Market Observations - Sep 26
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Shutdown Looms: Since 1976, there have been 20 government shutdowns. The week before the shutdown, the S&P 500 has declined an average of -0.4%. On the first day of trading during a shutdown, it averaged a gain of 0.1%. The consequences of a shutdown include an erosion of confidence in government officials, voter frustration as the 2024 election rapidly approaches, and a significant waste of time and resources. Moody’s has an “Aaa” rating for the U.S. government with a stable outlook - the highest creditworthiness it assigns to borrowers. It is the last major agency with such a rating after Fitch downgraded the U.S. government triple-A rating by one notch in August to AA+ - the same rating assigned by S&P Global in 2011. According to the Senate Homeland Security and Governmental Affairs Committee, the last three government shutdowns cost taxpayers nearly $4b, including billions in back pay to furloughed workers and millions in fees, lost revenue, and late fees on interest payments.
US Monday Market Wrap: After 4 Red days, we get a little green!??The Dow closed up 43 points or 0.1%, the S&P gained 0.4% and the Nasdaq “jumped” 0.50%. Eight S&P sectors closed green, with energy leading the gains +1.3%.
One popular trade at the moment is to sell U.S. treasuries. Rates were sharply higher again on Monday, with the yield on 10y Treasuries rising 0.103% to 4.541%. It was the 3rd consecutive increase, bringing the benchmark rate to its highest level since October 17, 2007. As a reminder, that was shortly before another crisis on Wall Street, one that wasn’t so easily contained as LTCM. Twenty-five years ago, the impending collapse of Long-Term Capital Management was so worrying to Wall Street that 14 of the biggest firms collectively coughed up billions of their own cash to rescue it. At the time, the gathering of leading investment bankers at the behest of the Federal Reserve felt like an extraordinary intervention. But looking back a quarter-century, and in light of all that followed, the resolution of the LTCM crisis now seems quaint. The collapse started a habit hard to break – the ‘Fed Put.’
The debt restructuring struggles continue for Chinese property developer Evergrande. Its shares plummeted after missing payments on $547 million in onshore bonds, delaying a debt restructuring meeting scheduled for today. Electric vehicle maker Nio plunged 6% before regaining most of that decline after the company denied rumors it was considering raising $3 billion from investors. And Li Auto shares fell 10% after telecom giant Huawei teased its first sedan and high-end SUV, entering the competitive market.
The U.S. dollar is stabilizing a bit, but only after extending its gains initially. It reached almost JPY149.20, while the Euro slipped to $1.0570 before recovering to straddle $1.06 in the European morning. Sterling sank a little through $1.2170 but stabilized to return to almost $1.2200. The Australian dollar tested last week’s low slightly below $0.6390 before resurfacing above $0.6400.
The equity rout continues. Several large bourses in the Asia Pacific region, including the Nikkei, Hang Seng, Taiex, and Kospi, are off by more than 1%.
Europe’s SXXP is off for the 4th consecutive session.
U.S. index futures are extending yesterday’s sell-off.
Benchmark 10y yields are mixed. Yields in the U.S., UK, Germany, and France are slightly lower, while the peripheral European yields are higher, led by a 3bps increase in Italy and Greece. The 10y U.S. Treasury yield is near 4.50%. In addition to a $60b cash management bill, the U.S. Treasury is also selling $48b two-year notes. At the previous auction, the high yield for the two-year was 5.02%. It is now near 5.12%.
Gold tested $1909 today, having been turned back from $1950 last week. This month’s low is near $1901.
November WTI slipped to an eight-day low near $88.20. It peaked a week ago at nearly $92.45. It is recovering in the European morning and looks poised to return to the $89.50-$90.00 area.
U.S. high-frequency data reports today include house prices (narrowly mixed), new home sales (softer after a 4.4% increase in July), and the Conference Board’s September consumer confidence (slightly softer). The Philadelphia Fed’s non-manufacturing survey, the Dallas Fed’s services survey, and the Richmond Fed’s survey round out today’s report. While there may be some headline risk, these reports are unlikely to change views on the U.S. economy. U.S. yields and the dollar remain firm. Some observers have expressed concerns about the demand for U.S. debt, and the U.S. Treasury is raising $158b in coupons this week and even more in bills. Yet, the concern seems misplaced or exaggerated. Recent bill and coupon demand has been strong, and the bid-cover has been robust. Even last week’s 20-year bond sale, which is not the more popular tenor, was over-subscribed 2.7x.
Meanwhile, the U.S. still appears headed for partial government shutdown. There are some efforts, of course, to avert it, but they lack sufficient support. A House proposal of a stop-gap measure cuts spending by more than 25%, which is unacceptable to the Senate. A bipartisan bill in the Senate will not get the support of much of the Freedom Caucus in the House. Four appropriations bills are progressing: State, Agriculture, Homeland, and Defense. What can go wrong?
Crypto Market Rundown
MicroStrategy reportedly bought $147 million worth of Bitcoin in August, raising its stake to 158,000. Meanwhile, hackers stole $200 million from Hong Kong-based crypto company Mixin, causing the network to suspend services.
The global crypto market cap is $1.05T, a -0.51% decrease over the last day. Bitcoin is trading around $26,200, trading up +0.64% in the past day. Ether is up 1.29% in the past 24 hours, now trading at $1,590.
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