Pivots & Policies | Morning Express 9/27/2022
Posted: Sept. 29, 2022, 9:03 a.m.
Currency and rate markets are dominating sentiment. The risk-off tone carried through to Wednesday morning amid a U.S. Dollar surge and sovereign debt collapse. Mr. Market does what it does and punished the British Pound and Gilts for the U.K. government’s plan to slash taxes and increased spending. We have been adamant for months the pain across risk-assets, such as equities, will not stop until the U.S. Dollar has a blow off top. Government officials from around the world tend to carry a disconnection between their utopian dreams and the economic realities of their actions. New U.K. Prime Minister Truss wants to avoid an economic recession and her massive fiscal package is case in point. The Bank of England, like the U.S. Federal Reserve has not only stopped buying bonds but had planned to unwind its balance sheet. Who will buy this newly minted debt? The yield of the 2-year Gilt was already rising sharply, going from 1.71% to 3.00% in August, before leveling off through much of September. As markets got wind of the new government’s fiscal agenda, yields surged from 3.00% last Monday to a peak of 4.76% in one week. Chaos ensued, with the British Pound falling to a new all-time low, but it was full panic yesterday morning as pension funds began feeling the squeeze with some bond holdings losing as much as half their value. Something had to be done, and the Bank of England stepped in. It reversed policy, delaying plans to start selling Gilts next week, and instead began buying yesterday.
Upon this news, Bill Baruch tweeted, “Cable (British Pound) holding pretty well given BoE news. Chaos & dysfunction across the globe. Loosely, like June 4 2020 ECB announced a bigger PEPP and EUR rallied off coordinated effort to stabilize risks. Given excessive negativity in GBP & others vs USD. Time to think counterintuitively.”
This is exactly what happened, for no reason other than no more buyers of the U.S. Dollar, it began reversing sharply. In fact, after the British Pound posted its worst day since March 2020, it had its best day since June. Also, the U.S. Dollar Index settled with a massive outside bearish technical candle. As of yesterday’s close, there is reason to believe this reversal in the U.S. Dollar Index can slide as low as 110.75-111.25, helping to lift risk-assets. Not so fast, early this morning, U.K. Prime Minister Truss doubled down on her plans to stave off a recession, creating added volatility. Given the recent large-scale swings, patience and closing levels become more necessary.
From the U.S., final Q2 GDP was in line with the previous -0.6%, but some GDP price data did tick up. Also, Initial Jobless Claims fell right through the 215,000 expected and at 193,000 it is the lowest level since April.
E-mini S&P (December) / NQ (December)
S&P, yesterday’s close: Settled at 3732, up 71.00
NQ, yesterday’s close: Settled at 11,555.75, up 222.00
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NQ (December)
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Crude Oil (November)
Yesterday’s close: Settled at 82.15, up 3.65
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Gold (December) / Silver (December)
Gold, yesterday’s close: Settled at 1670, up 33.8
Silver, yesterday’s close: Settled at 18.88, up 0.543
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Silver (December)
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