US equities were stronger yesterday, S&P up 2.8%. US 10-year yields down 18bps to 3.65%, 2-year yields down 16bps. Sterling rose ~1% to 1.13, and 10-year gilt yields fell 13.2bps to 3.95% after the UK Chancellor revered tack to abolish the top rate of UK income tax and brought forward the timeline to publish a medium-term fiscal plan to later this month (initially slated for November 23).
Oil rose 4.3% after weekend reports that OPEC will consider s production cut this week.
US Treasuries rallied to start the week, and yields were pushed even lower when US ISM Manufacturing surprised market participants to the downside in September, printing at 50.9, lower than 52.1 in the survey and 52.8 in August.
As Fed rate hikes begin to bite at the heels of the US economy, orders and employment fell to 47.1 and 48.7, respectively, dipping below the 50 expansion/contraction threshold.
However, the positive aspect in the data is prices paid dropped to 51.7, the lowest print since June 2020, triggering a mini-risk revival in stocks and a sell-off on the US dollar as US yields continued to slide during the New York session. In this hawkishly priced risk environment, bad data is considered good news, as it raises the possibility of a dovish pivot by the Federal Reserve.
Energy stocks led the way, with XLE up 5% after crude oil had a solid start to the week as multiple articles over the weekend pointed to OPEC+ potentially cutting production by even more than the 1 million barrels per day.
Oil
Oil is higher on expectations of a significant cut in production as OPEC+ delegates will meet on Wednesday in person for the first time since the start of the pandemic. The softer US dollar and lower US yields provided a more stable risk-taking environment.
Although OPEC will win few friends in the West by cutting production and possibly pushing inflation higher ahead of a potential decline in Russian exports later this year, OPEC could justify the move due to the recent significant decrease in prices, down 40% since their June peak as mounting global growth concerns and a drop in investor participation due to liquidity concerns chilled the oil markets this year. A view supported by the CFTC data released on Friday shows that money managers further cut their net long US crude futures and options positions by 23,179 contracts to 155,750 in the week to September 27.
So, with lots of oil traders' dollars sitting idle on the sidelines, the prospects of an OPEC production cut were music to their ears and attracted some participants back to the market overnight.
More important, after OPEC signalled a willingness to cut production further at the last meeting, a more significant cut is needed to maintain the group's credibility after a weak period for oil. And this would support the view that the group intends to defend a floor for the oil price. So, the prospects of an OPEC backstop should embolden beleaguered oil market bulls further.
Gold
Gold is trading significantly higher, breaking above the psychological $1700 per ounce level in early Asia trade on weaker US ISM data. The softer ISM drove US yields lower and contributed overnight to the soggy US dollar. The softer US ISM print raises the possibility of a lower FOMC rate hike glide path which is positive for gold.
The push higher in bullion prices suggests plenty of support for gold. And for investors beyond the US, where real yields are still profoundly negative, there remains a case for owning gold.
Foreign Exchange
Sterling was the talk of the town yesterday after Cable squeezed considerably higher as there was a building sense that responsibly grown up in the Conservative Party were slowly taking charge of government policy.
But the US duration rally provided breathing for Asia and G-10 FX while commodity currencies rallied on the back of stronger oil.
The loonie was another standout, which tends to thrive when both risk appetite and oil prices increase.