From a kind of anecdotal perspective, it “feels” like US equities should have sold off sharply on Wednesday (“Feel the market! Good luck!”).
Global growth jitters – the proximate cause of recent market angst and the driver of the mammoth DM bond rally – were palpable. The RBNZ leaned dovish, tipping the next move on rates would likely be a cut. Obviously, they couldn’t just stand by as their global counterparts pivoted.
“The global economy has slowed and dovish remarks by other central bankers have sent their currencies down, and the Kiwi up [because] that’s what happens when, as the RBNZ was doing until today, you stand out from the crowd”, SocGen’s Kit Juckes wrote. “We just won’t all it a currency war, at least not yet! That happens when President Trump starts talking about the currency more frequently”, he added.
This is indicative of how the dominoes get tipped. One dovish pivot “deserves” another, because otherwise, you get unwanted currency appreciation at a time when inflation is still being stubborn.
In any case, that was just the latest example of policymakers attempting to walk the fine line between, on the one hand, acknowledging risks to growth and inflation and avoiding undesirable currency strength, and on the other, not accidentally “confirming” the market’s worst fears about those very same risks to growth. It’s an absurd paradox, to be sure.
10-year yields stateside dropped to their lowest since late 2017 as consensus continued to build among market participants that the Fed will be forced to cut rates by year-end.
Some are fully on board with the notion that Fed cuts are some semblance of “imminent”, while others, not so much.
“Over a shorter horizon, there’s less risk rate cuts are realized–in 2006, it took nearly a year of front-end forward yield curve inversion at or around current levels before the Fed actually began to cut rates”, Goldman wrote Wednesday. “That is, even if, contrary to our expectations, data were to deteriorate, we suspect it will take the Fed some time before it actually begins easing.”
Don’t tell that to Stephen Moore lest he should become “really furious” with you.
The manic moves in US rates have been amplified by hedging flows.
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Pervasive worries that Europe is “turning into Japan” were underscored when bund yields dropped below JGB yields for the first time in years as Mario Draghi reiterated that risks across the pond remain skewed to the downside.
As noted first thing Wednesday morning, Germany sold 10-year notes at a negative rate for the first time since 2016.
Meanwhile, oil fell below $60.
So, if what you wanted to do was latch onto the global growth scare as an excuse to de-risk, you wouldn’t have had a hard time finding confirmation bias on Wednesday.
And hell, if that wasn’t enough of a reason to lighten up, markets got a heavy dose of idiosyncratic EM risk in the form of an absolute meltdown in Turkish equities as Erdogan’s effort to stabilize the lira ahead of local elections this weekend caused extreme consternation. Stocks in Turkey dove the most since the coup.
Long story short (and if you want the long version, you can find it here), Erdogan is going to prevent banks from providing lira liquidity until the elections are out of the way. After that, it’s anyone’s guess how things play out.
“Following the recent aggressive funding squeeze engineered by the CBRT, we see scope for some near-term TRY outperformance as short positions become prohibitively expensive to hold [but] the domestic set-up post-local elections poses risks, as rhetoric suggestive of expedited rate cuts would likely result in TRY weakness”, Barclays wrote Wednesday.
TD called Erdogan’s efforts “a close equivalent to capital controls”. “Having found a new and apparently effective weapon to use in their fight to support the lira, there is a clear risk that the authorities will use it again”, TD’s strategists wrote in a note. That said, the bank contends that “things will return to relative normality after the election”. We’ll see.
Oh, and Theresa May said she’ll quit if she can get her Brexit deal passed. Of course nobody cares at this point. That’s the weird thing about Brexit – market participants habitually put it on their “top worries” list, but the whole thing has become so hopelessly farcical that with the possible exception of FX traders, you’d be hard-pressed to find anyone who professes to give a damn outside of that one time a month when someone asks you to make a list of the “biggest tail risks”.
Through it all, Wall Street managed to close just a half a percent lower which, again, somehow feels like a bullet dodge.
