One of the biggest questions facing investors this year has been whether central banks will be able to contain inflation quickly enough and let the air out of asset bubbles slowly enough to achieve their goal of a soft landing without crashing markets or the economy and causing enough chaos that they would then need to backtrack. As the year has progressed, more and more central banks have been singing off of a hawkish song sheet, aggressively raising interest rates, ending negative rate regimes, and starting to shrink/normalize their balance sheets which became bloated by the Covid QE stimulus of 2020-2021.
In response to volatility in the British Pound in the wake of the recent UK mini-budget and soaring 10-year UK Gilt yields which pushed above 4.35% earlier today, the Bank of England appears to have blinked this morning. Governor Bailey announced that plans to start asset sales (Quantitative Tightening) next week have been shelved and the central bank is starting a new “temporary” asset purchase (Quantitative Easing) program immediately to “restore orderly market conditions”.
Equities tried to rally on this news but were unable to get very far and have turned back downward following a short-lived bounce. Currently, US index futures are down 0.3% to 0.9%. In Europe this morning, the Dax is down 1.3% and the FTSE is down 0.8%. Asia Pacific trading saw the Hang Seng plunge 3.4% and the Nikkei fall 1.5%. Commodity action is mixed. Natural gas is down 2.1% even amid problems with the Nord Stream pipelines in the Baltic Sea and Hurricane Ian rolling through the Gulf of Mexico.
Treasury yields continue to climb. The US 10-year treasury note yield has moved above 3.90% to within striking distance of 4.00%, while the German 10-year Bund yield has moved up above 2.25%. In currency action, the British Pound is getting hammered again, down 1.1%, while the Euro, Gold and the Canadian Dollar are down a more moderate 0.3% against the still-soaring US Dollar.
Fed Chair Powell speaks at 9:15 am EDT this morning, with investors watching for any sides of hawkishness cracking on this side of the Atlantic. Fed Governor Bowman is also speaking today. US pending home sales are due at 9:00 am EDT followed by weekly DOE crude oil inventories at 10:30 am.
SIA Wealth In The Media:
Chief Market Strategist Colin Cieszynski appeared on BNN Bloomberg today where he spoke to the impact of recent US Dollar strength on currency markets and the outlook for corporate earnings. He also discussed tactical investing, relative strength and SIA Wealth Management’s recent return to 0% equity exposure.