Displaying items by tag: dollar

(Washington)

Investors, be worried about the Fed, and not for the reasons you think. While all the market’s focus has been on how quickly the Fed will raise rates, what could really cause problems is the Fed’s unwinding of its balance sheet. According to the Indian central bank, this unwinding is sucking Dollars out of the system and causing a Dollar liquidity squeeze. According to Urjit Patel, the governor of India’s central bank, this Dollar-squeeze means “a crisis in the rest of the dollar bond markets is inevitable”, with a growing “possibility . . . a ‘sudden stop’ for the global economic recovery”.

FINSUM: It sounds like emerging markets are going to have increasing trouble issuing Dollar bonds, which could definitely throw a wrench into the recovery. Maybe this is how the Fed sparks a global recession and not just an American one.

(Sao Paulo)

Investors who had been betting on emerging markets stocks might want to take notice of what is happening in the Treasuries market. While the explanation is a little technical, hear this: since the US deficit is set to rise rapidly, the US will see a surge in Treasury issuance. That big jump is issuance will suck up investor Dollars, and is likely to greatly wound Dollar-based EM funding. The Fed will also be forced to stop shrinking its balance sheet, which will also exacerbate the situation for EMs.

FINSUM: It sounds like the EM funding market is going to take a hit, which could have major ripple effects throughout the whole asset class.

(New York)

Despite the hopes of investors, yields moved higher yesterday, with ten-year Treasury yields now back above 3%. For a while the momentum higher had been stemmed, but yesterday saw yields move sharply upwards. The move got the Dollar back on track, but it left equities nervous about what may lay ahead. Some market watchers say the recent market moves are a preamble to a correction.

FINSUM: Markets (stock and bonds) are bouncing all around, essentially momentum-less. We think things are going to be this way until a strong narrative takes hold—either trade war and recession, or something that renews the bull market.

(New York)

Yields on the ten-year Treasury note crossed the 3% threshold this week and seem set to stay there for some time, sparking a big change in bond markets. Bloomberg argues that yields at this level change everything for all asset classes. The reason why is that a jump in yields to above 3% starts to cause a shake out amongst highly indebted companies, boosts the Dollar, and in turn, makes emerging markets less attractive.

FINSUM: To be honest, our biggest concern was not even discussed by Bloomberg, which is how higher yields affect the arithmetic for whether to put money in richly valued stocks, or into bonds that are starting to offer acceptable returns. 3%+ yields really could put an end to this bull market.

(New York)

Investors need to be on red alert today, as this is the day markets have been waiting for. US inflation data for January comes out this morning, the piece of information which will either assuage or accelerate fears about pending Fed rate hikes and a possible recession. Not only will the data affect US markets, but if inflation accelerates, it will also impact other asset classes, such as the Dollar, and by extension, emerging markets.

FINSUM: If inflation is ahead of forecasts, or looks at all strong, it will likely panic markets. If it is weak, there may be a relief rally.