It appears that Hillary's pneumonia has spread to global capital markets.
Last Thursday, with the S&P trading just shy of all time highs, we warned readers to "Brace For VaR Shock", and explained how the BOJ's surprising intent to steepen its Japanese yield curve could unleash a global bond market selloff, as a result of record high correlations between bond and stock assets. The very next day, accelerated by further hawkish comments by the Fed's Rosengren who saw a "reasonable case" for a rate hike, the S&P saw its biggest plunge since Brexit as fears about central bank "inaction", coupled with the realization of the BOJ-driven VaR shock spread through the market, and topped off with news that the Fed's Lael Brainard was set to deliver an unscheduled last minute speech in Chicago today around noon, which according to some could hint at a September rate hike by the legacy dove.
While it remains to be seen what Brainard will say, the market today is in a sell first, ask questions later mode, as the Friday bond liquidations that started in Japan and spread to the US, has now slammed Europe. Here are some recent indicative levels courtesy of Tradeweb:
- SPAIN'S 10-YEAR BOND YIELD RISES TO 1.13 PERCENT, HIGHEST LEVEL SINCE LATE JULY AND UP 4.5 BPS ON DAY - TRADEWEBWEB
- PORTUGAL'S 10-YEAR GOVERNMENT BOND YIELD RISES TO TWO-MONTH HIGH OF 3.23 PERCENT , UP 6 BASIS POINTS ON DAY - TRADEWEBEWEB
- ITALIAN 10-YEAR BOND YIELD RISES TO HIGHEST LEVEL IN OVER TWO MONTHS AT 1.33 PERCENT , UP 5 BPS ON DAY- TRADEWEBWEB
The biggest pain however is for Japanese bonds, where the 40 Year yield has exploded from 0.06% to 0.61% overnight, resulting in a 15% absolute price decline, from nearly 150 to under 130 in under 2 months,
Here is a snapshot of the current bond rout around the globe:
As we warned last week, and as @Schuldensuehner pointed out moments ago, the correlation between bonds and stocks is now the highest it has been since the financial crisis...
... which means that nobody is spared: the surge in bond yields is spreading to equities, in the case below, the Dax, which is tumbling 2.5% in early trade.
Other European cash indices are not doing better:
- Eurofirst 300 down 1.9% to a 6 week low
- France’s CAC 40 has shed 2.1 per cent
- The FTSE 100 has slipped 1.5 per cent
Not even China was immune: the Shanghai Composite tumbled 1.9%.
A recap of the main cross-asset moves:
- Equities: MSCI Asia Pacific (-2%), FTSEMIB (-2%)
- Bonds: German 10Yr yield (+3bps), French 10Yr yield (+4bps)
- Commodities: LME 3m Nickel (-3.1%), Natural Gas Futures (+1.6%)
- FX: Yen spot (+0.4%), Euro (+0.2%)
- Hang Seng China enterprises down 4%
- Vstoxx Index rises 15.5% to 22.29
Finally, US equity futures are likewise dumping, with ES algos aggressively defending the 2,100 level. If the eMini drops below this key support level, the Fed may have no choice but to cut rates, forget about hiking them.