MFR’s RECAP OF YESTERDAY’S MARKET ACTIVITY
Weak equities and a EUR rally contributed to a bounce in gold and oil prices during the NY session today. Treasury yields that had initially moved lower in sympathy with European rates, started to move higher following hotter than expected July PPI (+1.2% mom and +0.7% core). With inflation back in focus — German July PPI had also been reported much hotter than expected overnight (+2% mom and 8.9% yoy) — gold began to move higher and this triggered USD selling, particularly against the EUR. Oil and other commodity prices took a bounce higher. Markets have moderated since the crescendo about mid-day, but equity markets continue to look vulnerable to the downside and investors exhibit risk averse behavior.
Continued concerns about the financial sector, talk that some big bank could fail, hotter than expected PPI (suggesting profit squeeze) and weak housing starts/permits combined to undermine stocks. The difference today however was the move higher in bond yields. They had been down during the European session but started to move higher will 10yr Treasuries at about 10am. Just about the time Dallas Fed President Fisher was saying that slower growth may not be enough to temper inflation and about the same time as gold prices began to move higher. Freddie Mac sold $3B in 5yr reference notes at 4.172% or 113bp above Treasuries, the highest spread in 10 years and more than the 69bp at its May sale or 105.5bp at the March issue - at the time Bear Sterns was the focus of attention. There was some thought that the attractive yields triggered some shifting out of Treasuries into agencies, adding to the upward move in Treasury yields. The gains in the 10s, reaching a high of 3.85% against 3.78% at about 8am, also pulled up 2s (from a low of 2.26% to 2.33%). By the time they closed, European yields were also pulled higher from early NY levels by 5-6bp along the curve. For example the German 10s were 4.11% when we came in and 4.16% when the European market closed. The 2s went from 3.92% to 3.97%. With the outlook for weak growth in coming quarters and investors anxious about financial sector stability, the downside bias for yields remains.
The gold price began to move higher along with the 10yr Treasury yields. This seemed to pull oil higher after some moderation early in the NY session. Rising gold and oil encouraged profit-taking from long USD positions. The USD index slip from about 77.20 at 10am to a low of 76.72. just after mid-day. The move also appears to have been largely EUR driven. EUR/USD went from 1.4640 to 1.4780. The EUR appreciated against all G10 currencies except the NOK. The bigger moves today were been against the USD (+0.4%) and the GBP (+0.4%). These moves in commodity and currencies appear to have been driven more by technical or position concerns rather than economic fundamentals. With markets thin and less liquid as the summer holidays come to a close, volatile swings remain a risk.