Less dovish comments from Fed officials overnight snapped yields higher, with the US 10-year rallying back to 2.75%. At the same time, more sabre rattling from China sapped some confidence from equity markets with a sea of red this morning across major global indices.
As we wrote on yesterday's Asia close note, prepare for the Fed speaker pivot push-back offensive to begin. With so few people believing in the 3.25% terminal rate, who buys this duration rally?
Meanwhile, the China tail risk re-emerges, Ferrari's (NYSE:RACE) order book confirms the burgeoning income disparities, Uber (NYSE:UBER) re-ignites reopening, and BP (NYSE:BP) can prepare for a populist backlash after a massive beat and dividend raise.
US equities whipsawed between gains and losses before ultimately finishing lower on Tuesday, as geopolitical tensions remained at the forefront. Headlines surrounding US House Speaker Nancy Pelosi's arrival in Taiwan were greeted by China announcing missile tests, keeping investors on edge, despite Pelosi maintaining that her arrival did not alter longstanding US policy in the region.
China's military drill is about 12 nautical miles from Taipei and 9 nautical miles from Keelung, which is very dangerous for military escalation between China and Taiwan as UN law defines territorial sea as within 12 nautical miles.
US Treasury 10-year yields soared 20bp on the day, with yields rising across the curve after a hawkish chorus of Fed speak reminded investors that the Fed's work is "nowhere near almost done."
Although the S&P 500 was trying to hold on to the 4100 level, the combination of Pelosi-induced Taiwan jitters and the Federal Reserve officials ultimately reaffirming their commitment to bring inflation under control proved to be the indexes undoing.
Rates had been suspiciously priced for a soft landing taking equities to a similar place. And while it sounds all too far-fetched, some stock market enthusiasts are still likely living in ISM manufacturing goldilocks Nirvana with activity down but not collapsing while deflationary pressures are building, ignoring the upcoming July FOMC reality check.
Watch out for ISM Services, Eurozone PPI and retail sales and US Factory orders today.
Oil
Oil prices rose after swaying to and fro in a choppy session as traders hedged against the possibility of more crude coming to market after the OPEC+ production meeting.
Brent is still trading below $100 as both event and headline risk continues to keep energy traders quick on the uptake. At the same time, the hawkish push-back from Fed members strengthening the US dollar provides yet another hurdle for oil bulls to clear.
Aside from a possible event risk from a shift in OPEC+ production policy when the group meets later, oil traders remain laser-focused on global macro data, particularly concerning the two largest oil-consuming economies in the world, the USA and China.