20th August - US Treasury Buys Its Own Debt
There were a number of news events yesterday, but there is only one place to start. The US Treasury yesterday announced plans to more than double the size of its liquidity-support buyback operations for longer-dated government securities, targeting the 10-to-20-year and 20-to-30-year portions of the curve. In other words, it will be buying back its own long-term debt. The change will take effect from the 9th of Sep and will run until the 4th of Nov at least, with the idea being to improve liquidity in these longer-term assets.
Just yesterday, we were speaking about the 30-year bond and the fact that yields were at their highest level for almost 20 years, caused in part by a lack of demand. This is exactly what the Treasury has sought to correct, increasing demand and so lowering the yield. Yields did fall, moving from 5.287% to 5.190%, but the biggest moves were in USD and Gold as we will explore shortly. The concern, however, is that this does not meaningfully change the fundamental outlook surrounding the US economy. The recent economic data is still weak, and the labour market remains uncertain. This intervention in the bond market seems as though it will have a similar effect to the BoJ interventions with the Yen; it will be a temporary help but long-term will not change the momentum of the markets. For that to happen, we would need to see a meaningful change in the market's perception of the US economy. Wells Fargo's Tony Miano put the caution well: "While the announcement may provide short-term relief, we do not believe it fundamentally changes the outlook for long-term yields."
Amid the focus on bond markets, something largely overlooked was the release of the FOMC minutes, which were more hawkish than expected. There were comments that the Fed would have to hike if inflation doesn't cool, which seems unlikely given oil is continuing to rise. We would normally see a positive reaction to the USD on hawkish news like this, but instead, it was completely overshadowed by the Treasury announcement and gives us a strong indication as to where the market's focus is.
On top of this, we also saw an announcement from Trump that he would be implementing "the most crushing economic operation ever taken against any country" in relation to Iran, but did not give any details on what this would entail. This comes after the UAE announced it would be severing all economic ties with Iran, following a new missile threat to the country from Iran. Once again, this had little to no effect on most markets, as everyone was focused on bonds.
Forex
The big loser from yesterday was USD, but interestingly the big winner from the same news was CHF. The DXY fell significantly, dropping 0.9% from 99.660 all the way down to 98.770. The obvious explanation for this is that when yields fall, they are less attractive to investors, and so less USD will be bought to be able to purchase the bonds. There is also the liquidity explanation in this case, that the US Treasury is pumping more dollars into the system by buying bonds, increasing supply and lowering the price. These, however, are longer-term effects of a lower yield, when yesterday's move only took one session. The reason for the fall above all else is a loss of confidence in the US economy, which ironically is the reason yields were higher in the first place. This also means that the main driver behind higher yields just became more acute, and so will likely put more pressure on both yields and the USD. In my opinion, this move seems to be a sticking plaster on a gaping wound, a temporary solution that may end up doing more damage than good.
The main beneficiary of yesterday's events was the CHF, which emphatically regained its safe-haven status among currencies after struggling to find such demand during the start of the Iran war. The fact that the CHF gained so much is all the evidence we need that the USD move was a sentiment shift as opposed to a mechanical move; capital moved out of USD as a safe-haven and into CHF as a safe-haven. The USD/CHF chart was a sea of red yesterday, with a move lower of 1.8%, an enormous move in forex markets. The interesting thing to monitor today is whether the move was overstretched yesterday and we see a pullback today, or whether there is still more downward movement this session. In the long term, there will be more USD weakness unless the fundamentals change, but in the short term, it will be interesting to see how quickly the weakness shows through.
The JPY also gained some safe-haven support yesterday, but nothing like the CHF. The other main currencies were relatively flat on the day as the market's entire focus was on the USD. GBP had its CPI print yesterday in line with expectations at 2.9%, while overnight the AUD saw unemployment reported at 4.5% against an expected 4.4%, but with all of the focus elsewhere neither data point has had a noticeable effect on the currency in question. There may be some catalysts that move currencies outside of the USD and CHF, but for the rest of the week at least, they will be taking a back seat to the main event.
Indices
All three indices snapped their losing streaks, but we only saw small gains on the day, if any at all. The Nasdaq Composite rose by 0.24%, but the Nasdaq 100 actually fell by 0.04%, showing just how much of a marginal day it was. Within the indices, though, we saw a continuation of the story of a struggling semiconductor sector. Moderna soared on the announcement of a new cancer treatment, while Apple, Salesforce, and Tesla all rose by 1% to keep the indices above water.
The yield story did not have a huge effect on the indices markets. Lower yields lifted the market as a whole but did not affect the AI complex, which is a little concerning as it means that sector is not responding to macro events in the way the rest of the market is. The selloff is about something other than general market confidence. This remains something to look out for and brings me back to the balloon deflating thesis we had discussed over the past few months. The market rising while the AI sector falls is the soft landing we had been hoping for. Time will tell if this continues, but it is absolutely something to watch.
Precious Metals
Metals ripped higher yesterday as safe-haven demand returned in force. We were discussing yesterday how higher yields could get in the way of a smooth push long for metals, even if the cause of the higher yields was a lack of confidence in the US economy. We now have a situation of lower yields and even less confidence in the US economy, which is a perfect storm for metals' strength. Gold jumped 4.2% on the day to $4,523, above the key $4,500 psychological level, while silver jumped 5.8% to $67.
The fact that this happened on the same day we saw hawkish commentary in the FOMC minutes is a perfect indication that this move is a confidence trade and not a rate-cut trade. In the current environment, metals are shedding their rates instrument shackles and are being pushed along by the more traditional safe-haven demand metals bulls have been craving since the start of the Iran War. Where we go next is fascinating and similar to the USD and CHF outlook. Do we see a pullback today to tell us the move yesterday was exaggerated, or do we see more strength today to tell us the lack of confidence in the US economy is significant and here to stay? I lean towards the latter, but markets never fail to surprise, so it will be one we need to keep a keen eye on.
Today's Key Market Drivers
US Treasury fallout - Yesterday's decision will continue to affect markets today. The question will be whether we see a pullback or a continuation.
Walmart, Alibaba, Deere, and Ross Stores earnings, after close - Walmart will be the big one and is a key read into the fate of the US consumer.
Philly Fed & Jobless Claims, 1:30 pm UK time - These are not high-impact news events normally but are still interesting to look out for. They are likely to be overshadowed this week, however, by the Treasury fallout, so may have limited impact unless there is a surprise.
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