Investors will be hoping for a positive surprise after Wednesday’s heavy selling. The MSCI Asia ex-Japan index had its worst day since June last year and the MSCI World index had its biggest fall since December, while the Nasdaq and S&P 500 posted their biggest declines since February and April, respectively.
Fitch’s decision late on Tuesday came as a surprise and certainly contributed to the slump in stocks. But its effect on the dollar and U.S. bonds – two areas where souring U.S. credit-worthiness should hit the hardest – was negligible.
Two- and 10-year Treasury yields moved a few basis points and the dollar rose. The dollar has now appreciated 10 of the last 12 trading days – bad news for hedge funds holding the largest short dollar position in two-and-a-half years.
G10 FX volatility crept to a two-month high on Wednesday but it’s worth remembering that in early June, vol slumped to its lowest since March last year.
The U.S. yield curve has been steepening for more than a week, led by selling at the long end. That trend accelerated on Wednesday after the Treasury laid out plans to increase the size of debt auctions in the coming quarters.
Japanese stocks on Wednesday suffered their worst day of the year, knocked down by the triple whammy of the BOJ’s step last week toward policy normalization, rising long U.S. bond yields, and a stronger dollar.
But again, the bigger picture is less alarming. The yen ended the day little changed, and dollar/yen volatility is comfortably lower than it was before Friday’s BOJ move.
