Bonds Everywhere Are Suffering as Rate-Hike Fears Swamp Traders

Bond

Summary:

Global bonds are slumping after two shock interest-rate hikes this week served traders a reality check that central banks are far from done fighting inflation.

Shorter-maturity Treasury yields are close to their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with more rate hikes to combat stubbornly fast consumer-price gains.

The tightening is convincing traders to rethink their bets of US rate cuts later this year, underscoring the threat that the battle against inflation may be far from over.

Fresh jitters over a prolonged rate hike cycle risk paving the way for a renewed surge in volatility across global risk assets. But just like during last year's hikes, the concerns also put traditional havens in the firing line — a gauge of US Treasuries fell more than 1% in May as funds repositioned.

"The Reserve Bank of Australia defied economist predictions to increase the cash rate again this week, which may put more pressure on the European Central Bank, US Federal Reserve (Fed), Bank of Japan and Bank of England," said Colin Graham, the head of multi-asset strategies at Robeco. "Expectations for July have now shifted from an expected cut to an expected rise" for the Fed, he said.

Treasury yields were little changed in Asia on Thursday (June 8), with the 10-year just below 3.8%, up about 10 basis points this week. Australia's three-year yield jumped as much as 17 basis points to 3.87%, the highest since 2011.

More hikes

Investors briefly priced in a full quarter-point rate hike by the Fed by July and though they still expect some easing by year end, multiple rate cuts have being priced out of markets. That's triggered a renewed flattening of sections of the US yield curve.

All eyes will be on US inflation data next week, which will provide further clues on the Fed's policy path.

"With inflation having proved more stubborn than we'd thought, we now think the central bank will keep its policy rate higher for longer than we had previously projected," Diana Iovanel, an economist at Capital Economics, wrote in a note.

While some firms including Societe Generale SA reckon US interest rates may already be at their peak, the same can't be said for those in Europe. Traders are pricing in half a percentage point of hikes by the European Central Bank in the next three months, swaps data show.

The ECB is "behind the curve in terms of inflation pressure, in terms of rates", Guy Stear, the head of fixed income research at SocGen told Bloomberg Television. "They have to keep going."

Source: Bloomberg

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Comments

Add to Favorites

Warren Takunda

Traders' Opinions

In a report released today, the United States Department of Commerce revealed that the nation's trade deficit reached a six-month high of $74.6 billion in April 2023. While the widening gap indicates challenges for the US economy, it managed to fall slightly below market expectations, which had projected a shortfall of $75.2 billion. The latest data reveals a complex mix of declining exports and rising imports, influenced by various industries and key trading partners.

Exports from the United States experienced a notable decline of 3.6% to reach $249 billion in April. Among the leading export categories that contributed to this contraction were crude oil, fuel oil, pharmaceutical preparations, gem diamonds, jewelry, financial services, and government goods and services. On the positive side, sales in the travel industry witnessed a rise during this period.

Meanwhile, imports into the United States increased by 1.5%, reaching $323.6 billion in April. The surge in imports was primarily driven by passenger cars, industrial supplies and materials, finished metal shapes, nonmonetary gold, organic chemicals, cell phones, and other household goods. However, there was a decline in purchases of crude oil, natural gas, as well as transport and travel services.

Analyzing the trade imbalances, it becomes evident that the largest deficits were recorded with China, amounting to $24.2 billion, followed by the European Union with a deficit of $17.3 billion. Mexico and Vietnam also contributed significantly to the trade gap, with deficits of $13 billion and $8.5 billion, respectively. On the other hand, the United States managed to achieve trade surpluses with the Netherlands ($4.2 billion), South and Central America ($4.1 billion), Belgium ($1.9 billion), and Hong Kong ($1.6 billion).

The widening trade deficit in April raises concerns about the impact on the overall US economy. A persistent trade gap could put pressure on domestic industries, potentially leading to job losses and affecting economic growth. Efforts to address the imbalance in trade, such as exploring new export markets and reviewing trade policies, may be crucial in the coming months.

Economists and market analysts will closely monitor future trade data, looking for signs of stabilization or further widening of the gap. The United States continues to navigate a complex global trade landscape, marked by evolving geopolitical dynamics and economic uncertainties.

Risk Warnings and Disclaimers

Comments

Add to Favorites

Owen Li

Commodity

LME three-month nickel sank to a nine-month low of $20,310 per tonne last week and at a current $21,500 is now down by 31% since the start of the year.

Nickel is pricing in a looming supply glut as Indonesia builds out ever more production capacity in its race to be an electric vehicle battery metals giant.

The country's mined output grew by 48% last year and by another 41% in the first three months of this year, according to The International Nickel Study Group.

Indeed, such is the scale of the Indonesian nickel boom that the market could be in large surplus until at least 2027, Macquarie Bank analyst Jim Lennon told an industry conference in Jakarta last week.

You wouldn't know it from LME stocks, which are at their lowest since 2007 with metal still departing daily.

The supply surge hasn't yet crossed nickel's class divide and low visible inventory is still cushioning the price fall.

Low Exchange Stocks, Divergent Spreads

Another 144 tonnes of nickel were loaded out of the LME warehouse system on Tuesday, their place in the exit line taken by 132 tonnes of fresh cancellations.

LME stocks have fallen by 32% since the start of this year and currently sit at a 16-year low of 37,386 tonnes. On-warrant inventory of 34,746 tonnes is the lowest it's been since November 2019.

Shanghai Futures Exchange (SHFE) stocks dwindled to just 560 tonnes earlier this month before getting a 3,678-tonne mini-booster last week. Shanghai time-spreads have been persistently tight due to chronically low stocks and the cash premium seems finally to be drawing in metal.

London time-spreads, by contrast, are trading in super-contango territory. The benchmark cash-to-three-months period flexed out to a contango of $210 per tonne in late May and was still a wide $122 at Tuesday's close.

The spread structure complements the outright price weakness in signalling growing oversupply.

Low exchange inventory, however, signals that the surplus is still largely confined to the Class II segment of the market and hasn't yet crossed over to the high-purity Class I nickel that trades on both the LME and ShFE.

Closing The Class Divide

The INSG last month raised its expected global supply-demand surplus to 239,000 tonnes. But it noted that while market surpluses have in the past been linked to LME-deliverable Class I nickel, this year's abundance will be in Class II intermediate product and chemical forms.

Russian nickel producer Norilsk Nickel has also just raised its assessment of 2023 market surplus from 110,000 tonnes to over 200,000 tonnes in light of the pace of Indonesian production growth. It too expects most of the surplus to come in Class II form.

Nickel's class divide is expected to close as a new generation of Indonesian operators master the processing route of converting the country's relatively low-grade ore to battery-ready nickel sulphate.

Upgrading Indonesian supply to battery-quality form should reduce demand for Class I nickel, previously the material of choice for conversion to nickel sulphate.

There are signs of this already happening.

China, which is heavily invested in Indonesia's nickel sector, has been importing ever rising quantities of intermediate products such as nickel matte and pig iron.

The country's call on Class I refined metal has been falling in tandem. Net refined metal imports slumped from 256,000 tonnes in 2021 to 133,000 tonnes last year. Inbound shipments in the first four months of 2023 amounted to just 11,000 tonnes, down 82% on the same period of 2022.

The displacement effect should help loosen a tight Class I market outside of China.

Norilsk expects the Indonesian displacement effect to generate a 40,000-tonne supply surplus in the Western market over the course of the year.

Waiting For Surplus

The Class I physical supply chain is easing. Nickel briquettes in Rotterdam are currently commanding a premium over LME cash in the range of $375-600 per tonne, according to Fastmarkets.

That's a long way off last year's extreme highs of over $2,000 per tonne when the market was panicking about the potential for official sanctions on Norilsk, a major supplier of Class I nickel.

However, the European premium is still elevated by historical standards. Prior to February 2022 and the Russian invasion of Ukraine it had been trading for many months just below $200 per tonne.

Russian nickel has been hit with penal import tariffs by the United States but remains free of government sanctions. Self-sanctioning by buyers opting for other brand metal clouds the picture but the flow of Russian metal, even if down changed channels, has been an important supply stabiliser in Western markets.

Yet it is evident that refined metal is still sufficiently scarce that material is still tightly held. The last inflows to the LME warehouse network were almost a month ago.

More arrivals would vindicate the many bears in the market. Until then, though, low and falling inventory remains a point of tension within a market pricing itself for massive surplus.

Source: Reuters

Risk Warnings and Disclaimers

Comments

Add to Favorites

Thomas

Central Bank

South Korea's central bank warned on Thursday (June 8) that an early shift in its monetary policy stance could pile more pressure on the local currency, a risk that needs to be properly addressed.

Highly uncertain inflation, accumulated financial imbalance, and credit risks related to the real estate market are among issues that required to be considered before changes to the monetary policy, the central bank said.

"Additional rate hikes by the US Federal Reserve (Fed) or an early shift in the domestic policy stance may increase downward pressure on the local currency," the Bank of Korea (BOK) said in its quarterly monetary policy report submitted to Parliament.

The BOK held interest rates steady for a third straight meeting last month, after 300-basis-point increases in 1-1/2 years through January, but also signalled it may not be done tightening.

The current policy interest rate of 3.50%, the highest since late 2008, is at a restrictive level, slightly above the neutral range, the BOK said.

However, the central bank said the degree of restrictiveness has lessened significantly this year with a sharp fall of interest rates in local financial markets.

Volatility in the won has risen above its long-term average since early last year following the Fed's interest rate hikes and exceeded that of most other currencies since August by a significant degree, the report said.

Domestic factors such as trade deficits have recently fuelled the increased volatility, it said.

The won has weakened by 3% against the U.S. dollar so far this year, following a 6% drop in 2022, when the South Korean currency once touched its lowest level in 14 years. That compares with the U.S. Dollar index's gains of 0.4% and 8.2% so far this year and in 2022 respectively.

The BOK said uncertainty was still high over how fast inflation would ease, citing core prices that were stickier in downward direction and delayed public utility price hikes.

The real estate market remains overvalued, the central bank said, adding that a declining trend in house prices softened this year, with a rebound in mortgage loans on loosened regulations.

Source: The Edge Malaysia

Risk Warnings and Disclaimers

Comments

Add to Favorites

Warren Takunda

Traders' Opinions

Economic

The Turkish lira plummeted over 6% against the US dollar on June 7th, reaching a new record low of 23 lira per dollar. This marked the largest daily drop since 2021 and brought the total depreciation to more than 16% since the runoff election held on May 28th. Reports have emerged suggesting that state lenders have halted the sale of dollars, signaling a change in Turkey's market interventions aimed at curbing the demand for foreign exchange. This move comes as the country's net forex reserves slipped into negative territory for the first time since 2022.

Investors and analysts alike have attributed this sharp decline to the new economic team's decision to pull back from intervening in the currency market. Led by Mehmet Simsek, a former deputy prime minister renowned for his market-friendly policies, this team is expected to implement a more conventional economic approach. Simsek's appointment as the new finance minister has fueled investor optimism, with many betting on a return to orthodox monetary policies and a market-driven exchange rate.

Furthermore, market participants are anxiously awaiting the nomination of a new central bank governor, which will further shape Turkey's economic direction. This appointment is expected to shed light on the future monetary policy stance and the extent of the government's commitment to restoring stability to the Turkish lira.

In addition to domestic factors, the decline of the lira has been influenced by Japanese retail investors who may have triggered stop-loss orders in both the lira and yen markets. Their actions have contributed to the lira's downward spiral, adding to the existing pressure on the currency.

The recent sharp devaluation of the Turkish lira underscores the urgency for the new economic team to address the country's economic challenges. Inflationary pressures, a widening current account deficit, and geopolitical uncertainties have been weighing on Turkey's currency in recent months. Investors will be closely monitoring the steps taken by the government to stabilize the lira and restore confidence in the Turkish economy.

As the situation unfolds, market participants will be keeping a close eye on the Turkish authorities' approach to managing the currency and the broader economic reforms that are expected to follow. The decisions made by the new economic team and the central bank will likely shape Turkey's economic trajectory in the coming months.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

Add to Favorites

Devin

Forex

Turkey's lira took a 7% nosedive on Wednesday as the country's newly re-elected government appeared to be abandoning its costly 18-month strategy of keeping the currency on a tight leash by any means necessary.

Ankara has seen decades of financial market difficulties and the charts below show the challenges the lira's weakness poses for the country's new economic decision makers.

1/let it go?

A combination of a sizeable budget hole, an inflation problem and thanks to a couple of years of highly questionable policies, a puny pile of FX reserves, means that there are plenty of reasons for the lira to keep falling.

If, or where, it stops nobody really knows. Analysts at Wall Street giants like JPMorgan and Goldman Sachs and FX forwards markets all think 25 or even 30 to the dollar might be possible, which is another big lurch down even from Tuesday's record low levels.

Much will depend on whether the central bank now jacks up interest rates in the big way it has done during other bouts of turmoil, or even introduces capital controls - something the authorities in Turkey have long insisted is not on the table.

The central bank is however widely expected to get a new head in the coming days. That would almost certainly be followed almost immediately by a super-sized hike, to somewhere in the region of 25%-30% from the current 8.5%, JPMorgan predicts.

Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt added: "This is what happens when you get an exponential move - for a long time you think nothing happens, and then all of a sudden all hell breaks loose".

2/No Gain, No Pain

A potential sharp interest rate hike could easily grind the Turkish economy to a standstill again, or even worse tip it into recession, as consumers tighten their belts and companies watch borrowing costs explode.

Some of the pain could be offset by the weaker lira spurring exports potentially adding to boost of the upcoming tourism season and the reconstruction spending in the wake of February's devastating earthquake.

"GDP in local currency terms is more at risk from a course correction on interest rates, where rate hikes rein in rampant credit growth, rather than devaluation per se," said Hasnain Malik at Tellimer.

Turkey's economy is no stranger to boom-and-bust cycles, oscillating between double-digit growth and contraction rates in recent years. In its latest spring forecast, the International Monetary Fund projected a 2.7% expansion for 2023.

3/Inflation Palpitations

A tumbling lira will fan fears over a fresh spike in inflation in the country which only last year saw it top 80%.

Data on Monday showed headline inflation dipped to below 40% although that was partly down to Erdogan providing Turks with free natural gas in the run up to the elections.

Analysts were already expecting it to climb back towards 50% before the latest currency drop and Tellimer's Malik said it might now even snap back to the peak levels of last year as both the free gas ends and the FX moves work through the system.

"It's just so inevitable," Abrdn's head of local currency emerging market debt, Kieren Curtis, said referring to the lira's slump this week.

"There is just going to be more inflation so it's difficult to say what's going to turn that without a huge hike in interest rates."

4/Accounting Problems

One of the costs Turkey now faces is covering the special lira depreciation-protected bank accounts the government and central bank set up in late 2021 to convince Turks not to convert all their money into dollars or gold.

Frank Gill, a top sovereign debt analyst at credit rating agency S&P Global, estimates that if the lira drops to around 26.5 per dollar - 20% lower than where it was after President Tayyip Erdogan's re-election on Sunday - the compensation cost would be just under 3% of GDP.

He did add however that the compensation would be paid to depositors in lira rather than dollars or euros and that bill would be split between the Treasury and Central Bank.

5/Debt Dilemma

The other big problem is that $100 billion worth debt borrowed by Turkey's governments, companies and households is in dollars or euros - loans which are now getting ever more expensive to service unless you're a company whose goods are also sold in dollars anyway.

If the debt can't be repaid, the banks that gave the loans have a problem too as their balance sheets will start sprouting holes unless they have hedged themselves accordingly.

It could have wider ramifications too. Fund managers at NinetyOne estimate that when default-threatened CCC-rated countries are excluded, Turkey accounts for approximately 60% of all "high yield" emerging market sovereign debt payments due for each of the next four years.

Source: Reuters

Risk Warnings and Disclaimers

Comments

Add to Favorites

Alex

Central Bank

The Bank of Canada's decision to resume raising interest rates shook global bond markets and underscored the difficult task faced by central banks as they try to slow economic activity and tamp down inflation.

Policymakers led by Governor Tiff Macklem increased the benchmark overnight rate to 4.75%, ending a pause they declared in January after Canada's economy proved surprisingly strong despite much higher borrowing costs.

The central bank said the economy is running too hot to bring inflation back to its 2% target, citing robust consumer demand for goods and services and a pickup in housing activity. But Canada's situation isn't unique — and it may be the case that other central banks, including the Federal Reserve, will have to push rates deeper into restrictive territory this time around.

"Usually what happens in Canada, nobody in the U.S. cares," Fidelity Investments portfolio manager David Wolf, a former adviser to the Bank of Canada, said on BNN Bloomberg Television. "But in this case, I think people are taking the message that maybe all of these central banks aren't as close to done as people would have thought."

The yield on 2-year U.S. Treasuries jumped as high 4.6%, while comparable Canadian government bonds now boast the highest yield since 2007. Traders briefly fully priced in a Fed hike by July.

The Bank of Canada's decision didn't include much forward-looking language, suggesting officials have jumped back into hiking mode without any certainty about where borrowing costs will ultimately end up.

And while some economists have given Macklem kudos for a quick restart, the rate move is also a tacit acknowledgment that policymakers paused prematurely. Rates are likely headed higher in Canada than previously thought necessary by most observers — and by the bank itself.

It's a vindication for economists such as Citigroup Inc.'s Veronica Clark, the first analyst in a Bloomberg survey to predict a rate hike this week. "The Bank of Canada did pause. They waited to see how the data were coming in. They were expecting activity and inflation to slow and it didn't," she said Wednesday by phone.

But by moving to the sidelines, the central bank also helped Canada's housing market find a floor and start to rebound, she said. "It's a bit of a cautionary tale for the Fed to be pausing too."

Other analysts see lessons for investors as they gauge what a potential pause in the U.S. tightening cycle might mean. Fed Chair Jerome Powell and his officials, who are now in a blackout period ahead of next week's decision, seem intent on skipping a rate increase, while explaining to the public that they're not done yet.

"We have seen two central bank surprises this week in Australia and Canada. Canaries in the coal mine?" Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said by email. "The U.S. market is coming to the realization that the Fed may surprise as well."