Are markets heading into a stability risk storm?

Are markets heading into a stability risk storm?
  • The Fed is far from pivoting
  • The Bank of England’s policy confusion
  • Bond markets debt sustainability issues
  • Hackers’ October bonanza
  • ​Key data for the coming week

S&P 500   0.09% QTD and  24.07% YTD
Nasdaq 100   1.68% QTD and  33.90% YTD
Dow Jones Industrial Average   1.79% QTD and  19.79% YTD
NYSE  0.55% QTD and  21.07% YTD 

Stoxx 600   0.51% QTD and  20.89% YTD
DAX   0.38% QTD and  23.37% YTD 
CAC 40   0.97% QTD and  18.66% YTD 
IBEX35   1.43% QTD and  16.67% YTD 
FTSE MIB   0.88% QTD and  25.16% YTD
FTSE 100   0.98% QTD and  7.56% YTD

MSCI World Index   0.23% QTD and  26.86% YTD
Bitcoin   1.18% MTD and  58.56% YTD
Ethereum   2.44% MTD and  64.79% YTD

Note: As of 6:15 pm EDT 12 October 2022

Fed minutes reveal persistent inflation surprise. On Wednesday the FOMC minutes from the September meeting were released. These showed that the continuing high inflation surprised many FOMC members. It also showed that continued disappointing productivity growth and the sluggish gains in the labour force participation seen so far this year, weren't going away anytime soon. The unemployment rate would therefore rise more slowly than in the July projection, meaning that inflation would continue to remain higher for longer due to tight labour markets. Although this signalled continued rate rises, markets were somewhat relieved to see that several participants noted that it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook. Nevertheless, it does appear that the Fed will not be pivoting its policy any time soon as Minneapolis Fed President Neel Kashkari reaffirmed on Wednesday the Fed’s commitment to the current rate-hike path when he was reported as saying the bar for a pivot away from monetary policy tightening is “very high.” This is likely to be reinforced as core inflation, inflation excluding food and energy, and the Fed’s go-to data point, increased 6.6% y/o/y in September, the highest level since 1982. 

USD strengthening will likely continue, as US Treasury Secretary Janet Yellen said on Wednesday that the currency’s strength is the “logical outcome” of different global monetary policy stances. The USD has risen over 17.5% YTD against the GBP, and is up about 14.5% YTD against the EUR, and is up over 27% vs the YEN

This week saw investors reacting to both geopolitical tensions, with the US putting more pressure on Chinese chipmakers, with tech stocks  including ON Semiconductor CorporationMonolithic Power Systems, and Nvidia

It's been a particularly volatile week for energy stocks as promises of continuing rate rises and a global growth slowdown hit the demand outlook including Exxon MobilChevron Corporation, Marathon Oil CorporationDevon Energy CorporationBaker Hughes, and Halliburton

Will the UK government or the Bank of England take the blame? After stepping in last week to purchase longer term gilts to help prevent pension funds with liability mismatches crashing after yields rose significantly following the mini-budget announcement by Chancellor of the Exchequer Kwasi Kwarteng, the BoE governor Andrew Bailey said on Tuesday that the Bank would end purchases on 14 October. It has been forced to take two further emergency interventions earlier this week, increasing the maximum size of its purchases and widening them to include inflation-linked bonds. This has put pressure on pension funds invested in liability driven strategies to reduce their leverage and find ways to better match liquidity requirements. Although the BoE is insisting that the programme will end on Friday despite yields continuing to rise, it is unclear if the UK government will actually change its plans in full or part as market concerns over the sustainability of the government’s tax and spending plans mount.

Are ECB and other bond markets at risk? As the ECB prepares to raise rates at its next meeting, the ECB is also having to think about quantitative tightening (QT), the shrinking of its €5.1 trillion portfolio. As noted by Bloomberg, Luxembourg central bank governor Gaston Reinesch referenced in a blog post that “the pace and schedule of the balance sheet reduction, which will be data-dependent, will be determined in due course.” According Refinitiv Lipper data, global bond funds have seen cumulative outflows of $175.5 billion so far this year as interest rates around the globe continue to rise in response to inflation and a rising dollar. This has raised the question of whether global financial market instability risks are rising. On Tuesday Cleveland Fed President Loretta Mester said that she doesn’t see any “big pending risks out there" and "there's no evidence disorderly market functioning is going on at present." However, this is not necessarily the view taken by investors as they increasingly look at the debt sustainability of various countries, including Italy, and the changing spread differentials between countries. 

Crypto hackers bonanza. According to Chainalysis, 2022 will likely surpass 2021 as the biggest year for hacking on record. So far, hackers have grossed over $3 billion dollars across 125 hacks. It says over $718 million has been stolen from DeFi protocols across eleven different hacks this month so far. About $100 million was stolen from DeFi service Mango after an attacker manipulated the price data of the token, causing a spike in value, and then taking out loans against them.

Key data to look out for this coming week 

Friday: Spanish Inflation data.
Saturday: A speech by ECB executive board member Philip Lane.
Monday: German Buba monthly report from the Deutsche Bundesbank and Italian CPI.
Tuesday: Eurozone ZEW Economic Sentiment survey, German ZEW Current Situation survey, and German ZEW Economic Sentiment Survey.
Wednesday: Eurozone HICP (inflation) data.
Thursday: EU leaders summit and German PPI.

Wednesday: Inflation data: CPI, PPI and RPI.
Thursday: GfK Consumer Confidence Survey results.

In the US:
Friday: Michigan Consumer Sentiment Index, Retail sales data, Fed Index of Common Inflation Expectations, University of Michigan 5 year Consumer Inflation Expectations.
Tuesday: Industrial production and capacity utilisation data. 
Wednesday: Building permits, Housing Starts, the Fed’s Beige Book. 
Thursday: Initial and Continuing jobless claims, and the Philadelphia Fed Manufacturing Survey.

Global: The IMF/World Bank Autumn meeting will conclude on Sunday, 16 October 2022.

Upcoming Corporate Earning Reports:

Friday: UnitedHealth GroupJPMorgan Chase & CoWells FargoMorgan Stanley
Monday: Bank of AmericaCharles Schwab
Tuesday: Johnson & JohnsonLockheed MartinNetflixHasbro
Wednesday: TeslaProcter & GambleAbbott LaboratoriesIBMLam ResearchBaker HughesPPG Industries
Thursday: Union Pacific CorporationPhilip Morris InternationalAT & TBlackstoneFreeport McMoranNucor Corporation

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

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