Bond, China stocks, and rouble decline

Bond, China stocks, and rouble decline

A Bruising August for Bonds Sends Shockwaves Through Global Markets

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A look at the day ahead in U.S. and global markets from Mike Dolan

A bruising August for bonds continues to unsettle world markets deep into the summer holiday season. China’s ailing property sector, in particular, has sent shockwaves through stock markets. Additionally, a buoyant dollar has hit many currencies, most notably Russia’s rouble. Despite the typical thin trading volumes during the summer months, recent market developments have raised concerns among investors.

The backup in long-term U.S. bond yields over the past couple of weeks, despite relatively unchanged expectations for Federal Reserve policy moves, has clearly unsettled investors. While many attributed this yield pop to Fitch’s surprise move to remove the United States’ AAA sovereign debt rating on August 1, as well as the influx of new Treasury bond and bill sales, there are other factors at play.

Despite 2-year Treasury yields remaining below 5% and lower than midyear levels, 10-year Treasury yields continue to reach 9-month highs around 4.20%. As a result, the yield curve has disinverted by approximately 20 basis points this month.

These bond market pressures have emerged despite positive consumer price inflation news last week. In fact, there have been signs of household inflation expectations ebbing to their lowest levels in more than two years. Moreover, Goldman Sachs has recently forecasted the first Federal Reserve rate cuts by the middle of 2024.

Surprisingly, interest rate futures continue to assume that the Fed is done with rate hikes. They are currently pricing in only about a one-in-three chance of a further hike by year-end and a cut from the current rate by May.

However, aside from concerns about debt supply, bonds may be unnerved by various other factors. These include a surge in energy prices and a fading of disinflationary annual base effects. Moreover, it is crucial to consider the potential impact of a reassessment and repositioning of the global investor overweight in bonds since the beginning of the year. Furthermore, the intensifying U.S.-China investment restrictions have raised concerns about the stability of China’s massive holdings of U.S. Treasury and mortgage bonds.

In addition to these factors, Japan’s recent monetary policy tweak may have had some backwash on Treasury bond investments. As the yield gap between Japan and the United States widens, the yen continues to slide, briefly hitting a 2023 low on Monday.

While the dollar surges against various currencies, it has had a particularly striking impact on Russia’s rouble, reaching 100 roubles for the first time since shortly after the Ukraine invasion last year. This has drawn criticism from the Kremlin, blaming the Russian central bank’s overly loose monetary policy.

Shanghai and Hong Kong shares kicked off the week on a negative note. Both markets saw heavy falls as the debt problems of property giant Country Garden intensified. As a result, onshore bonds were suspended and company shares plummeted by 16%, hitting a record low. This downward trend extended to other Asian stocks as well.

Meanwhile, Wall Street futures and European bourses are on the rise. U.S. investors are anticipating a pivotal week for assessing retail activity, with July’s national retail sales data and second-quarter earnings reports from major retailers expected on Tuesday.

Today’s events to watch out for include the U.S. Treasury auctions of 3- and 6-month bills.

Key Market Indicators:

U.S. Expected Inflation Rate:

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Over the past month, the expected inflation rate in the United States has steadily increased.

Comparison of Global Markets:

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A visual representation of the performance of global markets illustrates the impacts of recent market developments.

China’s Country Garden Debt Crisis:

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The ongoing debt crisis faced by China’s largest property developer, Country Garden, has significantly affected its share prices.

U.S. Stock Market Comparison:

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A comparison of the U.S. stock market’s performance over the past year provides insights into recent market fluctuations.

This article highlights the challenging situation faced by global markets due to the ongoing bond market turmoil. Understanding the factors contributing to this instability is crucial for investors to make well-informed decisions. Moreover, monitoring events and key market indicators will provide valuable insights, allowing for a more comprehensive understanding of the situation.