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North American Morning Briefing: Stock Futures Edge Higher as Bond Rout Eases

MARKET WRAPS

Watch For:

Durable Goods for August; S&P CoreLogic Case-Shiller Home-Price Index for July; New Home Sales for August; Conference Board -- Consumer Confidence for September

Opening Call:

Stock futures rose around 1% on Tuesday, although recent volatility is likely to persist, as concerns about the world economy push financial markets into disarray.

The likelihood of sharply higher interest rates has tilted the odds toward another recession within a year, economists say. Yet some still hold out hope the U.S. can muddle through with a period of slow growth instead of outright decline.

The risk of a recession over the next year "has now climbed above 50%," said chief economist Douglas Porter of BMO Capital Markets. "This more aggressive series of rate hikes will weigh more heavily on the U.S. economy."

Market Insight:

The global inflation trajectory is becoming even more central for tactical asset allocation, and it could keep volatility elevated until the next set of CPI releases, JPMorgan said.

"A core belief behind our tactical asset allocation approach is that the most consistent factors moving asset prices are business-cycle momentum and monetary-policy decisions."

In this elevated-inflation environment, the direction of inflation becomes crucial because it becomes a de facto driver of both those factors, JPM said. Elevated inflation directly hurts disposable income and indirectly slows future aggregate demand via the central banks' reaction function.

Forex:

The dollar rally paused early Tuesday but the currency remains just below the fresh 20-year highs it notched on Monday.

The currency's recent rise creates an "untenable situation" for risk assets that has historically ended in a financial or economic crisis, according to Morgan Stanley.

Read more here.

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The dollar-value of cryptocurrencies rose on Tuesday, buoyed by optimism in global stock and bond markets.

Bitcoin added 5.6% from its late-afternoon ET level Monday to trade at $20,200.63 apiece. Ether, the second-largest cryptocurrency by market value, gained 4.5% over the same period.

Cryptocurrencies have largely risen and fallen alongside broader market sentiment in recent weeks, with little other news pushing values.

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Sterling looks vulnerable after the Bank of England said it would assess the impact of new fiscal policy at its next meeting instead of delivering an emergency interest rate rise as some market participants expected, ING said.

GBP/USD hit a record low of 1.0349 on Monday following last week's U.K. mini-budget statement, prompting the BOE to signal it could take action at its next scheduled meeting in November.

"But six-to-nine weeks is a long time in FX markets," ING said. "We had felt that the BOE would prefer to avoid getting sucked into defending the pound with rate hikes."

Pantheon Macroeconomics said the BOE is expected to accelerate its interest-rate hiking cycle as financial markets have lost confidence in the U.K.'s macro policy regime.

Raising interest rates to near 6%--the level markets are currently pricing in--would crush inflation but lead to a sharp increase in mortgage defaults, Pantheon said.

Hiking more slowly would weigh on sterling and boost imported inflation, allowing it to stay above target for longer, Pantheon said.

This option is one that the BOE is likely to see as the lesser of two evils, though a recession is unavoidable as many households and businesses will cut spending immediately knowing that higher interest rates and further price increases are in the pipeline.

Bonds:

Bond yields worldwide stabilized after extending the biggest gains in seven decades.

The 10-year Treasury yield, along with German and Japanese bonds, were all little changed. The U.K. 10-year yield, which has skyrocketed since Friday when the new British government announced a series of big tax cuts, pulled back to 4.052%, down from as high as 4.282% on Monday.

The pause comes as bonds cope with their first bear market in more than 70 years, as defined by prices falling 20% from their recent peak. More than a decade of global bond returns have been erased for the first time since the 1950s, according to Deutsche Bank analyst Jim Reid.

Read more here.

Energy:

Oil futures posted gains of close to 2% in Europe as supply concerns keep prices supported, although Goldman Sachs said the strong dollar and falling demand expectations "will remain powerful headwinds."

It added, however, that the market's supply tightness should support prices and help Brent climb higher before the end of the year.

"The structural bullish supply set-up--due to the lack of investment, low spare capacity and inventories--has only grown stronger, inevitably requiring much higher prices."

Metals:

Gold and base metals made steady gains in Europe, having sold-off sharply on Monday, but Peak Trading Research said investors "are nervously watching interest rates rise and the dollar rip higher."

It added that there is a very bearish macro environment, which is a big headwind for all commodity markets especially in a light data week.

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Liberum said six months ago, "most of the sell-side was bullish" on commodities. "Most are short-term bears now."

Concerns about the impact of inflation and rising rates on demand are prompting the shift in forecasts, the Liberum said. It is among those that holds bearish forecasts for the asset class.

Although, it highlights that "any shift in the status of three drivers--Fed policy, China's growth story and Russia's war--can deliver different demand/price outcomes."

Read: Copper Prices to Remain Weak for Rest of 2022, Says Fitch

   
 
 
   
 
 

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Global Bonds Take a Breather Amid Biggest Rout in 70 Years

(MORE TO FOLLOW) Dow Jones Newswires

September 27, 2022 05:58 ET (09:58 GMT)

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