Commodities | Economics & Growth | UK | US
Looking at month-to-month changes, you’d be forgiven for thinking that markets simply took a breather in September after the selloff in August. The S&P 500 eked out a 0.4% gain; 10-year Treasury yields rose a modest 10 bp to 1.64%; the dollar moved about 0.2% higher against a trade-weighted basket; and oil was down 3.2% to $53.62.
September may not have lived up to its reputation as the roughest month of the year for markets, but there was still ongoing drama across multiple stages throughout it. Equities jumped early in the month on a more constructive tone from President Trump on the trade war with China. Growing expectations of easier money by the ECB and the Fed pushed rates off August lows. At one point the 10-year Treasury yield jumped to 1.90% before the Fed meeting. As optimism grew, the VIX dropped 5 percentage points to 13.7%.
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Looking at month-to-month changes, you’d be forgiven for thinking that markets simply took a breather in September after the selloff in August. The S&P 500 eked out a 0.4% gain; 10-year Treasury yields rose a modest 10 bp to 1.64%; the dollar moved about 0.2% higher against a trade-weighted basket; and oil was down 3.2% to $53.62.
September may not have lived up to its reputation as the roughest month of the year for markets, but there was still ongoing drama across multiple stages throughout it. Equities jumped early in the month on a more constructive tone from President Trump on the trade war with China. Growing expectations of easier money by the ECB and the Fed pushed rates off August lows. At one point the 10-year Treasury yield jumped to 1.90% before the Fed meeting. As optimism grew, the VIX dropped 5 percentage points to 13.7%.
Saudi’s Oil Plant Attacks
But this buoyant mood dissipated quickly over the weekend of the 14th, when Saudi Arabia’s key oil processing plants at Abqaiq and Khurais were attacked, shutting down production and sending oil prices sharply higher. Over the next few days the situation settled as it became apparent that global oil reserves would be sufficient to tide markets over until Saudi Arabia resumes more normal production.
Repo Market Flash Crash
And then there was the repo market flash crash on 18 September, when overnight repo rates soared from 2.2% to nearly 10%. Analysts are still assessing what happened, but it appears that money market funds that would normally supply liquidity couldn’t do so because of cash drawdowns to make quarterly tax payments and to pay for newly issued Treasury securities. And banks either could not or would not lend against their excess reserves.
There are several theories why. One is that the Fed’s ongoing effort to reduce excess reserves may have gone too far. The Fed’s open market operations, where it steps in to adjust reserves so as to keep money markets well-oiled, have been dormant for a decade now, and they may have simply lost the institutional knowledge to process what was going on. Another theory is that as-yet unspecified regulatory requirements may have kept them from stepping in. More likely, given there have been a number of flash crashes in various sectors over the past decade, traders have learned to step back when markets start going haywire until they figure out what’s going on.
In any case, this episode hammered home the point that monetary policy in the post-crisis era is still very much a work in process.
Geopolitics
Toward the end of the month, geopolitical factors took over. In Britain, the Supreme Court ruled unanimously that Prime Minister Boris Johnson’s manoeuvre to prorogue Parliament for an unprecedented five weeks was illegal, injecting a new layer into the myriad of uncertainties and possibilities surrounding the Brexit process. And in the US, a whistleblower emerged who said President Trump had withheld military aid that had been Congressionally appropriated while he encouraged the president of Ukraine to investigate one of his political opponents in hopes of unearthing damaging dirt. This led to House Speaker Nancy Pelosi agreeing to proceed with impeachment proceedings. Neither development had much market impact; the reaction was more wait-and-see.
The Markets Ahead
Looking ahead to October, markets face several major issues. First is Brexit. One way or other, something beyond political grandstanding will happen before the end of the month deadline. Either Britain will be forced to petition for – and get – an extension to the Article 50 process. Or it leaves the European Union, with or without a deal. Second is the impeachment process in the US. In the coming weeks, it will become apparent whether Nancy Pelosi is able to engineer a fast-process investigation that will lead to a timely resolution or whether it will turn into a dragged-out muddle.
Third, Macro Hive will be watching closely to see whether the painful drop in the latest ISM purchasing manager’s manufacturing index shows up in later economic releases.
And finally, trade talks between China and the US are scheduled to resume midmonth.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.