By Geoffrey Smith
Investing.com -- The selloff in global bonds resumed and the dollar rose again after a sharp short-covering rally in risk assets on Wednesday. Stocks are set to open under pressure, accordingly. Nike and Micron are set to report earnings after the close, while Porsche rises on its debut after pricing its IPO at the top of its range. In the U.K., the pound, bonds, and stocks all fell again as Prime Minister Liz Truss doubled down on her budget-blowing tax cuts policy, while in Germany inflation continued to roar as the start of winter brought more alarming economic news. Here's what you need to know in financial markets on Thursday, September 29.
1. Bond market selloff resumes; GDP revision, jobless claims due
The selloff in global bond markets resumed and a fresh wave of safe-haven demand lifted the dollar after the importance of Wednesday’s emergency intervention by the Bank of England in the U.K. was slowly taken on board.
Yields on the benchmark 10-Year U.S. Treasury note surged again by 13 basis points to 3.84%, giving up a large part of Wednesday’s short-covering rally. The 2-Year note yield rose by 12 basis points to 4.22%. The dollar index meanwhile rose 0.6% to 113.62, still comfortably below the highs it posted earlier in the week.
The U.S. market has to absorb final data for second-quarter U.S. GDP at 08:30 ET (12:30 GMT) along with the more timely weekly jobless claims, where no major change from last week is expected. Federal Reserve speakers include St. Louis’ James Bullard and Cleveland’s Loretta Mester.
Outside the U.S., there are more big central bank rate hikes expected in Mexico and Nigeria, while the Czech Republic and Kenya are expected to stand pat.
2. U.K. assets slide again as Truss doubles down
U.K. assets started to slide again as Prime Minister Liz Truss doubled down on her policy of unfunded tax cuts in a series of unconvincing radio interviews.
Her comments came a day after the Bank of England committed to buy 65 billion pounds of U.K. government bonds in an effort to guarantee market liquidity, after the steep rise in Gilt yields over the last week triggered mass selling by pension funds to meet margin calls on interest rate derivatives. They were accompanied by sniping from the sidelines by Mark Carney, the former BoE Governor, who accused the government of undercutting the Bank and the Office for Budget Responsibility with its plans.
The BoE’s bond-buying solves a short-term problem of market instability, but contrasts crassly with the rest of its monetary policy. In addition to raising interest rates, it had intended to start selling its own government bond portfolio back into the market from October. By reversing its course, it makes its task of bringing down inflation even harder.
3. Stocks set to open lower; Nike, Micron earnings eyed
U.S. stock markets are set to open lower later, giving back some of the gains they made on Wednesday.
By 06:20 ET, Dow Jones futures were down 230 points, or 0.7%, while S&P 500 futures were down 1.0%, and Nasdaq 100 futures were down 1.3%. The three main cash indices had all risen by around 2% on Wednesday amid a sharp short-covering rally.
Stocks likely to be in focus later include Tyson Foods (NYSE:TSN) after news of a big management shake-up. CarMax (NYSE:KMX) reports earnings before the open, while Nike (NYSE:NKE) and Micron (NASDAQ:MU) share the stage after the close.
4. German inflation still roaring as first blast of cold weather triggers gas alert
Europe’s economic woes went from bad to worse. Four German research institutes cut their growth forecasts for this year to 1.4%, from 2.7% six months ago, and now expect Europe’s largest economy to contract 0.4% next year, instead of growing by over 3%.
Things could be even worse: under a risk scenario of a cold winter and gas shortages, the institutes expect German GDP to shrink by 7.9% in 2023 and by 4.2% in 2024. Small wonder that the country’s grid regulator Bundesnetzagentur called on households to cut their consumption by 20%, after Germans reached for the thermostat in response to the first spell of colder weather last week.
Inflation in Germany continues to run unabated: figures from its largest states were above expectations and set the stage for a headline figure of over 10% in September.
5. Porsche IPO offers a reprieve from the gloom
German sports car maker Porsche (F:P911_p) rose some 5% in initial dealings in Frankfurt after pricing its IPO at the top end of the marketing range, making it the biggest equity raise in Europe - and one of the biggest in the world - so far this year.
The deal will raise 19.5 billion euros ($19 billion) for the electrification drive of its parent group Volkswagen (ETR:VOWG_p), which will continue to hold a controlling stake. It values the group as a whole at 78 billion euros, more than twice its nearest rival Ferrari (NYSE:RACE).
That also creates an intriguing arbitrage possibility with Volkswagen as a whole, whose market value is only a little higher at 81.5 billion euros. That implies that the market assigns basically no value to the whole of the rest of VW's carmaking operations.