Hitting the pause button

Global financial markets recovered on Monday from their sell offs that dominated most of last week. The S&P 500 index led with gains of 2.59% to close at 3,678 while Nasdaq etched out a gain of 2.27% to close at 10,815, slightly above the crucial support levels we tested on Friday. Tech sector recovered broadly, only Tesla countered the recovery losing 8.6% on the day to 242.40, after Elon’s newest robot toy failed to impress investors.

US Treasury yields were lower on Monday too, with the 10yr down 15bp to 3.64%, after last week testing the 4% mark. Corporate bonds recovered in line with better risk sentiment, with credit spreads tightening around 4bp on average in investment grade and 13bp in HY Bonds.

One of the key drivers for the strong market has been the release of ISM data for September. The manufacturing ISM dropped to 50.9 vs. 52.2 expectation, signalling a significant contraction ahead. But more importantly, the prices paid index continued its decline in September as well to 51.7, the lowest since June 2020, indicating that the contraction in economic activity is starting to slow down the momentum of inflationary pressures. In short, the market got a bit more confident that we don’t see a Volcker-moment in rates anytime soon.

In Europe, rumours are surrounding Credit Suisse, where an email by the CEO to staff over the weekend failed to restore confidence in the embattled bank, which is struggling with the aftermath of various investment banking mishaps in recent history. While the Bank’s Tier1 capital ratios have been healthy in their most recent quarter, the subordinated T1 capital bonds lost around 10 points across the curve and CDS spreads hit a new high at 320bp.

Asian markets are opening up in the green, with Nikkei up 2.8% and Korea, Singapore and most other regional markets also following the US lead from overnight session. Hong Kong and China are closed today for a public holiday.

Heading into the week, we have further important economic data points, with the all-important Non-farm Payrolls coming up this Friday. For now, the important support levels on the major indices charts have held. The US Dollar’s bull run has stopped for now, and rates are stabilizing. Time will tell if this is just a pause in the recent sell off or early indication of a relief rally we could see heading into the US midterm elections.

Happy investing!