Bathed in a sea of red

A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent, Treasury

Data refreshes every time you open this email. For more European market news, click here. Please send any feedback to morningbid@thomsonreuters.com” rel=”noopener” target=”_blank” style=”text-decoration: underline; color: #005da2;”>morningbid@thomsonreuters.com.

It’s a sea of red in Asian share markets as investors flee from risk and a lot of crowded trades unwind in an unruly manner. Popular positions from yen carry trades to crypto are being dumped in a rush to the exits, with volatility spiking and liquidity drying up.

There’s also talk of investors having to close profitable positions because they need to cover losses elsewhere, which may be one reason gold has struggled.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 2, 2024. REUTERS/Staff

The sprint to sell has seen trading halts triggered in several markets including the Topix and KOSPI, while the Nikkei was down a scary 7% at one stage. The index is now in bear territory having fallen 20% from its peak, which was hit less than a month ago.

Investors are hoping central banks will ride to the rescue with a global version of the Fed put. Futures now imply a 73% chance the Fed will cut by 50 basis points in September, and a total 115 basis points by Christmas. Rates are seen near 3% by the end of next year.

Markets have priced in another 74 basis points of cuts from the ECB and 47 basis points from the BoE. There are also doubts the Bank of Japan will go ahead and hike again in October, less than a week after it took a turn to the hawkish side. As a result, JGBs recouped all their recent losses sending 10-year yields back to where they were in April.

There’s even chatter of an inter-meeting easing from the Fed, which seems like wishful thinking from investors in the red. The Fed’s Goolsbee played down the impact of the payrolls report on Friday and has a chance to do so again later on Monday, along with San Francisco President Daly.

Graphics are produced by Reuters.

A jobless rate of 4.25% is still pretty low historically and analysts suspect it will come back down in August. Those citing the Sahm rule should remember economics is not actually a science, no matter how much it might like to be. It wasn’t that long ago that negative interest rates were considered to be impossible.

The U.S. ISM services index is also due and analysts are hoping for a bounce after June’s surprising slide. Clearly its jobs index will bear watching given how many workers there are in the sector. The Fed’s survey of senior loan officers will get more than its usual attention for any sign of lending stress.

It is notable that Treasuries, opens new tab have not extended Friday’s huge rally, with 10-year yields back at 3.78% having hit a low of 3.723% earlier. Fed fund futures also pared early gains, particularly in the 2025 contracts.

Still, two-year yields are now just eight basis points away from slipping under the 10-year and turning the curve positive for the first time since mid-2022. Such a dis-inversion has sometimes heralded recessions in the past. Goldman Sachs has upped the risk of recession to 25%, while JPMorgan puts it as twice that.

Morning Bid is sent every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.

Want to stop receiving this email? Unsubscribe here. To manage which newsletters you’re signed up for, click here.

Reuters Terms & Conditions and Privacy Statement