Marketmind: Gimme Shelter

Marketmind: Gimme Shelter

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

As the final quarter approaches a relentlessly awkward year for global markets, stocks and bonds are now plunging to new lows as central banks continue to talk hard and debt pressures mount across major economies.

The explosion in British bonds and the pound remains the center of the storm this week, as global credit rating firms and the International Monetary Fund criticized the British government’s plans to cut taxes as incoherent in the fight against inflation and the risk of debt sustainability driving up inequality.

Even US Treasury Secretary Janet Yellen said she is monitoring developments in the UK, though she added that financial markets are “still doing well” with no liquidity issues so far.

But with the pound falling again against the dollar on the back of the credit rating and IMF warnings, the real problem lies in British government bonds, or gold bonds.

Ten-year Treasury yields jumped 1.2 percentage points in a week, and 30-year Treasury yields — usually stable due to regulatory requirements and demand for pension or insurance — are up 5%, double what they were a month ago.

Aside from the contagious effects of other major bond markets from the effect of the funds’ cross-holdings of so-called “risk-free” assets, investors fear that the type of market turmoil taking place in the UK markets could take a life of their own in the mortgage and credit markets and unfold the broader impact of a rally. Interest rates are everywhere as the dollar rises.

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The explosion of record borrowing rates in the UK has already seen mortgage lenders withdraw products due to turmoil in the interest rate swaps market and widespread concern about the impact on liability management in the pension and insurance markets.

British officials have denied a Sky News report that Finance Minister Kwasi Koarting will ask financiers not to bet on the British pound during a meeting with bankers on Wednesday.

With Wall Street stocks hitting a new low of the year on Tuesday, global stocks slumped to two-year lows on Wednesday.

Although Tuesday saw some positive economic news in the US, concerns about a future global recession persisted and reports that Apple (NASDAQ:) was abandoning its plans to boost production of new iPhones reflected some of that. Oil prices fell again.

US 10-year Treasury yields crossed 4.0% for the first time since 2010, meanwhile, as markets bet the Federal Reserve may have to take rates above 4.5% in its anti-inflation crusade.

Federal Reserve Chairman Jerome Powell and a host of other Fed speakers are in the diaries again later on Wednesday.

Key developments that should provide further guidance to US markets later on Wednesday:

* Bank of England Deputy Governor John Cunliffe speaks in London. Swati Dhingra, policy maker at the Bank of England

* European Central Bank President Christine Lagarde speaks in Frankfurt. ECB Board Member Frank Elderson and Slovak Central Bank President Peter Casimir

* US Federal Reserve Chairman Jerome Powell speaks in Washington. Fed Governor Michael Bowman, Richmond Fed President Thomas Barkin, St. Louis Fed President James Bullard, San Francisco Fed President Mary Daly, Atlanta Fed President Rafael Bostic, Fed President Chicago Fed Charles Evans.

* US Retail and Wholesale Inventories for August, US pending home sales for August

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* US Treasury auctions of 2-year floating rate bonds and 7-year notes

* US corporate earnings: Paychex (NASDAQ :), Cintas (NASDAQ 🙂

(By Mike Dolan; Editing by Eileen Hardcastle; [email protected]. Twitter (NYSE:)::reutersMikeD)

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