Markets Liven Up As September Gets Going

WHERE WE STAND – US desks returned from the holiday weekend yesterday, and markets unsurprisingly livened up once more.

Anecdotally, I’m pretty sure this sort of thing happens every year. We endure a dull August where markets plod along, lulling us into a false sense of security, then September gets underway and bang, vol returns with a vengeance.

Despite that seemingly happening every year, we all (including me) tend to get caught out by it and end up surprised when it happens. The phenomenon, though, does make a lot of sense, as participants return after their summer breaks, take a look at markets with a fresh set of eyes, and determine how the want to be positioned for the final stretch of the year.

How did those fresh eyes view things yesterday? Well, they certainly took a dim view of developments here in the UK, with the quid slumping well over 1%, and Gilts selling-off across the curve yet again – taking benchmark 10-year yields to their highest since Jan, and benchmark 30-year yields to their highest since 1998.

There’s not really anything new to say here, with the UK still stuck in a ‘doom loop’ of ever-higher taxes to pay for an ever-higher welfare spending bill in an attempt to fill an ever-deeper fiscal ‘black hole’. While further tax hikes now would be counter-productive, the Treasury seem set to deliver them anyway in the autumn, thus setting the whole cycle off for another round-trip. Put simply, it’s pretty much impossible to be bullish on long-end Gilts here (6%, anyone?), while the pound’s recent rally looks to be built on sand, with the GBP long overdue a reality check. Cable trading down to the low-1.30s isn’t hard to envisage, though I still prefer to be short GBP in the crosses, to take out the dollar side of the equation and any associated ‘Trump risk’.

It must be said, though, that the long-end Gilt sell-off was not isolated to here in the land where lettuces last longer than PMs, and Chancellors cry in the Commons. DM govvies traded softer across the board, perhaps most notably as the 30-year Treasury approached 5% once more, with a chunky IG supply slate exerting notable pressure.

Again, there’s not really anything new here, simply a continuation of the curve steepening that we’ve seen for some time as the Fed embark on a dovish pivot, with a September cut inevitable, and in turn run the risk that inflation expectations un-anchor from the 2% target. At the same time, of course, President Trump’s continued efforts to erode the Fed’s policy independence are also shaking confidence, in turn helping hard assets such as gold, which printed new ATHs yesterday, and where the bull case remains intact. Similarly, the bear case for the greenback, which stems from the very same idea, is also a convincing one.

While Treasuries softened yesterday, so did basically everything else, especially once US desks got up and running for the day – G10 FX slumped across the board, equities lost ground on both sides of the pond, while crude also barrelled lower. In short, it was one of those days were all correlations went to 1, and programmatically-driven selling rather took over proceedings, setting logic and rationality to one side.

As frequent readers will know, I tend to take the view that the majority of intraday price action is little more than noise, and am even more inclined than usual to adopt that stance after a day like yesterday, especially when the overall macro backdrop has hardly changed at all.

As a result, I certainly don’t plan on shifting my bullish equity view any time soon, and remain a dip buyer. Economic growth is still solid, earnings growth remains resilient, calmer tones continue to prevail on the trade front, and the Fed are soon set to resume their easing cycle. If that wasn’t enough, retail demand seems likely to return now the summer break has come to an end, with corporate buybacks also set to increase once again.

This, for me, is a strong enough backdrop to remain convinced that the path of least resistance – albeit, not a linear path – still leads higher over the medium-term.

LOOK AHEAD – While today’s economic docket looks relatively busy, it’s debateable the extent to which any of the scheduled events are likely to move the needle.

Arguably, the most interesting event of the day comes this afternoon, where a host of BoE policymakers are due to address the Treasury Select Committee, including Governor Bailey. Given the bitterly divided nature of the MPC, which voted through a 25bp August cut via the narrowest possible 5-4 margin, and taking into account the rather ugly July inflation figures, the MPC find themselves in a bit of a pickle right now. Explicit policy guidance on Bank Rate is likely to be lacking, with Bailey set to reiterate the ‘gradual and careful’ approach that we’re now very familiar with, though some guidance as to the upcoming QT decision wouldn’t go amiss, especially given the shakiness in the Gilt market.

Elsewhere, we get a selection of final services & composite PMI prints throughout the day, as well as the latest US factory orders and job openings figures, both of which are rather stale. The same could be said about the Fed’s ‘Beige Book’ of anecdotal economic evidence, out tonight, though nothing in that is likely to dent the chances of a now-inevitable September rate cut.