Market Commentary: Yields rise further but US dollar gives some back 

Market Commentary: Yields rise further but US dollar gives some back 

Key Points 

  • Bond yields rose further, but the US dollar gave back some ground. 
  • The Japanese yen led, while the Australian dollar lagged. 
  • Gold fell, while WTI crude oil rose. 
  • The S&P 500 was down. 

Presently, there are two primary factors influencing market sentiment:  

1) Escalating bond yields 

2) Concerns about China’s economic situation.  

These two aspects are interconnected, as evidenced by China’s recent directive to banks to increase intervention in the yuan. This action might involve the selling of Treasuries to support these maneuvers or, at the very least, a reduction in Treasury purchases. 

Despite new yearly highs in long-term yields, both USD/CNH and the broader US dollar experienced a retracement today. This counteracts the prevailing narrative and can be attributed to weaknesses in the equity markets, particularly evident later in the day when USD/JPY dropped from 146.25 to 145.62. During earlier Asian trading, the pair reached its highest point of the year at 146.50, sparking discussions about potential intervention. 

The Asian session currently holds significant market dynamics, and upcoming Japanese CPI data might indicate a spike in inflation. This could contribute to upheaval in both the yen and bond markets. Japanese 10-year bonds are trading at 0.65%, slightly below the previous peak earlier this month. 

Commodity-linked currencies registered slight declines again today, partly influenced by a soft Australian employment report. However, the declines were modest, suggesting that sellers might be taking a pause. 

Meanwhile, the British pound, despite recent economic concerns, is holding its ground well. Elevated inflation and increasing gilt yields are providing support to the pound, which has seen gains for a third consecutive day amid challenging market conditions. 

China’s struggling economy: Growing debt woes and market disillusionment 

A recent report indicated that China has instructed banks to intensify their intervention in the yuan, and the market is interpreting this as a signal that a substantial devaluation similar to that of 2015 is less likely. 

Concurrently, China’s issues are deteriorating further. Today, we learned that the Chinese trust company, Zhongzhi, is considering a debt restructuring, and it appears that debt troubles are spreading. Additionally, it seems that the central government is hesitant to resort to drastic measures. 

This week, we witnessed an unexpected interest rate cut from the PBOC, and today they declared that their “prudent monetary policy will be precise and forceful.” However, the market is growing weary of China’s cautious approach and is looking for more assertive actions. This sentiment is compounded by discussions about a potential ban on stock sales in China, making the situation appear clumsy. 

To be fair, China still has various strategies at its disposal, especially given the current 0% year-on-year inflation rate. Nevertheless, both the market and I are quickly losing confidence. Initially, this year was expected to mark a robust recovery for China following the COVID-19 pandemic, but at every juncture, the results have been disappointing. 

Currently, markets’ outlook on China is becoming increasingly bearish, which is moderating my optimism for global growth and commodities. 

The real challenge lies in the bond market, where the potential consequences of China selling Treasury holdings or halting reinvestment could be profoundly negative on the long end. This might already be unfolding, further complicating the task of deciphering developments in global capital markets. From a technical perspective, there don’t appear to be significant barriers preventing 10-year yields from reaching 4.50%. Thus, we might proceed from this point or await the Fed’s indication to mark the peak in interest rates. 

Author: Jacky.T

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