first monthly close above the high of a prior bear cycle in the 40+ year bull market. Detailed more in our note, Diary: Year 3 Week 26 – Stonewall Jackson
US10YR: Completed a bullish outside month with a close above 3.10%, suggesting an acceleration toward horizontal resistance at 3.50% (2022 high).
US30YR: Completed a bullish outside month with a close above 3.28%, suggesting an acceleration toward horizontal resistance between 3.46-3.49% (2018 & 2022 high respectively).
US2YR sets a new 2022 high; bullish outside month completed on US5YR, 10YR, & 30YR…
With yields rising, one last note from the CHARTS department and THIS from 1stBOS
Multi Asset Macro Pack: Key Technical Themes for the next 1-3 months
… From a technical perspective, we shifted back to a tactically negative bias for Equity markets in mid-August after our recovery objective including the 200-day average was reached almost exactly for the S&P 500 and following the decisive rejection of this key level over the past week, we now also shift formally to negative on a 3-6 month horizon. We look for the S&P 500 to retest and eventually break its 2022 lows…
… Finally, Bond Yields are moving higher within their range, however we maintain our core view that longer-term bond yields have peaked, especially given our view that inflation expectations are in the process of forming a major top.
From charts to geo-econ-politics of the moment? Yep. I’ve made it so far without any mention of geo-political-economic relations and so, HERE IS ONE from the Chicago Fed
Chicago Fed: Inflation as a Fiscal Limit
Low and stable inflation requires an appropriate fiscal framework aimed at stabilizing government debt. Historically, trend inflation is critically influenced by actual or perceived changes to this framework, while cost-push shocks only account for short-lasting movements in inflation. Before the pandemic, a moderate level of fiscal inflation has counteracted deflationary pressures, helping the central bank to avoid deflation. The recent fiscal interventions in response to the Covid pandemic have altered the private sector’s beliefs about the fiscal framework, accelerating the recovery, but also determining an increase in fiscal inflation. This increase in inflation could not have been averted by simply tightening monetary policy. The conquest of post-pandemic inflation requires mutually consistent monetary and fiscal policies to avoid fiscal stagflation.
Finally, all of this really matters NOT if there’s no LIQUIDITY in one of, if not THE deepest, most liquid and highly traded markets in the world. The Treasury market. I’ll leave this one from BBG (via ZH) here,
Treasuries' Worsening Liquidity Points To Broader Market Turmoil
Treasuries' Worsening Liquidity Points To Broader Market Turmoil
By Masaki Kondo, Bloomberg Markets Live commentator and reporter
Deteriorating liquidity in Treasuries points to turbulence across various assets.
A Bloomberg liquidity index that measures deviations of yields from their fair value climbed to the highest level since March 2020 this week.
Such “noise” in the US bond market suggests a general lack of arbitrage capital and tightening of liquidity in the overall market, according to a research paper from the National Bureau of Economic Research.
The apparent decline in arbitrage capital may be a result of persistently hawkish stance by the Fed and other major central banks amid historic inflation that’s at the same time fanning concern over a global recession.
The shortage of risk takers could create a one-way move in asset prices, especially when they are falling. Looking at implied volatility, the equity market seems to be most under-pricing such liquidity risks.
I guess, then, all is NOT well … remain calm at your own risk?
Ok so in an effort to end on a high note, here’s everyone thinking about how NEXT year is gonna be THE year … raises are coming, job security and all as inflation drops back down. Gonna be KILLIN’ it, right?
Food for thought ahead of tomorrows NFP and LONG WEEKEND … THAT is all for now. Off to the day job…
Thank you!!!