A look at the day ahead in U.S. and global markets from Mike Dolan
A bruising August for bonds continues to unsettle world markets deep into summer holiday season, with China's ailing property sector whacking stocks there on Monday and a buoyant dollar hitting many currencies - especially Russia's rouble.
With seasonal trading volumes so thin and the events and data diary bare today at least, there's a danger of over-interpreting recent market developments.
But the backup in long-term U.S. bond yields over the past couple of weeks despite relatively unchanged expectations for Federal Reserve policy moves has clearly unsettled investors.
The much-criticised, surprise move by credit firm Fitch to remove the United States' AAA sovereign debt rating on Aug. 1 and a welter of new Treasury bond and bill sales in the pipeline were cited as triggers for this month's yield pop. But there are other factors at play.
Although 2-year Treasury yields remain below 5% and are lower than they were at midyear, 10-year Treasury yields continue to probe 9-month highs around 4.20% and the yield curve has disinverted by some 20 basis points this month as a result.
The bond hit came despite more positive consumer price inflation news last week, signs of household inflation expectations ebbing to their lowest in more than two years and Goldman Sachs (NYSE:GS) on Monday forecasting the first Fed rate cuts by the middle of 2024.
Interest rate futures, meantime, continue to assume the Fed is done with rate hikes - pricing about a one-in three chance of a further hike by year-end and a cut from here by May.
But aside from debt supply concerns, bonds may be unnerved by a range of factors including a pop in energy prices and a fading of disinflationary annual base effects there.
A rethink and repositioning of the overwhelming global investor overweight in bonds since the start of the year may also be an issue, while there will be concern too about how the increasingly rancorous bilateral U.S.-China investment restrictions play out.
If the tit-for-tat on portfolio flows between the two economic superpowers ratchets up, there may be speculation about the stability of China's massive U.S. Treasury and mortgage bond holdings.
Japan's recent monetary policy tweak may also have had some backwash on Treasury bond investments, but the yen continues to slide and briefly hit a 2023 low on Monday as the bond yield gap between Japan and the United States widens.
Briefly topping 145 yen again, the dollar was pumped up across the exchanges and its main index hit the highest in more than a month. The dollar soared against Russia's rouble, vaulting 100 roubles for the first time since shortly after the Ukraine invasion last year and drawing criticism from the Kremlin of its central bank's overly loose monetary policy.
It was another bad start to the week for Shanghai and Hong Kong shares - both of which fell heavily again as property giant Country Garden's debt problems deepened, its onshore bonds were suspended and its shares plunged 16% to a record low. Asia stocks were generally lower too.
China's yuan hit its lowest since June as traders look to a possible easing of 1-year interest rates on Tuesday.
But Wall St futures and European bourses were higher and U.S. investors looked to a big week for assessing retail activity, with national retail sales data for July due on Tuesday and second-quarter earnings due from the big retailers.
Events to watch for on Monday:
* U.S. Treasury auctions 3-, 6-month bills
(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)