Reuters blog archive

from Breakingviews:

Rampant market fear clarifies global divide

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Suddenly, fear has overwhelmed greed. Yields on 10-year U.S. Treasury bonds slumped below 1.9 percent at one stage on Wednesday, and the 2 percent slide in the S&P 500 Index erased what remained of this year’s gains, although the index ended the trading day down just under 1 percent. It all augurs poorly for the expected end next month of the Federal Reserve bond-buying program. Yet the domestic economy has been steadily improving. Slowing growth elsewhere presents the bigger worry.

U.S. Treasury yields

One sign of that broad concern is tumbling oil prices, to well below $90 a barrel, a downward trend echoed in the prices of other commodities. That in turn reflects expectations of softening demand growth in big economies like China’s. Low inflation – potentially going lower still – in Europe is another symptom of relatively sluggish growth in many parts of the world. The decline in U.S. producer prices reported on Wednesday played a role in the selloff, as may have the frenzy surrounding two U.S. cases of Ebola.

Market volatility and oil

All the same, America’s economy isn’t doing badly. Second-quarter GDP growth rebounded to an annualized 4.6 percent, and the IMF last week actually upgraded its forecast for U.S. economic expansion to 2.2 percent in 2014 and 3.1 percent in 2015. Worldwide growth expectations, however, were downgraded to 3.5 percent in the second half of this year and 3.8 percent next.

from Morning Bid with David Gaffen:

Simple Tricks and Nonsense

Heading into the end of a violent week and ahead of a slew of earnings reports, the market has swung from one extreme to another, as the average daily move in the S&P 500 rises dramatically, as futures promise another big drop at the open Friday, and as investors try to take stock of what's happening here in their beloved stock market.

The U.S. economic growth situation hasn't changed all that much - after all, jobless claims continue to fall and the expectation again is for another strong earnings season. And, as awful as Europe is right now, there's only so much damage its economy can do to the U.S. The extent of that should be known before long if recent German data is any guide.

from Morning Bid with David Gaffen:

Speak softly, and carry a big helicopter

Days like Wednesday are the ones that remind investors why the Federal Reserve is what it is, and how some believe the other world central banks cannot compete, even as some expect the European Central Bank and Bank of Japan (to an extent) to take up the slack the Fed will leave behind when it ends quantitative easing in the next weeks and prepares for its first interest-rate hike some time in the third quarter.

The odds on that hike, by the way, shifted late Wednesday after the Fed's minutes showed there was concern about moving policy too quickly. It’s the pace of increases that worries the Fed, not the idea of doing it at all. The Fed is likely to push rates to about 50 basis points either in July or September (the market is betting on September now, the Fed is probably thinking July), but it’s important to keep in mind that the monetary policy committee is not going to then start doing the one-move-per-meeting thing they did in the last rate-hiking cycle back in the Pre-Cambrian Era.

from Morning Bid with David Gaffen:

Five and Five

Just when the market thought it was out, it got pulled back in. The Federal Reserve will release its minutes later in the day that details what it was thinking during its most recent September policy meeting, but of late, the markets have been of a mind that the expectations for higher rates ought to be tempered a bit.

On Tuesday, New York Fed head William Dudley suggested in remarks that the chances of economic growth in the long-run coming in faster than anticipated is a fantasy that people should get shut of - and so that helped take down the market and not ironically contributed to a further decline in the five-year/five-year forward spread that serves as one of the market's best barometers of inflation expectations.

from Morning Bid with David Gaffen:

Dollar bulls, equity bears

The preparation for tighter U.S. monetary policy is showing up in markets in a number of areas, most notably through the appreciation of the dollar which has a greater affect on GDP growth than people sometimes realize. Rising strength in the greenback, which would be expected to continue given the dovish monetary policies being pursued in Europe and Japan, turns into notable weakness in a number of U.S. sectors tied to exports like autos and energy.

US assets 2014

Citigroup's William Lee dives into this by pointing out that substantial rallies in the dollar have the power to brake GDP in a way that Fed tightening even doesn't, saying GDP growth could decline by a percentage point if the rapid move in the dollar continues through early 2015.

from Global Markets Forum Dashboard:

GMF @HedgeWorld West, World Bank/IMF and Financial & Risk Summit Toronto 2014

(Updates with guest photos and new links).

Join our special coverage Oct. 6-10 in the Global Markets Forum as we hit the road, from the West Coast to Washington to the Great White North.

GMF will be live next week from the HedgeWorld West conference in Half Moon Bay, California, where we’ll be blogging insight from speakers including Peter Thiel, former San Francisco 49ers great Steve Young and other panelists' viewpoints on the most important investment themes, allocation strategies, reputation risk management ideas and more.

from Morning Bid with David Gaffen:

Work work work work work!

As Abraham Simpson would put it, "that's a job report you can set your watch to." Overall growth came in a bit better than expected, with job growth at 248,000 and the unemployment rate dipping to 5.9 percent. There's no wage growth, of course, because, well, it's kind of an ongoing situation now, and the U-6 rate of underemployment fell to 11.8 percent, which is also overall strong news.

The market's initial reaction is telling - bond markets are selling off, with more pain in the five to - and 10-year area of the curve, reflecting expectations for higher rates before long but not so much that you can really point to something that will derail economic growth. With futures higher, the thinking right now is that the market will manage to close out the week with a somewhat better tenor than it did coming into the week.

from Breakingviews:

Chinese banks learn Western capital tricks

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Chinese banks are learning Western capital tricks. The country’s largest lenders have changed the way they measure the riskiness of their loans. For most, that has made capital ratios look healthier. It’s another reason to question Chinese banks’ balance sheets.

from Over-Gaffenated:

MORNING BID – Uneasy lies the head that wears the crown

One day before the key jobs report that will likely paint yet another muddled picture of the current economic state, it's the bond market that's gotten more dynamic and interesting than the other asset classes out there. Treasuries are seeing a safe-haven bid on the back of Ebola and protests in Hong Kong, along with a comparison to the still-falling yields in the euro zone. High yield securities are seeing their spreads widen out in a way that's commensurate with previous pullbacks that have later manifested into notable corrections in the stock market (and given the Russell 2000 hit that 10 percent threshold on Wednesday, the answer is yes, this is something to keep watching), and so that's yet another bit to watch for as well.

Some of it can be explained by the sudden departure of a certain fixed income manager in California from the firm he founded a million or so years ago. And while there's a heavy temptation to emulate Bill Gross here by somehow speaking this column out loud as if my rabbit had penned it, we'll be content to note that the Treasury market's selling pretty well snapped back in a couple of days.

from Over-Gaffenated:

Crosscut Saw

Plenty of cross-currents to be aware of in the markets right now - many of which are pretty confusing and relate countervailing messages when it comes to where equities and other risky assets are headed. Stocks were heavy at the open on Monday and slowly got better throughout the day but energy stocks remained under pressure. The expectation of more unrest in Hong Kong certainly has contributed to the jitters, but the U.S. is a pretty resilient economy regardless of outside forces so it's while it's easy to blame China broadly, it's hard to apply too much of a causation (probably why equities recovered throughout the day).

The bond market might be the better signal for the worries in equities. Last week speculators increased their short position in two-year notes to their longest since 2007, and asset managers hold their biggest short position in five-year notes since 2011; taken together that's a clear sign of bearishness in the front end of the curve, reflecting expectations for a flattened yield curve as part of higher rates across the board. With the dollar continuing to strengthen, there's a bearish sense in the air when it comes to U.S. central bank policy, and that's something that again threatens to undermine equities -- witness the weakness again in energy names.