(Neil Wilson – Markets.com)
Sterling for sale
The pound has steadied somewhat after it fell to a record low against the US dollar early Monday morning in thin Asian trade. It made steady progress throughout the European session, recovering from around 1.03 to above 1.09 – a very wide trading range for a single day. Cable then came off again as the Bank of England responded with a rather timid statement saying it won’t hesitate to raise rates at “its next scheduled meeting”, which rather fell short of what the market was calling for. It said little and praised recent government actions. The Treasury also said there will be more announcements in the coming weeks describing supply side reforms that might sweeten things for the market somewhat. Falling again to 1.0630 yesterday evening, GBPUSD is up to 1.08 this morning. So, steady enough for now – they’ve bought themselves a bit of time it looks – but few think the pound has made a bottom.
Ok, no one said the BoE was in an easy position with that statement – the risk of doing a lot and the market calling its bluff was not one they wanted to chance. Scarred by events in 1992 perhaps. Fair enough. It chose to look toothless rather than clueless. And certainly you can say that appearing to panic might be counterproductive and miss the wider point: sterling is just one of many currencies on the ropes this year against the dollar, whose strength is undeniably causing havoc across financial markets as the Fed tightens aggressively. Nevertheless, the pace at which sterling sold off was clearly a direct response to the budget; a record low for the pound against the dollar is nothing to be proud of. Also, whilst global bond yields are rising, the speed at which UK gilts imploded was staggering; way beyond what is happening elsewhere in the world. It was incredibly disorderly –we have not seen this elsewhere this year; rather it’s been a steady grind. Spreads too point to a policy error – or at least what some are calling a ‘stupid’ premium attached to UK policy. The gap between 10yr UK and German bond yields widened to 207 basis points, the highest since 1992. Credibility is being tested and is creaking.
The Atlanta Fed’s Raphael Bostic said on the UK’s budget last Friday that it had “increased uncertainty”. He added: “The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the US economy is going to perform.”
Today’s trade is marked by a slight reversal of some of the outsize movements of the last couple of days. UK gilt yields have come off a touch but retained most of the recent spike; the 5yr under 4.4% after touching 4.58% earlier. The 2yr dropped to 4.20% from 4.52%; encouraging signs of more stability within the market. Gilt yields can probably move a bit lower now as markets, in light of the BoE’s position, will need to rethink the kind of 200bps-by-November pricing we saw yesterday. We’re also seeing the dollar move lower –DXY dropping to 113.30 from 114.20 struck yesterday – a cooling in upwards USD pressure that is allowing something of a relief rally for stocks.
Equities are stronger today
The FTSE 100 ended yesterday unchanged at 7,020 and is 40 or so points firmer this morning. European indices that had fallen a bit yesterday are making up the ground this morning in early trade with the DAX rallying 1.4% to nudge the 12,400 level again. US futures are firmer by more than 1%.
US stocks fell
The S&P 500 posted a new closing low for 2022 and the Dow Jones industrial average fell into a bear market. The S&P 500 declined 1% to 3,655, below the June closing low of 3,666, having fallen as low as 3,644, just 8pts from its intraday low of the year. Futures indicate it will open above 3,700. The Dow also fell 1% to close more than 20% its January high.
The Vix popped out of its recent trend above 30 and with the Vix curve inverted – paying a premium for short-term protection over further out, points to stress about the immediate market backdrop and what is likely in the coming days/weeks. Further out people tend to think you be a lot closer to the Fed pivot so that is when things should improve – a case of riding out the storm for now.
Are US equities now oversold and ready to bounce again? Bespoke has interesting stats showing that the S&P 500’s 10-day advance/decline (A/D) line dropped to a record low, which mean underlying breadth over the last 10 trading days “has been the weakest it has ever been in the last 32 years”. Relative strength index for the S&P 500 is at a level at which we have previously witnessed bounces occurring…but it still feels as though the moment of total capitulation is yet to come.
Dollar strength remains the driving force – or wrecking ball – in financial markets at the moment. It’s not only wrecking relative currency stability but is a major factor in the weakness for equities. MS: “On a year over year basis, the DXY is now up 21% and still rising. Based on our analysis that every 1% change in the DXY has around a -0.5% impact on S&P 500 earnings, 4Q S&P 500 earnings will face an approximate 10% headwind to growth all else equal.” So that’s the E bit of the PE equation. On the P bit, MS says the Fed will maintain restrictive policy for a long time – hard to see the FOMC not needing to go above 5%; they’ll keep going until something breaks.
A better day for risk assets seems to be lifting oil prices a bit after Brent sunk to $82.50 yesterday, its weakest since the middle of January, though it seems to be moving inexorably towards a YTD low.
Softer USD means the euro has bounced back a bit with some more hawkish noises from the European Central Bank seeing markets up bets on the pace of rate hikes. Bundesbank President Joachim Nagel said the eurozone risks runaway inflation. “The risk that long term expectations get de-anchored remains high,” he said in a speech yesterday. “Further decisive action is required to bring the inflation rate down to 2% in the medium term.”
Coming up…a slew of Fed speakers today starting with Chuck Evans of the Chicago Fed, who’s in London to speak before the Official Monetary and Financial Institutions Forum: “The Future of the U.S. Economy”. Uber-hawk Bullard, San Francisco Fed’s Mary Daly and chair Jay Powell are all due to speak. Also check BoE chief economist Huw Pill who is due to speak later today. For data we look to the US CB consumer confidence, Richmond manufacturing index and new home sales.