With the absence of trading in the U.S Treasury market on Monday, it may have seemed like investors were in for a bit of respite from that risk-off mood.
But don’t go thanking Christopher Columbus just yet, as it looks like the rot that set in for stocks last week may have legs. Add this to the mix: China equities falling apart, Italy budget worries are back and oil prices are under pressure. Casting a pall over everything, of course, is the collapse in U.S. government bonds and fears over higher U.S. interest rates.
Read: Bond-market bloodbath likely to hit mortgage rates soon — another test for the housing market
“If the rise in rates continues at the steep rate of the past few days, continuing to trend upward quickly, the stock market will head into a much more significant correction,” warned a post on the Sun and Storm Investing Market Timing Blog.
Check out: Sure, yields are rising — but it’s the bond market’s velocity that threatens to throttle stocks
Read that, but also check out our call of the day, from UBS’s chief global economist, Paul Donovan, who takes a more sanguine approach, saying we’ve seen far bigger bond meltdowns.
“The media attention on this bond yield move is out of all proportion to the economic and financial implications of the bond yield move of course. This is hardly 1994,” Donovan told clients in Monday update.
Explaining further in an email to MarketWatch, he says the size of the bond-yield move last week is “too small to have any meaningful economic impact. Indeed, the real yield this year (deflating by CPI) has barely moved at all – a 20bp increase in real yields (approx.) is hardly cause for panic.”
What’s more, there’s no big shift in economic data, which has come in just as economist have expected, backing up that bond move, nor any big move in expectations about the Fed. “The Fed debate has resolved into the rather academic argument about the position of the neutral interest rate, not about the pace of tightening accelerating or decelerating,” he says.
“Compare this to 1994. There was a rise in yields of approx. 250bp. This was entirely a real yield increase. There are economic consequences from that sort of a move in nominal and real yields, and thus that was a bond market move that mattered,” says Donovan.
Meanwhile, he says most of the U.S. Treasury market’s customers are “captive investors” — that is, the Fed, along with foreign banks that tend to default to Treasurys without applying the valuation scrutiny other investors do.
“This means that market moves are likely to be limited, and the sort of sell off witnessed in 1994 is unlikely to recur. The bond market is also unlikely to trigger a meaningful economic reaction in the U.S. at the moment,” says Donovan.
The market
Even with bonds out of the picture, Dow YMZ8, -0.34% S&P 500 ESZ8, -0.25% and Nasdaq NQZ8, -0.36% futures are firmly in the red. The S&P SPX, -0.55% Dow DJIA, -0.68% and Nasdaq COMP, -1.16% all closed sharply lower on Friday, dogged by worries about rising rates.
Gold US:GCU8 and silver SIZ8, -1.12% are under pressure, while crude US:CLU8 is also falling and the dollar DXY, +0.41% is climbing, notably against the EURUSD, -0.4426% as Italian budget worries wash around.
Check out the Market Snapshot column for the latest action.
Banks are dragging Europe SXXP, -0.90% south, with Italy I945, -2.35% in the lead. It wasn’t much better in Asia, where the Shanghai Composite SHCOMP, -3.72% finished down 3.7% after China returned from a one-week break.
The chart
After a solid recent run, oil is backpedaling this morning, dogged by reports that the White House could grant waivers to Iran sanctions and that Saudi Arabia has been replacing Iran’s lost oil. Upcoming U.S. sanctions on Iran oil imports from Nov. 4 have been a huge driver for the market.
That brings us to our chart of the day, from Saxo Bank’s head of commodity strategy Ole Hansen, who finds evidence oil bulls may be losing some of their moxie. His chart, from the weekly Commitment of Traders report, tracks how speculators are positioned across various assets.
“Despite all the talk about supply shortages and $100/b before year-end, leveraged funds instead chose to reduce exposure,” noted Hansen on Twitter.
The most striking change in last weeks COT update was the net-selling seen in both #Brent and #WTI crude #oil. Despite all the talk about supply shortages and $100/b before year-end leveraged funds instead chose to reduce exposure. #OOTT pic.twitter.com/6xZ61sdHSG
— Ole S Hansen (@Ole_S_Hansen) October 7, 2018
The buzz
The Nobel Prize for Economics has gone to two Americans — William D. Nordhaus and Paul M. Romer — for work on the interplay of climate and economy.
Citigroup C, -0.28% JPMorgan Chase JPM, -0.56% and Wells Fargo WFC, -0.60% will get the earnings ball rolling later this week, while next week’s biggie is Netflix NFLX, -3.38%
China investors returned from a weeklong holiday and promptly sold off, with worries over the economy, trade and U.S. interest rates hanging over their heads. Perhaps trying to get ahead of things, the People’s Bank of China cut the reserve ratio requirement for banks, a move that fell flat as investors clearly expect more.
Tesla TSLA, -7.05% is up after the company said in a blog late Sunday that the National Highway Traffic Safety Administration has given its Model 3 sedan a glowing report over safety, saying it “has the lowest probability of injury of all cars” the agency has ever tested.
Plus: Tesla fans beg CEO Musk to stop tweeting
Meanwhile Elon Musk’s other company SpaceX lit up California on Sunday, in the first successful launch and landing of its resuable Falcon 9 rocket.
In the latest reaction to the Chinese spy chip story, the Department of Homeland Security said over the weekend it has “no reason to doubt” denials from Apple AAPL, -1.62% Amazon AMZN, -1.04% and Super Micro SMCI, -1.63% that some of their servers were hacked.
The economy
No data for Monday, given the holiday, but the rest of the week will contain some key reports, such as consumer inflation, producer prices and a consumer sentiment number. As well, International Monetary Fund and World Bank meetings will take place in Bali, Indonesia this week.
The quote
“Limiting warming to 1.5ºC is possible within the laws of chemistry and physics but doing so would require unprecedented changes.” — That was Jim Skea, co-chairman of an Intergovernmental Panel on Climate Change working group, commenting on a fresh assessment by the scientific panel that warned a whole lot more has to be done to prevent catastrophic climate changes.
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Taylor Swift makes a rare political statement
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