Podcast: Surge in US and European bond yields. China cuts 1-yr loan rate.

Created: 21st August 2023

So, what do we know?

(A forex, index, and commodity market review)

Global stock and bond markets were buffeted by contrasting news from China and the US. Weak consumer sentiment driven by a run of weak data over the past week resulted in the PBOC injecting liquidity to stop the fall in the Renminbi and bolster waning consumer sentiment. On the other side of the globe, US and other developed economies were fretting over persistent inflation and comments from the Federal Reserve in the minutes from the last FOMC meeting.

Overnight the PBOC has cut one lending rate, 0.1% off the 1-yr loan rate, but against expectations has kept the 5-yr loan rate unchanged. Bloomberg poll suggested participants were expecting a cut of 0.15% to both the 1-yr and 5-yr loan rates. Chinese shares fell between and 1% to 2% on the news.

Weekly change (amount change and percentage change on the week)

FTSE -261 -3.48%

DAX -257 -1.63%

DOW -780 -2.21%

S&P -94 -2.11%

NASDQ -354 -2.59%

NIKKEI -1,022 -3.15%

Hang Seng -1,154 -5.89%

Global stock markets slumped last week, as contrasting news from China and the US painted a global economy where weak Chinese economic activity looks likely to undermine global growth this year. The Federal Reserve said it was concerned about “significant upside risk to inflation” in its minutes released last Wednesday from the last FOMC meeting.

Many investors believed that interest rates were at or very close to a peak and were speculating that the Federal Reserve would soon be able to lower rates as inflation edged towards the Fed’s target of 2%. Despite the Fed’s comments, investors already knew that some members of the committee were unconvinced of the need to raise rates any further, but still the concern mounted.

By Friday, the benchmark 10-year US Treasury Bond yielded 4.25%, up 0.06% on the week and up from 3.88% a month ago.

Despite the concerns about the persistent inflation worry, expectations for future rate rises later this year have shifted only slightly with at worst a 1 in 3 chance of a rate hike. Interestingly, forward rates for next year now imply the Fed will keep rates on hold until May next year which has shifted from a forecast 0.25% cut by March 2024 predicted one month ago.

UK and European markets were also hit hard with the weak data out of China hitting resource stocks in the FTSE100, whilst headline inflation fell sharply in the UK as expected, worries about core inflation were heightened with a big jump in services inflation, which jumped to a 40-year high.

In common with other international sovereign bond markets, UK gilts tumbled as the yield on the 10-year Gilt jumped to 4.67%, up from 4.58% the previous week and sharply higher than the 4.33% recorded a month ago.

The re-rating of the risk that inflation may be more persistent than investors were hoping is not unexpected as markets were tending to assume that as inflation was falling, that central banks would conclude their tightening cycle and start to focus on cutting rates in H1 next year. Perhaps the thin holiday season played its part in the scale of the move, with many participants away on their summer vacations. Investors will be very keen for any central banker to provide feedback on the scale of last week’s moves and the markets interpretation of the Fed’s comments about persistent inflation.


EURUSD -0.77 -0.70% GBPUSD -0.40 -0.30% USDJPY +0.43 +0.29%

The US Dollar gained further ground as the rebound in the US dollar continues as rate expectations harden and concern over China’s economic growth prospects also encouraged further Dollar buying. Sterling was one of the strong currencies last week, as investors reacted top the worrying service sector inflation within the CPI data released last week. Markets are now expecting another 0.25% hike in rates when the BoE reconvene on 21st September, with another 0.25% expected before year end, taking the base rate to 5.75%.


Gold -25 -1.30% UK OIL -1.84 -2.13% US OIL -1.88 -2.27%

Gold continues its fall, undermined by the US Dollar, which extended its run of gains following the reversal in its fortunes in Mid-July. Since the recovery in the US Dollar, Gold has fallen nearly $90 from a peak of 1980 on 18th July.

Oil reacted to the worsening economic backdrop in China, with a continuing run of poor economic data promoting the PBOC to attempt to prop up the renminbi and bolster consumer confidence. That action looks not enough, with the prospect of further interest cuts to key lending rates expected at the PBOC’s monthly policy meeting on Monday.


What don’t we know….yet?

(What traders need to look out for in the week ahead)

A turbulent week for markets with a risk off move exacerbated by the less-liquid holiday markets. With may participants away on vacation, the effects on global markets of last weeks news was likely to have been greater than otherwise would have been expected. This week’s data is all about PMI data on both services and manufacturing sectors in the major western economies. We also have the annual Jackson Hole Symposium in Wyoming, where a closed gathering of central bankers and finance ministers meet to resolve the ever-increasing problems they find in their in-trays.



China PNOC rate decisions. Consensus was for 0.15% cut in both 1-yr and 5-yr loan rates. Disappointing the market, PBOC reduced the 1-year loan rate by 0.1% but left 5-yr loan rate unchanged.



BRICS BRICS (Brazil, Russia, India, China, and South Africa) summit in Johannesburg. No Putin. The group is looking to expand its membership in a push-back against the western dominated G7. India has so far blocked any move that creates a political body.



Eurozone, UK & US Flash manufacturing and Services PMI data. Little improvement. Manufacturing sector continues to struggle (well below the 50 reading in all cases) following the rapid rise in interest rates over the past 18 months. The slowdown in China is a big worry for global growth and the fortunes of countries that have benefited from significant export growth to China. Germany comes to mind. – Economists argues Germany is again the sick man of Europe and is expected to grow more slowly over the next five than the US, Britian, France, and Spain.



US Core durable goods. Expected +0.2%. USD sensitive.

US FOMC member Harker speaking on CNBC about economic outlook. Should be interesting for fed watchers and the markets.

US Day 1 of 3 of Jackson Hole Symposium.



Germany IFO Business climate survey. Large survey of manufacturers, builders, wholesalers, services, and retailers. Euro and eurozone assets sensitive.

US FOMC member Harker still doing the rounds. This time on Bloomberg.

US Revised UoM Cosnumer Sentiment. No change.

US Day 2 of Jackson Hole Symposium with Lagarde and Jay Powell addressing the attendees. Whilst press on not allowed to attend, news always leaks out. Central bankers unlikely to make investors feel any more confident that they were at the end of last week.


What should we be trading?

(Analysis of the popular markets and what we like)

Some excellent markets over the past week, with stock indices retreating to major support levels. In this section, Adrian reviews the UK100 as it hits 7250 and bounces for the 3rd time. In addition, we review the 10 D1 Sniper Strategy trades from last week, which results in an overall 6.3% gain, including EUR/CAD, EUR/GBP, GBP/CAD, GER40, JPN225, UKOIL, US30, USOIL, AUD/JPY AND GBP/USD.