A look at the day ahead in U.S. and global markets from Mike Dolan.
As Hurricane Ian raged and set its sights on Cuba and Florida, a global financial storm in bond and currency markets calmed moderately - though likely only temporarily.
Ian strengthened into a Category 3 hurricane on Tuesday and is expected to make landfall in Cuba, with its path predicted to hit western Florida by the end of the week.
For all its potential destruction, Ian doesn't yet appear on the world markets radar. But that's mainly because global investors are fighting a financial firestorm of their own - one spreading back and forth across major economies as governments and central banks attempt to go their own ways in dealing with raging inflation, an energy shock and looming recessions.
The U.S. Federal Reserve's drive to snuff out decades-high and sticky core inflation continues to ratchet up interest rate expectations, Treasury borrowing costs and boost the dollar across the globe - forcing others to keep pace or fuel even more inflation via dollar-priced energy and commodity imports.
"Contagion" - a much-feared word in market circles - is appearing regularly in investment and banking research.
Britain's alarming attempt last week to slash taxes to lift growth into an inflation surge sent the pound to record lows, UK government bond yields soaring and heaped pressure on the Bank of England into more extreme rate rises to steady the ship and forced mortgage lenders to pull products.
The near meltdown of the bond markets of a G4 reserve currency, which has now lost more than 20% this year against the dollar, is feeding back to European and even U.S. bond markets as uncertainty about economic and central bank policies everywhere goes up a notch.
Even Atlanta Fed President Raphael Bostic on Monday said the reaction to the UK government plan was "a real concern" and could weaken the wider European economy further, rebounding in short order on the United States. UK debt auctions this week will be watched very closely.
CURRENCY VOLATILITY
Currency market volatility captured by the CVIX index has almost trebled over the past year and aside from the extreme peak as the pandemic hit in 2020 is now at its highest for at least 10 years. U.S. Treasury market volatility captured by the MOVE index is at its highest since 2009, in the immediate aftermath of the Lehman Brothers crash.
U.S. stock market volatility reflected in the Vix "fear index", meantime, closed back above 30 for the first time in three months.
With the third quarter coming to a close on Friday and markets awaiting signals from a hefty slate of central bank speakers later today, stocks, bonds and currencies appeared calmer on Tuesday. Asian and European bourses steadied, with Wall St futures marked higher before the open and the dollar easing back a touch against most currencies except the Chinese yuan. Even the pound clawed back ground.
But this may be the eye of the storm.
Delayed relative weakening in Italian government bonds versus German benchmarks after the weekend's election looked set to deliver a far-right Prime Minister was notable on Tuesday - with 10-year Italian yield premia hitting their highest since 2020.
Key developments that should provide more direction to U.S. markets later on Tuesday:
* ECB President Christine Lagarde, ECB Vice President Luis de Guindos, ECB board member Fabio Panetta all speak
* Bank of England chief economist Huw Pill, BoE chief financial officer Afua Kyei, BoE executive director of Prudential Policy Directorate Vicky Saporta all speak
* U.S. Federal Reserve Chairman Jerome Powell speaks in Washington; St Louis Fed chief James Bullard, Chicago Fed chief Charles Evans speak in London, San Francisco Fed chief Mary Daly speaks in San Francisco
* U.S. Sept consumer confidence, U.S. Aug new home sales; U.S. Aug durable goods orders, U.S. July house prices; Euro zone Aug credit and money supply; China Aug industrial profit
* U.S. Treasury auctions 5-year notes; UK auctions 2031 gilts; Germany auctions 5-year notes; Japan auctions 40-year bonds
(By Mike Dolan, editing by Ed Osmond, mike.dolan@thomsonreuters.com. Twitter (NYSE:TWTR): @reutersMikeD)