Global Markets News Round-up to start your day: 13/02/23

Investors do not have to win the bond market’s fight against the Federal Reserve to be successful, according to DoubleLine Capital’s Jeffrey Sherman. Bonds provide a steady stream of income, even if the debt doesn’t appreciate in price, and this has underpinned many bullish fixed-income calls this year, with yields on Treasury bills at multi-decade highs. However, Sherman warns against investing in all types of bonds, citing that this year’s rally has seen even the riskiest corners of the fixed-income market benefit, fueling a flood of money into junk bond funds, which he sees as not worth the risk. Other money managers are also wary of the rally, with building risk appetite having narrowed investment grade and high-yield spreads to the point where they no longer compensate for credit concerns, making it difficult to find good value.

Russia has announced a cut in its oil production by 500,000 barrels per day, which is equivalent to 5% of its January levels. This move is a retaliation against the western energy sanctions and is expected to cause turmoil in the crude market. However, delegates from OPEC+ countries have indicated that they will not increase production to make up for the gap. 

Meanwhile, Ukraine was hit by a wave of airstrikes from Russia, targeting its energy infrastructure. 

The UK managed to avoid a recession last year, but its economy is still 0.8% smaller than at the end of 2019, making it the only G-7 country that has not yet recovered its output lost during the Covid-19 pandemic. 

Adidas’ shares declined after it warned of a €1.2 billion pile of unsold merchandise, and Inditex’s shares also dropped after agreeing to raise the pay of its Spanish store workers by an average of 20%. 

Kazuo Ueda, a former Bank of Japan policy board member, has been nominated as its next governor.

The increasing number of crypto bankruptcies is causing headaches for US courtrooms, as fast-paced and loosely regulated nature of the asset class makes it difficult for courtrooms to deal with disputes about ownership. Moreover, legal complications such as alleged conflicts of interest among lawyers and advisers, and limited resources are hindering the progress of court cases, as well as adding to the fees being charged. As a result, federal judges are being forced to fill the regulatory void, ruling on issues such as the classification of tokens, digital asset depositors’ rights and the value of crypto debts during repayments. 

According to Yesha Yadav, a former World Bank lawyer and financial regulation specialist at Vanderbilt Law School, bankruptcy court is “essentially becoming like a proxy regulator.” Meanwhile, lawyers and advisers are making a fortune from crypto bankruptcies, such as the $20 million fees being charged by those acting for FTX, and the big question will be if the fees are justified or excessive.

Markets since Friday:

A Bloomberg podcast with Fabio Natalucci, the deputy director of the Monetary and Capital Markets Department at the International Monetary Fund, discussed the tension between growth and financial stability. Natalucci’s role is to identify hidden sources of risk and leverage that investors and policymakers are not aware of. During the discussion, Natalucci highlighted the significance of economic growth in maintaining financial stability. He pointed out that the best ingredient for a successful banking system is growth. Natalucci compared the situation of US and European banks after the global financial crisis, where the solvency of the US banking system was not a concern after 2009, while it was a constant worry for European banks. Steve Eisman, a portfolio manager at Neuberger Berman, also shared a similar perspective, where he explained that the reason the mortgage rate shock of 2022 did not cause a housing market disaster was because people were employed and not forced to sell their homes. This means that instruments associated with housing remained stable due to the underlying cash flows provided by employed people. In conclusion, robust growth and a robust job market are important in preventing financial system damage.

Shares in Asia have declined as investors prepare for an eventful week, which includes the release of US consumer price data that could confirm the inflation battle isn’t over and the potential of dashing hopes for a Federal Reserve rate pivot. This negative sentiment is affecting major indexes in Asia, leading to the regional equity benchmark headed for its lowest close in more than a month. Contracts for US stock futures have also declined. 

Last week, the S&P 500 ended 1.1% lower, while the tech-heavy Nasdaq 100 slipped 2.1%, marking the worst weekly performance for the two indexes this year. 

The decline in bonds is also significant, with the Bloomberg Global Aggregate index dropping 1.6%, the worst weekly run since September.

Australian and New Zealand government bonds are also experiencing losses in Asian trading following the selloff in US government debt, which pushed up the 10-year Treasury yield by seven basis points. 

The yen weakened after whipsawing following news reports of Kazuo Ueda being picked as the next governor of the Bank of Japan. Ueda seems to be more hawkish than the current dovish Governor Haruhiko Kuroda, which could have a positive impact on the Japanese yen in the medium term.

Investors are reassessing the potential rise of US interest rates this year and are betting that the Fed rate could peak at 5.2% in July, up from less than 5% a month ago. This could cause a hard landing in the US, requiring more aggressive rate cuts later. 

Traders will also be keeping a close eye on geopolitical developments and the economic growth forecast for Singapore, which has been revised from 3.8% to 3.6%. 

Oil has fallen due to concerns about slowing global growth, while gold has edged lower.

Global indices at 5:35am UKT:

Dow Jones: 33,869.27 (+0.50%)

NASDAQ: 11,718.12 (-0.61%)

FTSE100: 7,882.45 (-0.36%)

CAC40: 7,129.73 (-0.82%)

Sensex: 60,450.07 (-0.38%)

Nifty50: 17,786.65 (-0.39%)

Nikkei225: 27,400.76 (-0.98%)

Disclaimer: The information provided in this summary is based on sources believed to be reliable and accurate. However, the accuracy and completeness of the information cannot be guaranteed. The opinions and views expressed in this summary are for informational purposes only and do not constitute investment advice. This summary should not be relied upon as the sole source of information when making investment decisions. Any decisions made based on information contained in this summary are the sole responsibility of the reader and may not be in the reader's best interest. The author and publisher assume no liability for any errors or omissions in this summary.