Linea Mercati Interview 8/21/23
August 21, 2023Linea Mercati Interview 8/21/23
August 22, 2023MARKET WRAPS
Watch For:
Germany PPI; U.K. aluminum production report; trading update from Pershing Square Holdings
Opening Call:
Shares may track higher in Europe on Monday as the focus this week shifts to the Jackson Hole economic summit. In Asia, stock benchmarks were mixed; Treasury yields mostly edged higher; the dollar weakened; while oil and gold advanced.
Equities:
European stock futures are seen higher early Monday amid the recent rise in U.S. bond yields and even as China’s economic woes continue to weigh on investor sentiment.
U.S. government bond yields on Friday fell back from Thursday’s multiyear highs but remained lofty enough to make investors think twice about betting on stocks to maintain this year’s surprising rally.
“The market seemed to be a bit ahead of itself in these last couple of months. It was due for a slowdown,” said Eric Kelley, interim chief investment officer at UMB Financial, a Kansas City bank.
Bond yields may have room yet to rise, he said, reasoning that they tend to peak just before the Federal Reserve reaches the end of rate-hike cycles.
Investors will be focused on Federal Reserve Chairman Jerome Powell’s speech on Friday at the Jackson Hole economic summit for hints as to whether the central bank is likely done hiking rates in this cycle.
“A few months ago if we were to predict a pullback in the equity market we’d say the catalyst was recession,” said David Donabedian, chief investment officer of CIBC Private Wealth US.
“Instead, the August pullback is driven by equity investors’ concern over the bond market and China. Bond yields have surged higher, making investors nervous.”
“Investors are concerned that if bond yields continue going higher, the economy is too strong and the Fed will need to raise interest rates further. And with the bond yield high enough, that poses competition for equity investors who feel the bond market is less risky than the stock market right now,” he said.
Meanwhile, China’s benchmark lending rate was lowered by a smaller-than-expected margin on Monday, after the central bank cut its key policy rates last week to offer more support for the slowing economy.
The one-year loan prime rate was lowered by 10 basis points to 3.45% while the five-year LPR was held at 4.2%.
The smaller reduction in LPR may reflect Chinese lenders’ reluctance to reduce their lending rates as they face narrowing profit margins. The benchmark rate was set by using quotations from a group of Chinese lenders that price their prime loans to clients based on PBOC’s MLF rates.
The rate cut came after the Chinese economy slowed across the board in July.
Forex:
The dollar weakened slightly early Monday.
Markets are adjusting “to the reality of the resilient US economy and sticky core inflation,” Bank of America said.
“A softer landing in the US compared with the Eurozone will support the USD.”
The bank reckons that markets were pricing “too many rate cuts too early” and expects the dollar strength to continue, with weak data in China negatively affecting the eurozone and the Fed reinforcing the higher-for-longer message.
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Chinese yuan weakened against USD in the onshore and offshore markets in Asia, pressured by China’s one-year loan prime rate cut.
It still seems evident over the past two weeks that China’s government seems unwilling to conduct substantial fiscal stimulus to turn the economy around decisively, Alvin T. Tan, head of Asia FX Strategy at RBC Capital Markets said.
While there are arguable long-term merits to China’s fiscal conservatism, near-term implications remain negative for the country’s currency and asset markets, on top of climbing Treasury yields, Tan added.
Bonds:
Treasury yields were broadly higher after last week’s selloff of long-dated debt.
But they could still move higher, Spartan’s Peter Cardillo said.
“There is a rush to sell bonds” with little to do with economic fundamentals, he said.
“There is a lot of speculation, yields aren’t necessarily rising for the right reasons.”
He said Chair Powell may indicate in Jackson Hole that, if inflation keeps cooling, the Fed might skip in September, and that would trigger a downshift in yields. Until then, “the intermediate trend remains higher.”
“The last few weeks of bond trading have been full of counterintuitive movements, featuring intraday spikes and dips that often follow no consistent or coherent narrative. Rather than focus on the day-to-day reactions, it’s worth taking a step back and looking at a slightly longer horizon,” said macro strategist Will Compernolle at FHN Financial in New York.
“What really sticks out about the yield changes since July 21 is not how much they have gone up, but that it’s been almost entirely focused at the long end of the curve.”
Energy:
Oil futures gained as the market shows signs of tightening and after China announced more policies to boost economic growth.
During the weekend, the Chinese central bank urged the country’s lenders to increase lending in a bid to shore up the economy.
In the meantime, the physical market continues to show signs of tightness; “U.S. commercial crude oil stockpiles have recorded another large drawdown. The widening of the backwardation in the WTI forward curve suggests tightness in near term deliveries,” ANZ said.
There continues to be a “battle royale between supply and demand, with OPEC+ cutting production, led by Saudi Arabia, while Chinese economic woes act as a counterweight,” Matt Smith, lead analyst for the Americas at Kpler said.
“Saudi Arabia continues to slash supplies to global markets in an effort to flush out bearish speculators and support prices,” he said, while “Chinese economic woes continue to provide gale-force headwinds to oil demand growth.”
In the oil market, “if you’re a hedger, it’s best to worry about a price spike because if the Chinese fears level out and the focus switches back to the supply side, or lack thereof, it could get ugly very quickly,” said Phil Flynn, senior market analyst The Price Futures Group.
Metals:
Gold edged higher in Asia in a comeback after being suppressed for some time amid U.S. dollar strength.
“With economic growth concerns in China mounting, the safe haven appeal aspect may increase with it,” Daily FX said.
Investors’ focus this week would be on the Fed chairman’s speech at the Jackson Hole Economic Symposium.
“This is a major event where central bankers and financial heavyweights come together to tackle pressing economic issues that impact the entire world,” Lukman Otunuga, manager of market analysis at FXTM said.
“When considering how such a gathering could provide investors with critical insights into the Fed’s stance on rates, gold may be in for a rollercoaster ride,” Otunuga said.
If Powell is seen indicating another interest rate increase is likely, gold could fall “somewhat further still,” Commerzbank said, though Commerzbank expects that Powell won’t commit to a move.
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Copper rose on possible position adjustment, but price gains were likely to be capped.
The fading China hype probably calls for additional pain for copper bulls on the horizon as the Chinese property sector’s headwinds morph into financial risks, TD Securities said.
The property sector is deeply embedded in the economy, underscoring the shift in markets’ focus toward contagion risks associated with local government financing vehicles, it added.
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Most iron-ore futures rose in the morning Asian session, buoyed by China’s cut in the one-year loan prime rate.
China is still easing monetary policy, contrary to many other countries, Phillip Securities Research team said.
Despite some weak Chinese economic data recently, steel production rose 11% on year in July, the team said, noting the weaker yuan is helping steel exports reach their highest in seven years.
TODAY’S TOP HEADLINES
China Cuts Benchmark Rate by Less Than Expected
China’s benchmark lending rate was lowered by a smaller-than-expected margin on Monday, after the central bank cut its key policy rates last week to offer more support for the slowing economy.
The one-year loan prime rate was lowered by 10 basis points to 3.45% while the five-year LPR was held at 4.2%, the People’s Bank of China said.
Chinese Developers’ Shares Fall After PBOC Holds Mortgage Rate
Shares of many Chinese property developers were lower in Asian morning trade, as investor sentiment took a hit after the country’s central bank kept its mortgage rate unchanged, exacerbating concerns over problems in the country’s property sector.
Property developers’ shares fell in both the Hong Kong and mainland markets. The Hang Seng Mainland Properties Index dropped 0.4%, with both Longfor Group Holdings and Seazen Group declining 0.8%. In the mainland market, Poly Developments & Holdings Group dropped 1.3% and China Merchants Shekou Industrial Zone Holdings retreated 1.6%.
Big Treasury Rout Lures Fresh Buyers
Bond investors say the summer selloff in U.S. Treasury debt is providing the best buying opportunity in years.
The Federal Reserve’s tightening campaign and the economy’s refusal to buckle under its pressure have lifted yields to their loftiest levels since the 2008 financial crisis. With the Treasury Department revving up its sales of long-term bonds, it is locking in some of the highest federal borrowing costs in years-a development that means bigger interest bills for taxpayers and stronger returns for many fixed-income portfolios.
Why the Era of Historically Low Interest Rates Could Be Over
Despite the Federal Reserve’s raising interest rates to a 22-year high, the economy remains surprisingly resilient, with estimates putting third-quarter growth on pace to easily exceed its 2% trend. It is one of the factors leading some economists to question whether rates will ever return to the lower levels that prevailed before 2020 even if inflation returns to the Fed’s 2% target over the next few years.
Dow Jones Newswires, 21 August 2023 00:00:26
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