North American Morning Briefing : Another Rocky Session in Prospect as Yields Breach 4%

09/28/2022 | 05:49am

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Opening Call:

Stock futures fell and bond yields rose early Wednesday as investors focused on signs of slowing economic growth, including a Bloomberg report that Apple had dropped plans to boost iPhone production.

The drop in U.S. futures suggested the S&P 500 could be on course to fall for a seventh straight session. Elsewhere, the yield on the 10-year Treasury note climbed for a third consecutive trading session, briefly trading above 4% earlier in the morning.

Ray Remy, a bond trader and co-head of fixed income at Daiwa Capital Markets America, said the bond market has been functioning as normal, but that investors are just dumping Treasurys as the Fed officials keep promising more rate increases.

"We're all bumping heads and scratching our heads a little bit," looking for explanations for the outsize move over the last few days, he added.

Shares in Europe declined for a five-day losing streak, while major benchmarks in Asia suffered broad losses.

On the European exchanges, shares of Apple suppliers STMicroelectronics, Infineon and AMS fell on a report that said the tech giant was scrapping plans to increase production of its latest iPhones this year due to weaker-than-expected demand.

Read more here.

Forex:

As the dollar rises to another 20-year high against a basket of currencies and against the euro, MUFG said it may be reaching extreme levels and risks destabilizing markets further.

"If the current speed of dollar strength persists, the contagion effect destabilizing markets globally will only intensify further and heighten risks of a deeper global recession," MUFG said.

Coordinated intervention to tame dollar strength looks unlikely for now, but "we should never rule anything out."

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Sterling could visit new lows ahead of speeches by some "dovish" members of the Bank of England, Mizuho said.

Huw Pill, chief economist of the BOE, has advocated "significant monetary policy response," thus speaking a "hawkish" language, but upcoming speeches by Jon Cunliffe and Swati Dhingra could tilt the tone in the "dovish" direction, Mizuho said.

"We wouldn't be surprised to see cable testing lows in anticipation of Dhingra's remarks," Mizuho said.

Bonds:

The yield on 10-year government bonds hit 4% for the first time in more than a decade on Wednesday, the latest leg of a historically steep rise that has jolted financial markets this year.

"It's shocking just the speed at which this has happened," Pictet Asset Management said. "But the new reality is inflation is much higher, so even at 4%, you ask yourself, is it going to be enough to bring inflation down?"

Read more here.

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Danske Bank said long-dated government bond yields are expected to continue rising over the next three months as high inflation figures keep ticking in, central banks tighten monetary policies further and concern about growing supply increases.

On a three-month horizon, the 10-year German Bund yield is expected to rise to 2.35%, while the 10-year Treasury yield should increase to 4.05%, Danske Bank said, adding that risks to these forecasts skew to the upside.

Danske expects bond yields to peak in 2022 and decline slightly in 2023.

Energy:

Oil prices dropped in Europe, reversing Tuesday's gains, as the dollar scaled a fresh high and risk assets sold off further.

DNB Markets said the declines in global equity markets are weighing on investor sentiment, which is undermining oil prices.

The stronger dollar makes oil crude contracts more expensive for foreign buyers, pushing down on prices. Other factors weighing on the market include reports that inventories rose last week and Goldman Sachs lowering its forecast for prices next year on prospects for weaker demand.

Read: European Natural Gas Prices Jump on Fears for Ukrainian Flows

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Other News:

Russian backing for an OPEC+ production cut would boost the chances that one will follow at the cartel's meeting next week.

Moscow has thrown its weight behind a 1 million barrel a day cut, Reuters reported. With an EU embargo on Russian oil set to come into force later this year, and Russia already significantly under producing its quota, Moscow "has every incentive...to try to orchestra a significant output cut," DNB Markets said.

With Brent prices continuing to tumble, defying OPEC's insistence that demand remains robust, the motives for a sizable cut from the group are growing.

"Given the decline in oil prices and the deteriorating macroeconomic outlook [Russia] might succeed in its effort."

Metals:

Base metals were lower in Europe, with Copper retreating for a fourth session, but losses were contained on hopes for a pickup in Chinese demand.

Norway's Norsk Hydro said it would cut aluminum production at two of its plants due in part to weaker European demand.

"The market remains concerned about the impact of rising interest rates on economic activity and thus demand," ANZ said. Still, an easing of Covid-19 restrictions in China is boosting hopes of a pickup in demands, it added.


TODAY'S TOP HEADLINES


Alzheimer's Drug Slows Disease Progression in Trial

Eisai Co. and Biogen Inc. said their experimental Alzheimer's disease drug significantly slowed progression of the memory-robbing disease in a large study, bolstering the drug's prospects for approval.

The pharmaceutical companies said their drug lecanemab reduced cognitive and functional decline by 27%, compared with a placebo, over 18 months in a Phase 3 study of 1,800 patients with early-stage Alzheimer's. The drug was also linked to higher rates of brain swelling and small bleeds, though the company said they were rarely symptomatic.


Apple won't boost production of iPhone 14 due to slower demand: report

Apple Inc. is dropping plans to boost production of its latest iPhones this year after lower-than-expected demand, according to a new report.

Bloomberg News reported Tuesday night that an expected surge in demand failed to materialize. Citing sources familiar with the matter, Bloomberg said suppliers have been told to pull back from efforts to ramp up assembly of about 6 million iPhone 14 units, settling on a goal of producing about 90 million iPhone 14s by the end of the year, about the same as iPhone 13 production last year, and in line with an outlook that Bloomberg reported in August. Bloomberg on Tuesday added that sources said demand for the higher-priced iPhone Pro model was stronger than for the lower-priced models.


Chinese Developer CIFI Shares Dive Amid Default Concerns

Shares of CIFI Holdings (Group) Co. fell sharply on Wednesday, following reports that an entity related to the Chinese developer had missed a debt payment.

The stock fell as much as 29% and was last down 27% at HK$0.93. That would put CIFI on track for its worst-ever one-day drop.


Wall Street to Pay $1.8 Billion in Fines Over Traders' Use of Banned Messaging Apps

WASHINGTON-Eleven of the world's largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees' use of messaging applications that broke record-keeping rules, regulators said Tuesday.

The firms include brokerage units of Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, UBS Group AG and Nomura Holdings Inc. Brokerage firms Jefferies LLC and Cantor Fitzgerald & Co. also settled the claims with the Securities and Exchange Commission and the Commodity Futures Trading Commission.


Tyson Foods Promotes Chairman's Son to CFO Role

Tyson Foods Inc. promoted the chairman's son to be its new finance chief as the meat producer navigates higher costs for worker wages and animal feed.

The Springdale, Ark.-based company on Tuesday said it named John R. Tyson as executive vice president and chief financial officer, effective Oct. 2. Mr. Tyson, who currently serves as executive vice president of strategy and chief sustainability officer, is set to succeed Stewart Glendinning.


10-Year Treasury Yield Hits 4%

The yield on 10-year U.S. government bonds hit 4% for the first time in more than a decade Wednesday, the latest leg of a historically steep rise that has jolted financial markets this year.

Yields, which rise when bond prices fall, have been climbing at their fastest pace in four decades because of escalating expectations for how high the Federal Reserve will raise short-term interest rates to tamp down the worst inflation since the 1980s.


China's Offshore Currency Hits Record Low Against Dollar

China's currency hit its weakest ever offshore trading level against the U.S. dollar, with the yuan falling below 7.2 to the dollar for the first time since a separate system for trading the currency outside mainland China was launched more than a decade ago.

The move caps a fall of about 12% for the offshore yuan against the dollar this year and comes despite repeated attempts by China's central bank to support its currency. The U.S. dollar has gained against currencies around the world amid a campaign of aggressive interest rate increases by the Federal Reserve.


Senate Advances Stopgap Funding Bill After Removing Joe Manchin's Permitting Overhaul

WASHINGTON-Sen. Joe Manchin (D., W.Va.) on Tuesday threw in the towel on including his contentious proposal to speed up permitting of energy projects in a must-pass funding bill, clearing the way for the Senate to advance the legislation needed to keep the government open.

With the permitting language out, the Senate voted 72 to 23 to advance the stopgap bill, which would extend current government funding levels until Dec. 16 and prevent a partial shutdown this weekend, when the fiscal year ends. The bill now moves to final passage in the Senate and will also need approval in the House, which returns Wednesday, before heading to President Biden's desk.


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09-28-22 0548ET

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