The benchmark 10-year U.S. Treasury yield on Monday spiked above 4.75% for the first time since January last year, part of a worldwide bond selloff that weighed on stock markets as investors digested an escalation in the U.S.-Iran war and the oil price rising back above $90 a barrel.
Today's Key Market Moves
Stocks: Asia narrowly mixed, Europe -0.8%, UK +0.3%. Wall Street in the red - Dow -0.7%, S&P 500 -0.3%, Nasdaq -0.1%.
Sectors/shares: Nine sectors on the S&P 500 fall, two rise. Industrials and utilities both -1.2%, energy +2.1%. Edison International -23%, PG&E Group -20%. CrowdStrike, Tesla, SanDisk all up 5% or more.
FX: Dollar -0.3%, yen +0.2%.
Bonds: JGB yields hit multi-decade, even record, highs. French and German yields at multi-year highs. U.S. 10-year yield above 4.75%.
Commodities/metals: Oil up nearly 3%, gold slips to 2-week low.
The China FX
Debate around China's exchange rate is intensifying. Not about whether it is undervalued - most observers agree it is - but the scale of that mispricing and what can or should be done to rectify it. The IMF reckons the yuan is around 20% cheaper than it should be based on economic fundamentals, others suggest it is closer to 35% undervalued.
A significant appreciation of the yuan would go a long way to fixing global imbalances, promoting more sustainable growth, and reducing financial and economic instability risks, the argument goes.
But is the exchange rate even as central to China's eye-watering trade surplus as critics claim? Germany thinks it is. The U.S.? Not so much. Could, or should, a globally coordinated "Plaza Accord" style agreement to drive the yuan higher be put on the table? Would China agree to any U.S.-led initiative, especially amid a U.S.-led trade war? Just some of the questions swirling around the G20 meeting of finance chiefs this week that are bound to rumble on.
What could move markets tomorrow?
G20 finance chiefs meeting in Asheville, North Carolina
Japan 10-year bond auction
Euro zone inflation (August, flash estimate)
U.S. 'JOLTS' job openings (July)
U.S. ISM manufacturing PMI (August)
Crushed again
Although Warsh managed to cement his inflation-fighting bona fides on Friday, the bond market remains under pressure. On Monday, the 5-year yield spiked above 4.50% and the benchmark 10-year yield rose above 4.75%, both for the first time since January last year. The 10-year yield is higher than it was the day the Treasury said it will increase bond buybacks.
It's not just the U.S. - France's 10- and 30-year yields on Monday hit their highest since 2008, and Germany's 30-year yield rose to its highest since 2011. Japan's two- and 10-year yields rose to the highest since the mid-1990s, and the 5-year yield hit an all-time peak. Investors seem to be selling bonds for "good" reasons (policy credibility-boosting rate hikes) and "bad" (policy credibility-sapping fiscal recklessness).
Warsh, take two
Investors' initial verdict on Fed chief Kevin Warsh's Jackson Hole speech was clear: relief. Relief that he avowed his commitment to the Fed's 2% inflation target, relief that he clarified that the policy rate is the best tool to achieve that goal, and relief that he indicated a willingness to use it if needed. The spike in short-dated bond yields and expectations for a September rate hike since his speech reflect that collective relief.
But now what? Rowing back from his poorly received July press conference was the bare minimum required from Warsh. Anything less, and his credibility would have dived even further, and the bond market could have got very messy. It can be argued that he has just put himself back into what is probably the growing middle ground on the FOMC. He has bought some breathing space, but now faces a different pressure — he's shown he can talk the talk, but can he walk the walk?
SPY•
