MARKET WRAPS
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Germany Ifo Business Climate Index; no major corporate updates expected
Opening Call:
Shares may open mixed in Europe after heavy losses on Friday. In Asia, stocks were lower; Treasury yields extended gains; the dollar strengthened; while oil fell and gold was little changed.
Equities:
European shares could trade mixed at Monday’s open after slumping Friday amid a sharp rise in the region’s government bond yields.
U.S. stocks posted steep declines Friday, but were off session lows, as government bond yields soared following the Fed’s rate increase and tightening by other central banks, and as the U.S. dollar soared versus major rivals.
A bond market rout has “upended sentiment,” said CMC Markets analyst Michael Hewson.
“While it would be tempting to blame some weak flash purchasing mangers’ index data, the tipping point appears to have been the announcement of the latest U.K. fiscal stimulus plan, which appears to be being treated as a high-risk leap of faith, prompting sharp spikes in yields over concern about surging inflation and recession risk.”
The projected victory of a right-wing coalition in Italy’s elections on Sunday has added to worries about rising interest rates and recession fears.
Italy’s high government debt of roughly 150% of gross domestic product, combined with its weak long-term growth record, makes it vulnerable to bond-market selloffs if investors lose confidence in the soundness of Rome’s fiscal policies, and dependent on the European Central Bank to keep its bond yields stable. ECB support has typically been conditional on Rome following cautious budget policies and enacting economic overhauls aimed at improving growth.
Forex:
The dollar made strong gains in Asia amid rising fears of a global recession.
If a sense of crisis about the world economy were to emerge, the dollar could climb substantially, CBA said.
The U.K.’s poor situation has exacerbated support for the dollar, while the pickup in financial-market volatility has aided the dollar and Swiss franc due to their safe-haven status, CBA added.
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The British pound fell to a record low, as selling continued after the U.K. government on Friday unveiled the country’s biggest tax cuts since the early 1970s.
The new government measures are aimed at kick-starting growth at a time of global economic turmoil, but they raised concerns among investors about the impact on inflation and the longer-term sustainability of U.K. finances.
Bonds:
Treasury yields continued gains from last week, when the policy-sensitive two-year rate set an almost 15-year high on Friday and markets adjusted to the likelihood of more interest-rate increases from the Fed.
Last Wednesday’s interest rate increase by the Fed and hawkish comments by Fed Chairman Jerome Powell have led to an aggressive readjustment of expectations in markets, which pushed the 2-, 10- and 30-year yields to multiyear highs last week.
Market participants remain concerned that the U.S. economy may slip into recession as the Fed could go too far in its monetary tightening cycle.
“In the week ahead, the third quarter will end as investors continue to digest the far-reaching ramifications from the dizzying array of central bank actions that have recently defined trading in US rates,” said BMO Capital Markets.
“Friday’s selloff which brought 10-year yields above 3.75% was partially in sympathy to the sharp moves in gilts,” BMO Capital added.
Energy:
Oil prices fell early Monday amid concerns about a gloomy global economic outlook.
“The increasing likelihood of a global recession is weighing heavily on oil prices,” CBA said.
Metals:
Gold prices declined in Asia. Developments relating to interest rates moves by the Fed will be closely watched, with FOMC members believing that interest rates will continue to climb further next year, Commerzbank said.
“For as long as the Fed remains on this interest rate path, the gold price is likely to have a hard time making any lasting gains,” Commerzbank added.
But the World Gold Council said the gold outlook could be brightening.
“We believe gold’s headwinds may start to subside while supportive factors will likely remain, encouraging demand for gold as a long-term investment hedge,” said WGC.
Rate hikes may slow given how much policy makers have tightened already. Also, central banks’ demand for gold remains strong and futures positioning has turned net short, which “historically hasn’t lasted long–often mean reverting in subsequent weeks,” WGC added.
Rising recession and geopolitical risks could spur investors to be more defensive, and seek high-quality liquid assets like gold to cut portfolio losses.
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Copper fell amid rising demand concerns.
Tighter monetary policy globally, weaker economic activity in China and Europe’s energy crisis have weighed on sentiment, ANZ said.
Problems in Europe have been highlighted by the eurozone’s composite PMI for September, which slumped to its lowest level since 2013, excluding pandemic shocks.
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Iron ore prices fell in China, extending a broad downturn in recent weeks amid interest-rate increases and rising worries over a global recession.
Galaxy Futures said it thinks the commodity’s downside will likely be limited in the near term, thanks to Chinese steel makers’ restocking demand for the ore ahead of the peak production season in the coming months.
But the brokerage is cautious on iron ore’s longer-term demand outlook, given continued weakness in China’s real-estate market, a major steel-consuming sector.
TODAY’S TOP HEADLINES
Pound Hits Record Low as Selling Continues After U.K. Tax-Cut Plan
The British pound fell to a record low against the dollar in early Asian trade on Monday as selling continued after the U.K. government on Friday unveiled the country’s biggest tax cuts since the early 1970s.
The pound briefly fell below $1.04, hitting a record low, according to data on CQG. Its previous all-time low was around $1.05 marked in 1985.
China PBOC Raises Forex Risk Reserve Ratio for Forward Trading
China’s central bank said Monday that it would increase the risk reserve requirement ratio for financial institutions when conducting foreign-exchange forward trading, as the yuan faces increasing depreciation pressure.
The People’s Bank of China said the risk reserve requirement for forward foreign-exchange sales will be raised to 20% from currently zero. The move, which the central bank said is aimed at stabilizing expectations in the foreign-exchange market, will take effect Wednesday.
Buying the Stock-Market Dip Is Backfiring. Investors Keep Piling In Anyway.
It is the worst year for buying the stock-market dip since the 1930s.
Instead of rebounding after a tumble, stocks have continued to fall, burning investors who stepped in to buy shares on sale. The S&P 500 has dropped 1.2% on average this year in the week after a one-day loss of at least 1%, according to Dow Jones Market Data. That is the biggest such decline since 1931.
Central Banks May Stoke Risks by Raising Interest Rates Together
Central banks around the world are raising their key interest rates in the most widespread tightening of monetary policy on record. Some economists fear they may go too far if they don’t take into account their collective impact on global demand.
According to the World Bank, the number of rate increases announced by central banks around the world was the highest in July since records began in the early 1970s. On Wednesday, the Federal Reserve delivered its third 0.75 percentage-point increase in as many meetings. This past week its counterparts in Indonesia, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and the U.K. also upped rates.
Slide in Transportation Stocks Flashes Warning About Economy
Shares of transportation companies are falling twice as fast as the hard-hit U.S. stock market, reflecting investors’ expectations that a recession is likely ahead.
The Dow Jones Transportation Average, which tracks 20 large U.S. companies ranging from airlines to railroads to truckers, has declined 12% this month. The S&P 500 and the Dow Jones Industrial Average are down about half that much.
Iran’s Hard-Line Government Faces Growing Unrest Over Women’s Rights
Antigovernment protests in Iran gathered strength Sunday with new demonstrations in scores of cities and indications that unrest was growing, posing one of the biggest challenges the country’s conservative Islamic rulers have faced in years.
A movement initially led by young people that focused on the country’s strict Islamic dress code for women appeared to be broadening into a mass outpouring of pent-up dissatisfaction among middle-class workers and even religious Iranians at the regime’s treatment of its own citizens.
Pushing East of Kupyansk, Ukrainian Forces Expand Offensive
KUPYANSK, Ukraine-The grain elevator towering over the eastern edge of Kupyansk, the former seat of Russian power in Ukraine’s Kharkiv region, was supposed to be defended by soldiers from an elite Russian unit.
But when troops from Ukraine’s International Legion moved to seize the compound on Thursday, part of the developing Ukrainian military offensive east of the Oskil River, the expected firefight never happened.
Climate Change Forces French Vineyards to Alter the Way They Make Wine
BORDEAUX, France-The wildfire began on an usually dry summer day in a forest bordering the Liber Pater vineyard. Winemaker Loïc Pasquet saw the flames rise and spread toward his precious vines, which produce Bordeaux that sells for $30,000 a bottle.
Hours before evacuating Mr. Pasquet and his staff destroyed the grass around the vineyard to prevent it from catching fire and dug trenches to block the blaze’s…
Read More: EMEA Morning Briefing : Stocks Seen Mixed Amid Global Recession Fears