Under Siege

Speculators are betting the UK’s pound will slide to a level that was virtually unthinkable in recent decades: $1 or less. After the pound tumbled to the weakest on record at $1.0350 Monday, options markets show traders expect it to keep falling. Three-month risk-reversal contracts against the pound are near the most bearish since 2016, while others show a 43% chance it will hit $1 before the end of this year. The Bank of England and UK Treasury failed in a joint bid to calm financial markets as both indicated investors will need to wait until November for a broader policy response to the fallout from the new government’s massive tax cuts.

Goldman Underweight Stocks

Goldman Sachs Group Inc. downgraded equities to underweight in its global allocation over the next three months while remaining overweight cash, saying rising real yields and the prospect of a recession suggest the rout has further to run. The US investment bank’s market-implied recession probability has increased to above 40% following the recent bond sell-off, “which historically has indicated elevated equity drawdown risk,” strategists including Christian Mueller-Glissmann wrote in a note Monday. 

Everything Sells Off

The little bit of respite for markets seen during Tuesday’s session in Asia has been modest to say the least. It leaves traders dwelling on Monday’s turmoil, which brought a stark warning for Wall Street daredevils: Stocks are still in free fall and bearish sentiment is far from getting exhausted — especially with hawkish central bankers rattling recession-obsessed markets like this. The S&P 500 just sank to the lowest since December 2020 as the pound weakened to records, while commodities buckled under the weight of a hulked-up dollar. US Treasury yields continued to rise, with the 10-year rate climbing to its highest level since April 2010. With bad news around the world piling up, selling pressure is still coming thick and fast for an equity market that’s already enduring its worst performance since 2008.

On the Offensive

Ukraine’s military is on the offensive against Russian forces and asking for more powerful weapons to press its advantage, but so far there is no sign that allies will step up their commitments. Instead, President Vladimir Putin dramatically raised the stakes in a Sept. 21 speech, threatening nuclear war and launching sham votes aimed at expanding Russia’s borders into occupied Ukraine. The fear now in Kyiv is that, despite US and European assurances, Putin’s threats of escalation could see its allies balk at the delivery of weapons they see as risking a direct confrontation with Moscow.

Coming Up…

European stock futures are pointing to a positive start, which could be the first day of gains in four days, despite cautious mood in Asian trading hours. Expected data include Finnish business and consumer confidence, as well as Swedish producer prices. The Dutch, UK, Italian and German governments are selling bonds. Ferguson and United Utilities are among companies reporting earnings or sales results.

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(Source: Bloomberg, Sept. 27-2022)