Fourth Day Fall for Europe

European stock markets fell for a fourth day, whilst shares in London headed for a second day of losses following a downbeat session in Asia, whilst bond markets are on the move with yields breaking out to new multi-year highs. Investors also had an eye on China’s Evergrande with shares plunging for a second consecutive day, down as much as 8%, as the company missed a debt payment. 

Bond Yield Break

Bond yields broke higher again, with the path of least resistance for the long end higher, producing steepening in the curve (less inverted). The US 10yr made a new 16-year high at 4.57%. Gilt yields were also higher and the yield on the German 10yr bund was at a 12-year high. Stocks across Europe fell. Wall Street put in a shift to rally a touch despite the higher bond yields – key neckline support around 4,360 on the e-mini futures is being defended valiantly.

Higher Treasury yields is putting bid into the dollar. USDJPY broke clear of 149 to hit its highest in almost a year. Sterling and euro also making new cycle lows with EURUSD at 1.05 and GBPUSD at 1.21, helping DXY futures hit a new high at 105.87 this morning.

ECB Messaging Consistent

The message from the central bankers has not changed in the last week. Christine Lagarde, the head of the ECB, reiterated that rates would need to stay restrictive for as long as necessary. The Fed’s Kashkari – an ultra dove - said “rates probably have to go a little higher, and then be held higher for longer”. 

Keep your eyes on Washington

If Republicans have not agreed a short-term funding deal to keep the US government from shutting down on September 30th, we could be in for a traumatic end of the month/quarter. A full, lengthy shutdown of the US government is "likely" at the end of the month, PIMCO said last week. Moody’s said a US government shutdown would likely have “an increasingly negative impact on the credit profile”. Are we seeing any of this in the bond market? I don’t know – maybe there is some risk premium being added, but also there is just a general impetus to push yields up – issuance + liquidity mismatch.  

Elsewhere…

Top of the shorts Asos fell as it said profits would be at the bottom end of guidance. Earnings before nasties are seen towards the £40m end of the £40m-£60m range, whilst free cash is seen down at £60m from £150m. Hot weather drove a strong June and a wet July and August produced a weaker sales result, which broadly netted out. However, phasing of sales impacted year-end cash flow, which will reverse in September and October, the company said. Shares were down around 1%, down ~30% YTD – it's the most shorted stock at 7.5% out on loan...offer coming? 

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