A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
At 4am Eastern Time this morning, the damage in bond markets was so bad that pseudonymous U.K. hedge fund expert LadyFOHF tweeted, "Just wait 'till New York wakes up and sees what a mess you've caused, Europe." The bulk of the focus was on German bunds where the 10-year yield, which was seven basis points as recently as mid-April, was bumping up against 100 basis points (one per cent).
Business Insider reliably donated some clickworthy hyperbole by describing market sentiment as "sheer panic."
"Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, told Bloomberg: 'This is sheer panic in the market from the standpoint of what's been happening in Europe ... Most of Wall Street is guarded here as far as taking on new positions.'
And while stocks didn't react much to the bond market on Wednesday, stocks are poised to open lower Thursday as the chaos spills over."
It's fun and exciting to watch professional managers freak out, but for Canadians the jump in yields is no laughing matter. Global markets are dragging Canadian bond yields higher despite all the chatter about another Bank of Canada rate cut. Rising bond yields threaten returns for the extremely crowded domestic trades in real estate investment trusts and other income-oriented sectors.
"There is 'sheer panic' in the bond market" – Business Insider
Morgan Stanley's global market strategist Anastasia Amoroso cites two main causes for the credit carnage, one fundamental – rising inflation expectations in Europe – and two, the technical reality of low levels of liquidity. Ms. Amoroso provided her useful summary in the short video with Bloomberg below, "Global Bond Selloff a Near-Term Move: Anastasia Amoroso" – Bloomberg
Bloomberg's Matt Levine expanded on the theme of bond market liquidity in a must-read post this morning. The piece is highly useful throughout, but this point stood out:
"The risk, if there is one, has to be located in what I've loosely called the value investors – the people who provide the ultimate bid for assets. … the biggest worries revolve around the possibility of herding among bond investors and around those investors' funding models. The worry is that there is one dominant model of bond investing, in which giant mutual funds and exchange-traded funds buy and hold every newly issued bond that comes along. Those funds offer their investors the ability to withdraw money pretty much any time they want. But if bond prices crash, investors will want to take their money out, the funds will need to sell, and all those giant bond funds that provided the bid for bonds on the way up will turn into sellers on the way down."
"People are worried about bond market liquidity" – Bloomberg
Bill Gross from Janus Capital correctly predicted the sell-off in German bonds and today has outlined a new "trade of the century" – a short position in China's lesser-known equity market, the Shenzen.
"Stocks are valued at the most expensive levels worldwide. The exchange's market capitalization now exceeds that of the U.K., while just five of the bourse's more than 1,700 shares have lost money this year. The benchmark index has surged 191 per cent in 12 months, a move Gross called 'almost hyperbolic' in an e-mailed message on Wednesday. It tumbled as much as 6.2 per cent on Thursday before closing 0.6 per cent lower."
Mr. Gross noted that the extraordinary rally may continue for a while but, "the end is near."
"Bill Gross sets his sights on this Chinese stock market" – Bloomberg
Saudi oil minister Ali al-Naimi provided some positive news for energy investors by noting that oil production is slowing while demand is climbing. This implies that the current glut in oil markets is a short term phenomenon and fundamentals will steadily improve over time. Mr. al-Naimi was cautious on the shorter term outlook.
"Asked if Saudi Arabia would invest in additional production capacity, Mr. Naimi suggested even he is uncertain about the outlook as OPEC's attempt to claw back market share from high-cost U.S. shale, Canadian tar sands and deepwater producers plays out.
'Is there demand for Saudi crude? Can you guarantee it? If I go and put a dollar can you guarantee I will get 10 per cent on that dollar?' Mr Naimi said."
"Saudi oil minister: supply slowing, demand growing" – FastFT
See also : "Six faces in the race to pump more oil" – Wall Street Journal
Tweet of the Day: I emphasize that this is a rumour – but it's one making the rounds on global trading desks:
"@SardonicaX Hate referring to scenarios as black swans, but ISIS takeover of Baghdad would prob qualify. Heard yday in Istanbul from well-connected ppl"
Diversion: "Street parking won't be a chore when your BMW finds spots for you" – Gizmodo
Follow Scott Barlow on Twitter at @SBarlow_ROB
Scott Barlow