Marketmind: Not nice out there

October 5, 2021

A look at the day ahead from Sujata Rao.

Inflation? Reflation? Stagflation? Whichever ultimately turns out to be correct, markets are running scared, with world stocks at the lowest since July and some 6% off the record highs hit a month ago.

Brent crude has hit new three-year highs above $80 a barrel after OPEC+ producers stuck to their output policy despite pressure to pump more oil. Record high gas prices and below-average European inventories portend a winter of higher heating and power bills for consumers and small businesses alike.

China’s property sector problems and a power crunch that’s idling factories meanwhile pose a threat to economic growth; developer Fantasia has joined Evergrande in missing a coupon payment and borrowing costs for “junk”-rated Chinese firms have soared.

Now add in the risk of a default in the world’s biggest economy. This according to Moody’s could cause U.S. economic activity to shrink nearly 4%, eliminate at a stroke 6 million jobs and lift unemployment towards 9%.

All that is keeping U.S. 10-year bond yields well below three-month highs touched last week while sending up shortest-dated borrowing costs — one-month Treasury bill yields are at the highest since last October.

U.S. credit default swaps, derivatives investors often use to hedge exposure, have risen to one-year highs.

For a graphic on Spiking credit default swaps:

https://ift.tt/2Yr5vQr

Energy costs, together with a dollar standing near one-year highs, will inevitably tighten global financing conditions, even as more central banks start to remove pandemic-time stimulus.

The Federal Reserve will almost certainly start unwinding stimulus from next month and New Zealand on Wednesday is expected to become the second developed country after Norway to hike rates.

Wall Street is attempting to claw back some of its losses from Wednesday when the Nasdaq plunged more than 2%. Futures are pointing higher there and European shares just opened firmer, although Japan’s Nikkei slipped to one-month lows.

Key developments that should provide more direction to markets on Tuesday:

–The Reserve Bank of Australia held their monetary policy unchanged in its Tuesday meeting, as expected.

–Japan’s services sector activity shrank for a 20th straight month in September

-UK passenger cars data

-BOE’s Dave Ramsden speaks

-ECB board member Fernandez Bollo speaks

-Fed speakers: Richmond Fed’s Thomas Barkin, Vice Chair for supervision Randal Quarles

-Euro zone PPI

-Romania central bank meets

-U.S. trade balance/ISM PMIs

(Reporting by Sujata Rao; editing by Dhara Ranasinghe)

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