A look at the day ahead from Sujatha Rao.
Inflation? reflection? Inflationary recession? Whatever ultimately turns out to be true, markets are terrified, with world stocks falling to their lowest since July and nearly 6% from record highs a month ago.
Brent crude has hit a new three-year high above $80 a barrel after OPEC+ stuck to its production policy despite pressure from producers to pump more oil. Record high gas prices and below-average European inventories portend a winter of high heat and electricity bills for consumers and small businesses alike.
China’s property sector problems and power shortages, which are making factories idle, meanwhile threaten economic growth; Developer Fantasia has joined Evergrande, a coupon payment and increased borrowing costs for “junk”-rated Chinese firms.
Now add the risk of default in the world’s largest economy. According to Moody’s it could cause US economic activity to shrink by about 4%, eliminate 6 million jobs in one stroke and raise unemployment to as much as 9%.
All that is keeping US 10-year bond yields below last week’s three-month high, while sending up the lowest-dated borrowing costs — one-month Treasury bill yields to the highest since last October.
US credit default swaps, which derivatives investors often use to hedge exposure, have reached one-year highs.
Energy costs with a dollar near a one-year high will inevitably tighten the global financing position, even as more central banks begin to remove pandemic-time stimulus.
The Federal Reserve will almost certainly start providing stimulus from next month and on Wednesday New Zealand is expected to become the second developed country after Norway to hike rates.
Wall Street has been attempting to recoup some of its losses since Wednesday when the Nasdaq fell more than 2%. Futures are pointing higher there and European stocks are still firmly open, although Japan’s Nikkei slipped to a one-month low.
Key developments that will provide further direction to the markets on Tuesday:
The Reserve Bank of Australia at its Tuesday meeting kept its monetary policy unchanged, as expected.
–Japan’s service sector activity declined for the 20th consecutive month in September
– UK passenger cars data
-BOE’s Dave Ramsden speaks
-ECB board member Fernandez Speaks Bolo
-Fed Speaker: Thomas Barkin of the Richmond Fed, Randall Quarles, Vice Chair for Supervision
-Euro Zone PPI
-Romania Central Bank meeting
– US trade balance / ISM PMI