MARKETS

US equities were weaker Wednesday, with S&P down 0.7% on mixed earnings reports. US10yr yields up 12bps to 4.13%. UK gilts rallied slightly, even as UK home secretary Suella Braverman quit after a “technical breach” of security rules leading market participants to conclude that the UK government is in shambles.

US stocks turned lower for the first time this week as Treasurys saw a wave of selling, and treasury yields ran up a one-way street breaching above critical support level with the 10yr yield at 4.13%. Long-duration and rate-sensitive stocks got crushed as equities were unable to decouple from the broader macros tape overnight; indeed, it was an ugly session for higher beta growth, consumer discretionary, housing, and Chinese ADRs

Besides high Treasury volatility, the equity market also has to deal with high Treasury yields. The 10-year yield is at 4.13 %, vs. 2.60% in July.

For all the talk of a looming recession and the Fed raising until something breaks, US real rates are holding up much more than one might expect; hence, downward resistance may get evaluated in a big way with macro uncertainties looming.

 

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In Asia, FX and local government bond yields are now playing a dominant role in affecting Asian equities versus oil at the start of the year, primarily due to rising US real yield and dreary China growth and property activity through the summer.

As is often the case, rising US yields and the strong US dollar are the sledge hammers pounding global equities lower.

OIL 

Whether it is White House headlines, Europe vs Russia or USA vs OPEC, one thing is sure; the oil patch will turn increasingly politically provocative over the next few weeks.

I think yesterday was a case of the market selling the SPR headlines but then buying the facts.

Markets will mostly ignore further releases from the SPR – prices are elevated because of the medium- and longer-term gap between supply and demand resulting from years of oil industry swoon and the resulting low CAPEX.

So, the impact of additional SPR releases will likely have diminishing returns with SPR at a multi-decade low. The plan is to commence re-filling purchases when WTI falls below $72/d – a lower floor than implied by OPEC+ actions, but a base, nevertheless.

The market will be interested to know what the administration may do to drive domestic production. In theory, short-cycle US shale production can pick up relatively quickly. Still, the low DUC well inventory and management teams are now conditioned to prioritize free cash flow generation and shareholder returns over drilling new holes; the speculative oil community could be weary about chasing this down.

Finally, if the White House puts export limits to keep a lid on domestic gasoline prices, it will raise prices outside of the US without a commensurate decline in.

FOREX 

Risk took a turn in Wednesday’s New York session. The USD ended the day stronger among most pairs on the back of the rates sell-off and safe-haven demand against the backdrop of a plummeting Yuan.

USDCNY’s 9.15 am fix on Thursday is a big focus as the USDCNH spot traded to a record high in the New York session on Wednesday. Reuters estimate is at 7.1438 (with adjustment). A stronger-than-expected fix is likely, especially with the offshore CNH spot now trading above the -2% (6.9682) /+2% (7.2527) onshore spot band based on Wednesday’s CNY fix at 7.1105. The market should expect more headlines from authorities regarding FX and an increased likelihood of further policy action

Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT