Week ended October 8, 2021: Debt ceiling crisis deferred (for now)
It was another blue Monday - the third running - followed by four days (three actually) of clawing back the start-of-week losses. Temporary relief under the debt ceiling provided ammunition for rallying equities on Thursday, whilst Friday morning’s weaker-then-expected employment report for September resulted in a mixed session to end the week. Europe largely followed this pattern, whilst Japan - marching to a tune of its own - fell again this week (-2.5% w-o-W) as euphoria related to the change of government a few weeks back has completely faded now. Chinese equity markets were closed all week ("Golden Week")except Friday, although the Shanghai index did eke out a small gain on the one day it was open.
In the US stock market, the tone was set by a dismal start-to-the-week, followed by pressure all week on US Treasuries and a session on Friday largely wrapped around one’s interpretation of a mixed September jobs report. The consensus on the September jobs report, which you can find here, seemed to be favourable from the perspective of risk investors which gained comfort that the Fed would remain supportive for an extended period as the labour market struggles to recover lost ground. I read nothing new into this report, but as we all know, we have been conditioned during the post-pandemic period to accept neutral news as good news. Looking more closely at the performance of US indices last week, cyclicals had the upper hand with both the Russell 2000 and NASDAQ Composite lagging.
US Treasures were under pressure most of the week, with yields higher across the curve. Also, the yield curve (2-10y) steepened further, indicating some combination of a more robust economic outlook, higher expected (persistent) inflation, or the lead-up to tapering (likely to begin in November). The yield on the 10y UST closed the week at 1.61%, its highest closing level since June 1st, 2021, and well above its yield of 0.93% at the beginning of the year.
Although government bonds in the UK, the Eurozone and Japan also sold off, the US had the rather unique complication of a looming debt ceiling with which to contend early in the week. Ultimately, Congress managed to strike a bipartisan deal to raise the debt ceiling which will allow the government to continue to operate until early December when the same sort of partisan brinkmanship will undoubtedly be repeated. However, US Treasuries did not retrace their losses even after the debt ceiling deal was struck, as inflationary concerns remained squarely in investors’ sights. The UK and Eurozone government bond markets are also suffering from inflationary pressures, mainly at the hands of highly volatile and rising natural gas prices as winter approaches.
Having mentioned the debt ceiling in the US, if this is an area about which you are interested in learning more, this is a very good article from The White House which explains the context for the country’s national debt and the relevancy of the debt ceiling: “The Debt Ceiling: An Explainer”. If you heard something about the $1 trillion platinum coin as a “solution” to the debt ceiling as discussions were occurring last week, there is a podcast from Quoth the Raven (@QTRResearch) that digs into the severe shortcomings of this approach, which although largely dismissed by economists, seemed to grab some support at the progressive end of the Democratic party. The first 6-7 minutes of the podcast are advertisements, and there are plenty of “F bombs” in this audio podcast, so listener beware: “Our Bullsh*t Economy”. Nonetheless, it is an aggressive, biased but not unfair assessment broadly of monetary policy, and more specifically, of the rather silly idea of printing a $1 trillion platinum coin to temporarily fund the government and doge the feared debt ceiling.
In the corporate bond market, credit spreads were reasonably stable in the USD-denominated investment grade and high yield markets, although yields on corporate bonds gapped out as Treasury yields rose. Yields on BBB-rated USD-denominated bonds increased 9bps w-o-w (to 2.42%), whilst yields on non-investment grade rated USD-denominated bonds increased 8bps w-o-w (to 4.28%). The widening was fairly even in the BB, B and CCC categories. It was a slightly different story in the EUR-denominated high yield market, where both spreads (+13bps w-o-w) and yields (+14bps w-o-w) gapped out, with EUR-denominated high yield bonds ending the week yielding 2.67%.
In spite of growing uncertainty and a feeling of market vulnerability, gold is moving sideways, and perhaps that’s an optimistic statement of the facts based on the safe havens slow price erosion and on-going weakness. Yen has also been weaker, perhaps as much a reflection of growing US Dollar strength as the political transition going on in Japan. Two other assets that are having no problem moving decisively and with conviction are oil and cryptocurrencies. WTI oil has increased in price 16.3% in just the last month, and 34% in the last six months. With a natural gas crisis in Europe and rising prices at the pump in the US (and elsewhere), political pressure has been piled on OPEC+ to increase its production quotas, but so far, OPEC+ has held firm at the monthly volume increases it agreed to several months ago. Rising oil prices are both a contributor to inflation but also a brake on global economic growth, so time will tell how this pans out.
In the meantime, Bitcoin has surged back above $50,000 – its first time above $50,000 since a brief stop at these levels in early September. Bitcoin reached its highest price on Friday intraday since early May, as its resurgence continues even as other markets consolidate and gains become more difficult to come by. As I have said before, ignore cryptocurrencies at your peril although they are certainly not this old-timer’s cup of tea!