19th August - 60 Day Ceasefire Expires With No Replacement
The most noteworthy news yesterday was the fallout from the expiration of the 60-day ceasefire agreement between the US and Iran. The ceasefire itself had been largely defunct already, but the fact that the official date has now passed carries psychological significance. Both sides have said there are no current talks, and Iran is saying that the Strait of Hormuz remains closed. We have also not had significant news of progress between Oman and Iran either, so we are currently sitting in a very uncertain moment when it comes to the Middle East picture.
Separate from this, but partially linked, yesterday US 30-year yields temporarily made it to a 20-year high, beating the mark set at the end of last month. This would be expected with inflation fears and rate hike concerns, as we saw earlier in the year. However, after recent news releases dampened inflation concerns and rate hike expectations lowered, we would have expected to see yields fall. This has not happened, as they have continued to rise throughout August. The reasons for this are nuanced, varied, but very important and something that could warrant its own post.
For me, there are two main points worth discussing in the context of the larger financial markets. The first is that demand for bonds is visibly weakening; the most recent 30-year auction last week cleared at 5.216%, the highest since 2001. With uncertainty around the Middle East, and more importantly, uncertainty around the health of the US economy, investors are currently just not interested in putting their capital into the US government. The second is related to the AI and data-centre boom and hits bonds from the supply side. With major tech firms taking on huge amounts of debt to invest in the AI boom, investors are currently being given the choice to invest in US debt or to invest in private equity debt. The debt market has seen its supply increase, meaning yields need to increase to stay competitive. This competition is pushing government bond prices lower and so yields higher. These higher yields have a knock-on effect for all financial markets, as explored below.
Forex
Yesterday saw the USD regain some of its losses, following the push it received on Tuesday afternoon. The gain was only minor, however, which has already been eaten up this morning. The USD is fighting against a month of consistently poor economic data and doesn't seem to have a way of fighting back. It saw some safe haven backing thanks to the uncertainty around the Middle East situation yesterday, but as we have seen this morning, it was not enough to change the momentum of the currency.
The fact that we have seen the USD under such pressure at the same time as long-term bond yields are at their highest for 20 years is a significant concern for dollar bulls. Higher yields should attract investment in US bonds and so mean people buy dollars to use for bond purchases. The fact that we are not seeing this is evidence that there is just not the demand to invest in the US economy, meaning we would need some form of structural change in the US economy or a strong set of economic data to change the market's perception of the economy. Apart from the FOMC meeting minutes released today, we do not have any major US news releases until this time next week (core PCE and prelim GDP), meaning I can see this negative sentiment around the USD continuing for a while yet.
Outside of the US, we saw a weak day for the AUD and NZD, as they struggled against weakening metal prices and an element of risk-off caution in the markets surrounding the situation in the Middle East. The CHF and JPY were relatively stable on the day, while the CAD was also relatively flat as oil prices stayed in place yesterday. The EUR and GBP were up a little but not a huge amount, possibly as a large stable alternative to the concerns around the USD. This could be something to keep an eye on over the coming weeks; strong moves in the GBP/USD and EUR/USD could further entrench the negative feeling around the USD.
Indices
Yesterday saw a sharply negative session. The Dow fell just 0.21%, the S&P 500 dropped 0.68%, but the Nasdaq slumped 1.73% to a one-week low. The tech-heavy index fell more than eight times as much as the Dow, with semiconductors as the catalyst. We saw the Philadelphia Semiconductor Index down 5.5%, and the memory names took the worst of it, as Micron, SK Hynix, and SanDisk all fell more than 4%.
That is a complete reversal of Monday's minor tech rally on the Anthropic revenue news. The entire gain from that story was given back within a single session, which partly answers the question I posed yesterday about Anthropic versus Cisco, and for now, it answers it in Cisco's favour. A one-day rally built on a private company's revenue print could not survive contact with the bond market.
This was not an earnings story; it was a rates story. Long-duration growth assets are by far the most sensitive to the higher 30-year yields we have discussed, which is exactly why the Nasdaq took the brunt while the Dow was barely scratched. The international picture reinforces the point. Europe was broadly lower, with the Italian FTSE MIB down 0.8% and the CAC 40 down 0.6%, but the UK's FTSE 100 rose slightly, and the Swiss SMI gained 0.45%. The two indices that held up are the two least exposed to growth and technology, which is the same defensive tilt playing out globally rather than just on Wall Street.
Precious Metals
The beginning of the pullback we have been waiting for arrived yesterday, and it arrived with force. Gold fell 1.18% and silver dropped 2.82%, with silver this morning down over 6% from Tuesday's high in the space of two sessions.
The catalyst was the Middle East, but not in the way you might expect. Iran declared it would shift to a "fully offensive" military posture following the breakdown of negotiations, after the 60-day agreement expired on Monday with nothing to replace it. Oil is sitting at its highest for a few weeks, inflation expectations rose on Hormuz concerns, the selloff in US government bonds accelerated, the dollar firmed, and the metals fell. We had increased geopolitical uncertainty focused on oil prices, and gold fell nearly 1.2% on the day.
This is the worst of both worlds dynamic returning, and potentially settles a question we raised last week. I had wondered whether the drivers had changed, and whether rising oil might now support metals through a stagflation channel rather than hurting them through the rate channel. Yesterday gave us some evidence we are not quite there yet.
The bond rates are important to touch on, as heightened long-term bond yields due to concerns about the economy do not easily reverse when the Fed pivots. A Fed-driven selloff does, but this is not one. If the long end is rising because investors are demanding more compensation to hold thirty-year US paper, then a dovish Fed rallies the short end and leaves the long end where it is. That is a headwind for gold via real yields that a rate cut alone will not remove, and I suspect it is a nuance that most of the market is not currently pricing. It does not change my medium-term view, but it does mean the path higher may be a good deal choppier than the past fortnight suggested.
Today's Market Drivers
GBP CPI, 7am UK time - Likely released by the time you read this, CPI will affect the GBP specifically and will influence the BoE's rate path moving forward.
US FOMC meeting minutes release, 7pm UK time - This will move markets if the sentiment revealed in the meeting is different from market expectations, but we will be keen to monitor it in case it changes our view on the Fed's rate path.
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