Markets juggle 5% yields and 150 yen
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[October 23, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Partly unwinding pre-weekend safety hedges related to the Middle East
conflict, world markets are back focused on some critical macro priced
levels and milestones that may once again define the week.
The beginnings of some aid convoys to Gaza and no fresh escalation of
the war there at the weekend at least saw crude oil and gold prices back
off their latest highs on Monday.
But in keeping with that retreat from havens, U.S. Treasuries and
sovereign bonds everywhere resumed their decline and 10-year U.S.
benchmark borrowing rates finally moved up through the 5% level for the
first time in 16 years early on Monday.
The dollar retained its bid as a result and continued to probe the 150
yen level many suspect the Bank of Japan will be keen to protect against
with open-market yen buying. But the buck did slip back on the euro as
the European Central Bank meets this week to assess its 10 interest rate
hikes over 15 months.
The ongoing anxiety in the bond markets, however, prevented a return to
risk assets more broadly and stocks continued to fall around the world
first thing on Monday, with China's blue-chip CSI300 index dropping to
its lowest in 4-1/2 years as the property bust there continues to
smolder.
Geopolitical angst is never far from the surface in China. Shares of
Foxconn Industrial Internet slumped 10% on reports its parent Foxconn,
the Taiwan-based firm which is a major supplier of Apple's iPhones, was
the subject of tax audits and land use probes in China.
What's more, U.S. bonds now enjoy the biggest 10-year yield advantage
against China in 21 years at some 226 bps and Goldman Sachs estimated
capital outflows from China spiked to $75 billion last month, the
biggest monthly figure since 2016.
The U.S. tech sector more broadly is front and center of this week's
third quarter earnings diary on Wall Street - with Microsoft and
Alphabet reporting on Tuesday, Meta on Wednesday and Amazon on Thursday.
But even these megacaps are still in thrall to the worrying squeeze in
U.S. bond markets and the breach of the 5% threshold on 10-year tenors
on Monday.
After a slew of speeches last week, Federal Reserve officials are in a
traditional blackout period ahead of their Nov. 1 policy meeting.
But even though Fed officials appear to have convinced futures markets
that they are likely done in their rate hiking campaign, that's been of
little solace to the long end of the bond market curve - now arguably as
worried about rising debts, deficits and soaring interest servicing
costs.
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., September 11, 2023. REUTERS/Brendan McDermid/File
Photo
That's seen the 2-10-year yield curve gap narrow to as low as 12
basis points - the least inverted that curve has been since July
2022. Both the 2-to-20 and 2-to-30 year curves are now back in
positive territory.
What's more, the slightly amorphous 'term premium' - a risk premium
demanded by investors for holding long-term bonds to maturity as
opposed to just rolling over short-term debt securities - hit close
to 50bps for the first time since 2015, according to the New York
Fed's flavored model.
In Latin America, Argentina's sovereign dollar-denominated bonds
fell by up to 4 cents to the dollar after Economy Minister Sergio
Massa emerged as the surprise frontrunner following weekend
elections. U.S.-listed shares of Banco BBVA Argentina were also down
4.3% pre-market.
The ruling Peronist coalition smashed expectations to lead the
results, setting the stage for a polarized run-off vote on Nov. 19
between Massa and libertarian radical Javier Milei.
In Venezuela, industrial engineer Maria Corina Machado declared
victory overnight in the Venezuelan opposition's presidential
primary, after she tallied a huge portion of votes with the count
just over a quarter finished.
In deals, Chevron said on Monday it will buy smaller rival Hess in a
$53-billion all-stock deal, just weeks after rival Exxon made a $60
billion offer for Pioneer Natural Resources.
Key developments that should provide more direction to U.S. markets
later on Monday:
* U.S. corporate earnings: WR Berkley, Brown&Brown, Cadence Design,
Packaging Corp of America, Alaexandria Real Estate
* Chicago Fed Sept national business survey
* Bank of Israel policy decision
* World Trade Organization holds ministerial meeting in Geneva
* U.S. Treasury auctions 3-, 6-month bills
(By Mike Dolan, editing by Susan Fenton mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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