A rough session for Gilts

US equities were weaker Monday, S&P down 0.7%. No panic, but instead, there was a painfully slow and steady drift lower in classic risk-off action. Still, stocks bounced off the lows after a slightly dovish skew in remarks from the Fed’s Leal Brainard, who suggested the board sees “tentative evidence of some rebalancing” in the labour market, “paying close attention to global risks,” household excess savings “is lower than previously estimated.”

Markets have been down this dovish pivot road before, and investors have been consistently too quick to price a fed pivot. So, traders will be more cautious about falling into the bear trap again. I suspect that last week’s roller-coaster ride, which saw the biggest two-day rally in the S&P 500 since April 2020 before plummeting to September lows, should keep investors on the defensive until there is a meaningful sign of inflation cooling the feverish demand for goods eases.

At this stage of the rate hike cycle, the 70s taught the Fed there are enormous risks of easing prematurely. But economic storm clouds are building that could foreshadow a global recession and crush the capital markets on that eventuality.

It was another rough session for Gilts. 10yr yields are up 24bps, 30yrs up 29bps even as BoE announced a new short-term funding facility to minimize volatility when its emergency bond-buying programme expires later this week. The UK debt market is in an absolute mess without a mop in sight. The front end has to price what is likely to be a very hawkish BoE outlook on a combination of fiscal view and Fed catch-up. The 3–5-year sector has to price the paper deluge from the government to pay for its splurges. At the same time, the 30-year is getting whacked by pension funds, which are still selling to get portfolios back in balance.

Missile attacks on Kyiv earlier on Monday also contribute to the risk-off mood in the market.

OIL 

In the wake of dreary China economic data, no let-up in Covid-related restrictions in Shanghai, and a high level of pessimism engulfing global risk assets, oil is trading lower as demand concerns temporarily outweigh tight markets.

FOREX

The US dollar rallies across the board as global risk sentiment deteriorates. Still, one thing the currency market has going for them is that traders are hugely hedged long USD heading into what is likely to be a northern hemisphere winter of despair. Dollar overbought conditions could certainly slow down the rally

USDJPY is creeping higher, given the pair’s strong beta to higher US yields which have been climbing post-US payroll. And this should set up a good test of wills between the market and Japan’s MoF if we press USDJPY 145.85, the level where the BoJ recently physically intervened.

Flows overall are on the lighter side, with the US celebrating Columbus/Indigenous Peoples’ Day.