Morning Bid: Eye of the Storm

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A look at the day ahead of Mike Dolan’s US and global markets.

As Hurricane Ian raged and set his sights on Cuba and Florida, a global financial storm calmed down the bond and currency markets moderately – though likely only temporarily.

Ian strengthened to a Category 3 hurricane on Tuesday and is expected to make landfall in Cuba, with a path expected to reach West Florida by the end of the week. read more

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For all his potential destruction, Ian is not yet appearing on the radar of the global markets. But that’s mostly because global investors are battling a financial storm of their own — one that’s spreading across major economies as governments and central banks try their own way in coping with raging inflation, an energy shock and looming recessions.

The US Federal Reserve’s drive to quell decades-long and sticky core inflation continues to push interest rates expectations, raising treasury borrowing costs and boosting the dollar around the world — forcing others to keep pace or even more inflation fuel through dollar-priced energy and commodity imports.

‘Contamination’ – a dreaded word in market circles – crops up regularly in investment and banking research.

Britain’s alarming attempt last week to cut taxes to push growth to a rise in inflation sent the pound plunge to record lows, UK government bond yields rose and pressured the Bank of England into more extreme rate hikes. to keep the ship stable and forced mortgage lenders to pull out. Products. read more

The near collapse of the bond markets of a G4 reserve currency, which has now lost more than 20% against the dollar this year, is now fueling European and even US bond markets with uncertainty about economic and central bank policies everywhere. goes up a notch. read more

Even Atlanta Fed President Raphael Bostic said on Monday that response to the UK government’s plan was “a real concern” and could further weaken the broader European economy, rebounding on the United States in a short time. . UK debt auctions this week will be watched very closely.

CURRENCY VOLATILITY

Currency market volatility recorded by the CVIX index is at its highest since 2009, in the immediate aftermath of the Lehman Brothers crash.

The volatility of the US stock market reflected in the Vix “fear index” (.VIX), meanwhile, closed above 30 for the first time in three months.

With the third quarter coming to an end Friday and markets waiting for signals from many of the central bank’s speakers later in the day, stocks, bonds and currencies seemed calmer on Tuesday. Asian and European stock markets stabilized, with Wall St futures higher before the opening and the dollar showing a slight pullback against most currencies except the Chinese yuan. Even the pound scrambled back to the ground.

But this could be the eye of the storm.

Slowed relative weakening of Italian government bonds against German benchmarks after the weekend’s election appeared to yield a far-right prime minister was notable on Tuesday – with 10-year Italian interest premiums reaching their highest levels since 2020.

Important developments that should give more direction to the US markets later on Tuesday:

* ECB President Christine Lagarde, ECB Vice President Luis de Guindos, ECB Board Member Fabio Panetta all speak

* Bank of England chief economist Huw Pill, BoE chief financial officer Afua Kyei, BoE executive director of Prudential Policy Directorate Vicky Saporta all speak

* US Federal Reserve Chairman Jerome Powell speaks in Washington; St. Louis Fed Chief James Bullard, Chicago Fed Chief Charles Evans Speaks in London, San Francisco Fed Chief Mary Daly Speaks in San Francisco

* US Sept consumer confidence, US Aug new home sales; US Aug durable goods orders, US July house prices; Eurozone Aug credit and money supply; China aug industrial profit

* US Treasury auctions 5-year bonds; UK auctions 2031 gilts; Germany auctions bonds with a maturity of 5 years; Japan to auction 40-year bonds

Deutsche Bank’s Currency Volatility Index Is At Its Highest In Two And A Half Years
UK markets

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By Mike Dolan, editing by Ed Osmond, [email protected]. Twitter: @reutersMikeD

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