Jittery: Yesterday’s sell-off in the US was the biggest one-day decline since June 2020, during the depths of the pandemic. It reflected deep uncertainty about the course the macroeconomic outlook, the Fed and how much inflation is going to stick around. We’ve talked endlessly here about how inflation would not be transitory and how higher for longer is what we need to contend with, so this is not a surprise. Market rallies have betrayed hope that the Fed has somehow beaten inflation already – the peak inflation, peak hawkishness narrative. It’s a fool’s logic. Inflation is not going to decline by much even if has ‘peaked’ to all intents and purposes. This matters since CPI above 5 per cent (it’s above 8 per cent now) is still way above where the Fed would like it. So, you’re looking for a long sequential decline in month-on-month inflation to get close to the Fed stopping.
Treasury yields soared, stocks cratered, and the US dollar jumped after the monthly CPI release, which showed core month-over-month inflation rising to 0.6 per cent from 0.3 per cent, with the annual rate up to 6.3 per cent from 5.9 per cent. The annual rate may have declined a touch to 8.3 per cent from 8.5 per cent as energy prices declined, there is a clear sense that it’s broader and stickier than anyone would care for. UK inflation data is displaying similar signs – today’s headline rate declined from double-digits in July to 9.9 per cent, but the core reading ticked up a touched. Gilts were offered, with the policy-sensitive 2yr UK bond yield up to 3.15 per cent.
So where does this leave central banks? Firstly, the Fed and it’s now looking a dead certainty that it will go for at least 75bps next week; markets are shortening the odds on 100bps. Crucially the terminal rate keeps moving up, now priced for 4.2 per cent in April 2023. Personally, I don’t think the Fed stops until 5 per cent on the Fed funds rate is hit. The Bank of England will also seek to take stronger action than it has hitherto – the more ‘forceful’ action that has been hinted at lately suggests also 75bps is very much on the table when it meets for its delayed meeting, though the consensus is still at 50bps, with the BoE seen taking the bank rate to 4 per cent by August 2023.
And where does this leave bond yields? The US 10yr spiked to almost 3.5 per cent, a level where stocks have tended to swoon, The question is can it get higher – 4 per cent is looking increasingly likely if you make a basic assumption that the Fed is a) not backing down on inflation; b) inflation is going to remain high for longer; c) the Fed doesn’t care about the stock market anymore, and d) the US labour market is strong enough to withstand higher rates. 4 per cent on the 10yr is not good for stocks and the doubling of quantitative tightening to $95bn monthly only starts tomorrow. And remember, the Fed doesn’t really know where it needs to go, it just knows it must keep going until something breaks. Cathie Wood says deflation is the bigger threat…
US markets had a shocker – E-mini futures sank about 100pts in a matter of minutes after the release and kept heading lower and the S&P 500 cash equity market closed just about at the session low at 3,932, down 4.32 per cent. The Nasdaq 100 shed 5 per cent as heavyweight tech names were smashed by the jump in yields. Apple declined almost 6 per cent, with Amazon off 7 per cent. Just five stocks on the S&P 500 were green for the day. It was a kind of mass panic sell, though the Vix is yet to get really going and only just topped 28 for a while, so there is still downside in there you think. The Dow Jones industrial average declined more than 1,200pts, falling 4 per cent. Futures show some stabilisation this morning.
And yet…despite the intense, broad selling, the S&P 500 failed to test the intraday lows of last week, nor did price action even touch the closing low of 6 September at 3,908. So, some support perhaps but the tape was atrocious and while there are clearly some short-term opportunities for lots of stocks being oversold, the bear market is alive and well. And the way this market can swing from euphoria to depression on the slightest delta on the inflation print it is not a sign of a healthy, confident market. You must get used to the fact that the numbers won’t go down enough to get the Fed to stop hiking any time soon.
Selling caught European markets too as the US session opened and there were broad losses across the major bourses which are extending to further declines this morning of around 0.5 per cent or so. Selling on the FTSE 100 ran out of steam around the 7,320 area, the intraday highs from a week ago and 50 per cent retracement of the September rally. Looking for this area to hold or we look to the next level of support around 7,275.
Fundsmith’s EM trust faces closure
The Fundsmith Emerging Equities Trust (FEET) is likely to wind up after its investment team decided to serve their notice, saying the fund had not lived up to expectations.
The board will propose to put the trust into voluntary liquidation and return cash to shareholders after investment manager Fundsmith indicated its intention to give notice. Terry Smith, the Fundsmith chief executive, said: “We have always maintained that we would only run funds where we felt we had a particular edge that would allow us to deliver superior risk-adjusted returns.” He added that the trust had “fallen below our expectations” despite making positive returns.
With a market cap of more than £300mn FEET is relatively large for an equity trust, though this seems limited compared with the tens of billions in the Fundsmith Equity fund. Winterflood data from 12 September shows it lagging most peers in its investment trust peer group by five-year net asset value (NAV) returns, while the trust’s share price total return since its 2014 debut lags the MSCI Emerging Markets index in sterling terms. DB
In FX, the dollar made all the running after the CPI release. GBPUSD retreated sharply to 1.1480 area, slipping 3 big figures, but is a tad firmer above 1.15 this morning. The move in the dollar left the euro back under parity. US producer prices are due later in the session.
Finally, OPEC yesterday said exactly what I’ve been talking about here for some weeks now. “The paper and physical markets have become increasingly more disconnected,” the cartel noted in its monthly report. This chimes with the view that the unwinding of a lot of speculative long positions over recent weeks has not really reflected the intensely tight fundamentals within the market. Crude prices are a little weaker, trending lower within the channel.
Neil Wilson is chief market analyst at Markets.com
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