Higher bond yields hit Nasdaq, Oil continues to rally

Nasdaq led markets lower again, down 0.5% in morning trade, with traders concerned about a continuing sell-off in US bonds which took ten year yields to their highest level since 2007. US mortgage rates hit 7%, with many commentators looking to an 8% peak. Further reading of the Fed’s July meeting minutes led many to believe that short rates are headed higher to curb inflation. Oil bucked the trend, up 1.7%, continuing a recent rally.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Fed Minutes highlight upside rate risks

The Federal Open Market Committee Minutes for July, released yesterday, revealed that “most” members still believe that the focus must be on staying the course to tame inflation amid concerns that they do not make the same mistake made by the Fed in 1980 when it pivoted too soon, and the nation paid a steep price for getting things back under control following that mistake. The Minutes also identified concerns that raising interest rates may hurt the economy, leaving “some” members reluctant to raise rates further at future meetings. So, the Fed is walking a tightrope to set interest rates high enough to curb inflation without crunching the economy.

Keep in mind that the whole point of rate hikes is to hurt the economy in order to slow hiring to tame wage inflation while slowing consumer buying. The Fed continues to say that it is focused on thedata, and plenty will be released ahead of next month’s meeting, but to this point the data suggests that we could see another rate hike – possibly as soon as the September meeting. That would likely surprise most traders.

Big short investor takes out equity hedge on S&P 500 and Nasdaq 100

"Big Short" investor Michael Burry, who called the 2008 mortgage crisis and won big on his credit bets, has now made two large bets against ETFs that track the S&P 500 and Nasdaq 100 with a combined notional value of $1.6 billion on June 30. Burry's Scion Asset Management held bearish put options on 200,000 shares of the SPDR S&P 500 ETF Trust, as a hedge against a major market sell-off, citing the risk of seemingly safe index funds which in fact have large positions in high valuation stocks like Nvidia, Tesla and others. Burry has been ringing the alarm on stocks and bonds for some time, identifying the "greatest speculative bubble of all time in all things" and predicted the "mother of all crashes" in the summer of 2021, later qualifying his view as being too early.

China’s property woes deepen economic concerns

China’s economic problems deepen. Seventy percent of the assets held by Chinese households are tied up in property, so its’ no surprise that a downturn in the property sector and housing values tends leads pullback in consumer spending. Data released this week shows that property foreclosures rose by nearly 20% in the first half of this year, with over 300,000 foreclosures, due to mortgage payment defaults. Chinese President Xi Jinping asked people to be patient and urged resilience in pursuit of “national rejuvenation,” but concerns are growing amid the lack of any meaningful government reform. Analysts interpreted his comments as tolerating slow growth for China.

Claims data continues to highlight tight labor market

• Today’s numbers again confirm that the jobs sector remains tight, supporting ongoing wage inflation
• First-time claims for unemployment benefits fell to 239,00 in the week ending August 12, as expected, and down from 250,00 the previous week
• The four-week moving average for claims rose modestly to 234,250, up from 231,500 the previous week
• Continuing Claims for the week ending August 5 rose 32,000 to 1.716 million, while the four-week moving average fell by 8,250 to 1.693 million

   

Philly Fed hints at a pickup in manufacturing

• The Philadelphia Fed manufacturing index rose to 12 for August, ahead of the expected -10 reading, and up from -13.5 in July
• That was the first positive reading for the Philadelphia Fed district in a year
• The numbers suggest overall expansion for the sector this month, with indices for current activity, new orders and shipments moving into positive territory
• However, surveyed firms continue to indicate overall increases in prices and declining employment, while also anticipating lower expectations for growth over the next six months

TODAY’S MAJOR MARKETS

Equity markets sell off, led by Nasdaq

• Equity markets sold off more sharply after the Fed minutes were published, with the Nasdaq and Russell 2000 off by 0.5% and 0.4% respectively, while the S&P 500 was off 0.2%
• Global markets were generally weaker, catching up with US markets, with the DAX down 0.7%, the FTSE 100 by 0.6% and the Nikkei 225 by 0.4%
• The VIX, Wall Street’s fear index, rose to 17.2

Bonds sell off, dollar unchanged 

• The dollar index was flat against a basket of currencies to 103.4, with the major cross rates all unchanged
• Bonds were the major story today, being markedly weaker, with 2-year and 10-year Treasuries yields at 4.97% and 4.32% -- ten year yields are at their highest level since 2007

Oil and Silver lead weak commodity markets

• Crude oil prices rebounded, rallying­­­ 1.5% to $80.6 per barrel
• Gold fell by 0.7% to $1,916 per ounce, while silver was 0.7% stronger at $22.7 per ounce
• Corn and soybean prices are trading higher today on hot dry forecasts for the Midwest in the second half of August, while wheat prices slip lower on the lack of any retaliation from Ukraine following yesterday's attack on Ukraine's export infrastructure by Russia
• Both corn and soybean prices should see more headline influence coming from social media next week when the Pro Farmer Midwest Crop Tour takes place, with participants reporting conditions from the field throughout the week

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com