A look at the day ahead in U.S. and global markets from Mike
Dolan
A rekindled bond market fire storm and simmering China property
crisis have dragged world stocks to two-month lows, but the
sell-off in Treasuries appeared to ease somewhat on Friday and
more credit easing is now expected from Beijing next week.
Perhaps in a circular logic, the jolt to the financial
system from a potential Chinese demand shock and a surge in
benchmark long-term borrowing rates to their highest in more
than a decade is seeing some demand for bonds returning at these
yields.
Investors certainly seemed to be buying into the latest
rout, with Bank of America reporting that Treasury funds saw
“strong” inflows of $3.9 billion in the latest week, the 27th
straight week of inflows and on course for a record inflow year.
But the swingeing losses in what are seen as ‘safe assets’
and how that infects borrowing more widely is unnerving for
many, with 30-year U.S. fixed mortgage rates hitting their
highest in more than 21 years this week at 7.09%.
The price hit is bruising. Exchange-traded funds invested in
Treasury debt of more than a year’s maturity hit their
lowest for the year this week, down 2.3% since mid-year and off
more than 5% from the 2023 high in early April. Junk bond
indices have fallen to their lowest in a month.
Yields backed off somewhat on Friday – with those on the
30-year bond falling back almost 10 basis point from
the 12-year high near 4.43% hit yesterday and 10-year real
yields ebbing by the same amount from 14-year
highs near 2%.
With the Federal Reserve’s annual Jackson Hole conference
next week now in focus, there was little respite on Thursday
from the week’s red-hot economic soundings and both labour
market updates and the Philadelphia Fed’s latest business survey
showed brisk activity continued into August.
But equally there was little let-up in the bad news from
China’s ailing economy and real estate sector. Embattled
developer China Evergrande filed for bankruptcy
protection in a U.S. court on Thursday as part of one of the
world’s biggest debt restructuring exercises – as fears of
property market contagion abounded.
China’s securities regulator said on Friday it would cut
trading costs, support share buybacks and introduce long-term
capital as it unveiled a package of measures aimed at reviving
the stock market and boosting investor confidence.
Shanghai stocks fell 1% and Hong Kong lost
another 2% on Friday and the offshore yuan weakened again
despite Thursday’s attempt by the People’s Bank of China to
marshal support for the currency via state banks.
Other Asian bourses and European stocks fell too, with U.S.
stock futures also in the red before the open. Emerging market
equity indices teetered near two-month lows too.
The dollar was more mixed generally – with Japan’s
yen gaining some ground on the U.S. yield retreat but
sterling hobbled by weaker-than-forecast UK retail sales
data.
Top cryptocurrency bitcoin hit a fresh two-month low
on Friday amid a wave of risk averse sentiment and the week’s
rise in U.S. real yields.
Events to watch for on Friday:
* U.S. corporate earnings: Palo Alto Networks, Deere, Estee
Lauder
* U.S. Treasury auctions 30-year inflation-protected securities
* U.S. President Joe Biden hosts Japan Prime Minister Fumio
Kishida and South Korea President Yoon Suk Yeol in a trilateral
summit at Camp David
(By Mike Dolan, Editing by Elaine Hardcastle
[email protected]. Twitter: @reutersMikeD)
