(Reuters) – A look at the day ahead in European and global markets by Wayne Cole.
It’s a sea of red in Asian stock markets as investors flee from risk and many busy trades unruly unwind. Popular positions from yen carry trades to crypto are being dumped in a rush to the exits, increasing volatility and drying up liquidity.
There is also talk of investors having to close profitable positions as they need to cover losses elsewhere, which could be one reason why gold has struggled.
The sprint to sell has led to trading halts on several markets, including the and , with the price falling a terrifying 7% at one point. The index is now in bear territory, having fallen 20% from its peak, which was reached less than a month ago.
Investors hope that central banks will come to the rescue with a global version of the Fed. Futures now imply a 73% chance that the Fed will cut by 50 basis points in September, and a total of 115 basis points by Christmas. By the end of next year, rates will be around 3%.
Markets have priced in another 74 basis points of cuts from the ECB and 47 basis points from the BoE. There are also doubts whether the Bank of Japan will go ahead with a rate hike in October, less than a week after taking an aggressive approach. As a result, Japanese government bonds have recovered all their recent losses, sending 10-year yields back to April levels.
There are even rumors of Fed easing between meetings, which seems like wishful thinking from investors in the red. The Fed’s Goolsbee downplayed the impact of Friday’s payroll report and has a chance to do so again later on Monday, along with San Francisco President Daly.
The unemployment rate of 4.25% is still quite low from a historical perspective and analysts suspect that this will fall again in August. Those who cite the Sahm rule should remember that economics is not actually a science, as much as it might want to be. Not so long ago, negative interest rates were considered impossible.
The American ISM services index is also on the agenda and analysts hope for a recovery after the surprising decline in June. Clearly the jobs index will be keeping an eye on it given the large number of workers in the sector. The Fed’s survey of senior credit officials will receive more than the usual attention for any sign of credit crunch.
Notably, government bonds did not extend Friday’s huge rally, with 10-year yields back at 3.78% after previously hitting a low of 3.723%. Fed funds futures also pared early gains, especially in 2025 contracts.
Yet two-year yields are now just eight basis points away from undershooting the ten-year yield and turning a positive curve for the first time since mid-2022. Such disinversion has sometimes heralded recessions in the past. Goldman Sachs has raised the risk of a recession to 25%, while JPMorgan is doubling it.
Key developments that could impact the markets on Monday:
– Final global services PMIs, EU producer prices
– US ISM Services Survey for July, Fed Releases Survey of Senior Loan Officers
– Federal Reserve Bank of Chicago President Austan Goolsbee speaks, as does Fed San Francisco President Mary Daly
(by Wayne Cole; editing by Christopher Cushing)
