Morning show: Eye of the Storm

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A look at the day ahead in the US and global markets from Mike Dolan.

With Hurricane Ian erupting with its sights set on Cuba and Florida, a global financial storm in the bond and currency markets has subsided moderately – although likely only temporarily.

Ian strengthened into a Category 3 hurricane on Tuesday and is expected to make landfall in Cuba, with its path expected to hit western Florida by the end of the week. Read more

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Despite all his potential destruction, Ian has yet to appear on the radar of world markets. But that’s mainly because global investors are fighting a financial storm of their own — one that is spreading back and forth across major economies as governments and central banks try their own ways of dealing with hyperinflation, an energy shock and a looming recession.

The US Federal Reserve’s campaign to end decades of constant core inflation continues to raise interest rate expectations, Treasury borrowing costs and boost the dollar around the world — forcing others to keep pace with or increase inflation via dollar-priced energy. Goods imports.

The word “contagion” – a word feared by many in market circles – appears regularly in investment and banking research.

Britain’s alarming attempt last week to cut taxes to raise growth spurred inflation sent the pound to record lows, soared UK government bond yields, and compounded pressures on the Bank of England to more extreme rate hikes to stabilize the vessel and force mortgage lenders to withdraw. products. Read more

The near collapse of bond markets for the G4 reserve currency, which has now lost more than 20% this year against the dollar, is once again feeding into European and even American bond markets as uncertainty about economic and central bank policies rises everywhere. . Read more

Even the head of the Federal Reserve in Atlanta, Rafael Bostick, said on Monday that the reaction to the British government’s plan was “a real concern” and could weaken the European economy further, rebounding in no time to the United States. UK debt auctions this week will be closely watched.

currency volatility

Currency market volatility recorded by the CVIX index reached its highest level since 2009, in the immediate aftermath of the collapse of Lehman Brothers.

US stock market volatility is reflected in the VIX ‘Fear Index’ (.VIX)Meanwhile, it closed back above 30 for the first time in three months.

With the third quarter coming to a close on Friday and markets awaiting cues from a massive slate of central bank speakers later in the day, stocks, bonds and currencies looked a bit more subdued on Tuesday. Asian and European bourses were flat, with Wall Street futures rising ahead of the opening and the dollar falling again against most currencies except the Chinese yuan. Even the pound is falling off the ground.

But this could be the eye of the storm.

The late relative weakness in Italian government bonds versus German indices after the weekend’s elections on the verge of delivering a far-right prime minister was noticeable on Tuesday – with the yield on Italian 10-year bonds hitting their highest since 2020.

Key developments that should provide further guidance to US markets later on Tuesday:

* European Central Bank President Christine Lagarde, European Central Bank Vice President Luis de Guindos, and ECB Governing Council member Fabio Panetta spoke.

* BoE Chief Economist Hugh Bell, BoE Chief Financial Officer Avua Kei, and BoE Executive Director of the Prudential Policy Directorate Vicky Saporta speak.

* US Federal Reserve Chairman Jerome Powell speaks in Washington. St. Louis Fed President James Bullard, Chicago Fed President Charles Evans speaking in London, and San Francisco Fed President Mary Daly speaking in San Francisco

* US consumer confidence in September, US new home sales in August; US durable goods orders for August, US house prices for July; Eurozone money supply and credit for August. China August industrial profit

* 5-year US Treasuries; UK Auctions 2031 gilts; Germany auctions 5-year bonds; Japan auctions 40-year bonds

Deutsche Bank’s currency volatility index hits a two-and-a-half-year high
UK markets

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Written by Mike Dolan, Editing by Ed Osmond, . Twitter: @reutersMikeD

Our criteria: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed under the Trust Principles to impartiality, independence, and freedom from bias.

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