Last week, markets were shaken again by coordinated tightening efforts that started on Wednesday with Sweden’s Riksbank delivering a surprise 100bps tightening move which was not welcomed by foreign exchange markets as the krona responded with a 1.1% decline to the news, closing the week with a 2.3% loss vs. an already sharply weaker euro.
On Tuesday, the August German PPI delivered a shock, coming out at it strongest rate ever, both in yoy (45.8%) and mtd (7.9%) terms, accelerating a bond selloff that persisted throughout the week except in Japan which responded to its own strongest CPI reading since 2014 (2.8%) and goods price inflation (5.7%) with an even more aggressive and unscheduled bond buying program, only to forewarn traders that it was not ready yet to concede any ground on yield curve anchoring policy that sets apart the BoJ from the rest of the central bank community, a little bit further every day. Just as JPY logically weakened further on the move, Japan was then forced to join action to words, intervening for the first time in 20 years in FX markets to prop up the yen on Thursday. This was however not sufficient to prevent JPY to close the week with another loss of 0.3%.
EURCHF initially rallied following the SNB own decision to end 10 years of negative interest rates by hiking rates by 75bps but this rally petered out towards the end of the week.
Adding to last week’s pressure points, on the war front, Russia announced plans to annex four regions in the country's east and south, while Moscow announced a broader mobilization which combined with the declaration of V. Putin about the potential use of nuclear weapons, delivered a clear ratcheting up of geopolitical tensions with possible ramification on wheat exports which despite a further decline of commodities closed the week with a 2.4% advance.
The White House said that the Kremlin “had been warned on nuclear weapons” (whatever that meant about already known mutually assured self-destruction risks).
While the equity and bond markets selloff accelerated, FX markets were hit by bout of risk aversion that weakened CNY by another 2% along with most other USD pairs. Credit markets were not spared sending China’s CDS 27bps wider on the week (to 101bps) with US and European HY suffering similar losses.
L. Summers blasted the new economic measures decided by new UK Prime Minister Liz Truss, saying that implementing the largest (and potentially unaffordable) tax cut since 1972, coupled with QT and BoE rate rises was like hitting both the brake and the accelerator simultaneously, opening the door for GBP to drop more and below parity on the cable (GBPUSD). “It makes me sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market”, he said to Wall Street Week.
L. Summers also flagged the dangers of a surging dollar which is adding to inflationary pressures around the world. The situation was sufficiently tense that the Bank of Korea asked foreign-exchange traders to provide hourly reports on the demand for dollars as a way to ramp up oversight of currency markets and help stem the won’s slide.
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Over the past week, the S&P500 sold off by -4,6% (-22,5% YTD, Z-score -2,3) while the Nasdaq100 sold off by -4,8% (-30,8% YTD, Z-score -2,2). The US small cap index sold off by -6,5% (-24,8% YTD, Z-score -2,6). AAPL dropped -0,2% (-15,3%).
Cboe Volatility Index rallied 13,8% (73,8% YTD, Z-score 2,5) to 29,92.
The Eurostoxx50 sold off by -4,1% (-20,0%, Z-score -2,6), outperforming the S&P500 by 0,5%.
Diversified EM equities (VWO) sold off by -5,4% (-24,1%, Z-score -2,4), underperforming the S&P500 by -0,9%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies rallied 3,1% (18,3%, Z-score 3,1) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -1,1% (-7,9%).
10Y US Treasuries underperformed with yields rising 24bps (217bps) to 3,68%. 10Y Bunds climbed 27bps (220bps, Z-score 2,1) to 2,02%. 10Y Italian BTPs underperformed rising 31bps (317bps, Z-score 2,6) to 4,34%, underperforming Bunds by 11bps.
US High Yield (HY) Average Spread over Treasuries climbed 25bps (229bps, Z-score 2,1) to 5,12%. US Investment Grade Average OAS climbed 4bps (62bps) to 1,62%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 21bps (87bps, Z-score 2,3) to 1,42%.
Gold dropped -1,9% (-10,1%, Z-score -2,2) while Silver sold off by -3,7% (-19,0%). Major Gold Mines (GDX) sold off by -6,5% (-29,9%, Z-score -2,4).
Goldman Sachs Commodity Index sold off by -4,0% (21,4%). WTI Crude sold off by -7,5% (4,7%).
Overnight in Asia,,,
S&P500 -14 points; Nikkei -2.0%; CSI300 +0.8%
Some positive news for the UK was published overnight with House prices reportedly rising 0.7% this month after a 1.3% drop in August, shaking off higher borrowing costs. However, GBP plunged 2.5% vs. EUR after Kwasi Kwarteng vowed to press on with more tax cuts, even as financial markets delivered a damning verdict on the new Chancellor of the Exchequer’s fiscal policies. The measure included suppressing the cap on global bankers’ bonuses…”to keep jobs in London and not have them move to Paris or Frankfurt” which likely looked like a casting error to many (timing wise at least). Global investors “may take fright” from ballooning budget deficit and current account deficit, “causing a major crisis for GBP,” Bank of Singapore chief economist Mansoor Mohi-uddin said this morning.
China should make further efforts to use monetary policy to stabilize economic growth and expand domestic demand, and there is no need to be overly concerned about inflation, according to a survey conducted by the Securities Times. This is helping Chinese markets this morning.
Right Wing block of G. Meloni stands to lead Italy’s most right-wing government since World War II (with little impact on the BTP/Bund spread so far as this outcome was expected). The right bloc won’t get a super majority, reassuring investors who were concerned about potential changes to Italy constitution, Bloomberg reported.
China reintroduced a measure aimed at making it more expensive to bet against the yuan via onshore derivatives. Earlier this month, the PBOC also reduced banks’ foreign-currency reserve requirement to boost the currency.
German Chancellor A. Scholtz secured just one shipment of LNG from his visit to the UAE, highlighting how difficult it is to secure additional supplies crucial to Germany to prevent blackouts.
In Iran, the death of a young woman in police custody set off protests nationwide over the week end.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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