Martin North – Page 92 – Digital Finance Analytics (DFA) Blog

Breaking The Bond Market – The Crisis Is Real!

Bond Markets Are Suffering from Rising Volatility and Price Moves, as Central Banks lift rates and threaten Quantitative Tightening to try to tame raging inflation. And the word “crisis” is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government’s debt auctions is becoming a concern. Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step last Wednesday of expressing concern about a potential breakdown in trading, saying after a speech in Washington that her department is “worried about a loss of adequate liquidity” in the $23.7 trillion market for US government securities.

Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation.

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Your Super Savings Are Shrinking!

In this week’s market review we will as always begin in the US, cross to Europe and Asia, and end up with a local Australian summary – bearing in mind that our market pretty slavishly follows those in the Northern Hemisphere, which had an up day on Thursday, and a down day on Friday.

Volatility continues to rage across most asset classes, and this is now having real world consequences on our superannuation, or pension savings, which in Australia are forced by Government. As we will see the losses are mounting up.

But first, it was a bad end to a wild week with U.S. stocks dropped on Friday as worsening inflation expectations kept intact worries that the Federal Reserve’s aggressive rate hike path could trigger a recession, while investors digested the early stages of earnings season. The previous day the stronger than expected inflation data showed inflation remained stubbornly high and this shocked the market into a volatile rise. But in the last session of a volatile week, equities opened higher, then reversed course after data from the University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gasoline prices moved higher. The median expected year-ahead inflation rate rose to 5.1%, above the 4.7% seen in September. A climb in inflation expectations, a closely watched metric by the Federal Reserve, comes just a day after data showed worse-than-feared inflation pressure.

“Yesterday you had this amazing, powerful intraday rally that was completely wrong,” said Phil Orlando, chief equity market strategist at Federated Hermes. “Then you look at the Michigan numbers this morning that’s consistent with what we’re seeing in the economy, and the stock market now is down to reflect that number. That’s correct.”

The latest edition of our finance and property news digest with a distinctively Australian flavour.

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When Bad News, Is Good News, Is Bad News!

The S&P 500 staged its biggest intraday reversal since March 2020, while US core inflation continues to accelerate. Indeed, all the hotter-than-expected inflation prints this year have caused the US market to sell off. Except this one.

In fact, US markets reversed a -2.4% fall in early trade to close 2.6% higher, the largest intraday swing since 26 March 2020 three days after the pandemic bottom.

The Dow closed at 30,038 up 2.83%, the S &P 500 closed at 3,669 up 2.6% and the NASDAQ rose 2.23% to 10,649. The Volatility Index landed at 31.94.

Talk about volatile. But of course, volatility is a trader’s friend, and Bloomberg rightly highlights that technical levels factored into the bounce. At one point, the benchmark S&P 500 had given back 50% of its post-pandemic rally, triggering programmed buying. A wave of put options bought to protect against such a rout moved into the money, and as profits were booked, that prompted dealers to buy stocks to remain market neutral.

Today’s post is brought to you by Ribbon Property Consultants.