- WTI crude oil down $4.64 at 78.84
- US 10-year rates down 2.7 basis points to 3.68%
- UK 10-year yields up 33 basis points to 3.83%
- Gold down $27 to $1,643
- S&P 500 down 1.7%
- USD leads, GBP is (badly) lagging
Today’s price action was likely just an extension of FOMC trading and the growing belief that Powell will overtighten the economy in a recession. But the trigger was the bond market, especially UK bonds. UK 5-year bonds had their worst day ever, down 50 basis points (!). This came after a series of spending and tax cuts in Kwateng’s budget.
Coupled with this, the pound cratered. It released 1.10 for the first time since 1985, then quickly released 1.09 on a cascade of sell-offs in the London fix. One would expect a rebound after that, but the USD bid was relentless and fell as low as 1.0840. The 1985 low is only 300 pips away and there doesn’t seem to be many buyers.
Even though the EUR/USD fell 150 pips to a new low, the Euro still managed to beat the GBP. The problem for Eurozone politicians is that the UK budget has demonstrated what will happen to them if they overspend or subsidize energy or do too much to stimulate growth. This puts them in a horrible situation. Meanwhile, another 1.4% drop in the euro adds to imported inflation.
At some point early in the day, a strong offer for Treasuries arrived. This briefly looked like it could turn the tide and 10-year yields ended lower at 3.68% after touching 3.83%. The front end was also volatile with 2s in the 4.11-4.27% range. At some point, you’d think there would be enough safety supply to weigh in, but bond bulls aren’t exactly rushing in what has been a brutal time for risk assets.
USD/JPY remains a major concern as the MOF chicken game begins. The pair added 94 pips today at 143.28. Everyone is looking at 145.00 and the overall strength of the dollar makes it more likely that we will go back there.
Commodity currencies also suffered but, curiously, the declines in AUD and NZD were around double the CAD. The loonie has slipped badly, so maybe it’s a catch-up trade, but it’s still unusual to see it on a day when oil is down 5.4%. Canadian retail sales were also weak today and I think the evidence is mounting for the BOC to pivot.