(Reuters) – A look at the day ahead in European and global markets from Wayne Cole.
Asian stock markets have been in a sea of losses as investors flee risk and many crowded trades are being unwound in a disorderly manner. Popular positions from yen to cryptocurrency are being hastily unwound as volatility rises and liquidity dries up.
There is also talk that investors are being forced to close profitable positions because they need to cover losses elsewhere, which may be one of the reasons why gold has suffered.
The sell-off halted trading in several markets including the US and Australia, while the Nasdaq fell 7% at one point. The index is now in bear territory, down 20% from its peak less than a month ago.
Investors are hoping that central banks will step in to save the day with a global version of the Fed’s sell-off plan. Futures now point to a 73% chance that the Fed will cut rates by 50 basis points in September, and a total of 115 basis points by Christmas. Rates are expected to be close to 3% by the end of next year.
Markets had priced in another 74bp cut from the European Central Bank and a 47bp cut from the Bank of England. There were also doubts about whether the Bank of Japan would go ahead with another rate hike in October, less than a week after turning hawkish. As a result, Japanese government bonds have recovered all their recent losses, sending 10-year yields back to their April levels.
There’s even talk of an inter-meeting Fed easing, which seems like just optimistic thinking from investors who are already reeling from the losses. Fed Chairman Goolsbee played down the impact of Friday’s payrolls report, and he has a chance to do so again later Monday, along with San Francisco’s Daly.
The unemployment rate remains at a historically low 4.25%, and analysts expect it to fall again in August. Those who cite Sahm’s Rule should remember that economics is not really a science, no matter how much we might like it to be. It wasn’t that long ago that negative interest rates were considered impossible.
The Institute for Supply Management’s US services index is also due, and analysts are hoping for a rebound after June’s surprise decline. The jobs index is clearly worth watching given the number of people working in the sector. The Fed’s survey of senior lending officials will be watched more closely than usual for any signs of lending pressure.
Notably, Treasuries failed to extend Friday’s massive rally, with the 10-year yield back at 3.78% after hitting a low of 3.723% earlier. Fed funds futures also pared early gains, especially in the 2025 contract.
But the two-year yield is now just eight basis points away from slipping below the 10-year yield and turning the curve positive for the first time since mid-2022. That shift has sometimes heralded recessions in the past. Goldman Sachs has raised the recession risk to 25%, while JPMorgan estimates it is nearly double that.
Key developments that could impact markets on Monday:
– Final global services PMIs, EU producer prices
– July ISM Services Survey, Fed to Release Senior Loan Officer Survey
– Chicago Fed President Austin Goolsbee speaks, as does San Francisco Fed President Mary Daly.
(Written by Wayne Cole, Edited by Christopher Cushing)