Risk-off takes hold as Treasuries rally and the massive Hurricane Irma looms over the Caribbean.
Yields drop
U.S.
Treasuries are holding steady after haven demand and dovish
pronouncements from Federal Reserve officials spurred a sharp drop in
10-year yields on Tuesday to 2.0596 percent, the lowest since Nov. 10. Governor Lael Brainard said more progress
is needed to achieve the Fed's inflation goal in order to justify
another interest-rate increase. Minneapolis Fed President Neel Kashkari
warned that the monetary-tightening cycle may
have harmed the U.S. economy. Five-year inflation-protected Treasury
yields also slipped into negative territory for the first time in nearly
three months during yesterday’s session, while the dollar tumbled.
Another hurricane
The most powerful storm to form in the open Atlantic Ocean, Hurricane Irma, could make landfall in Florida as early as this weekend, and its destructive potential may
surpass Hurricane Katrina. News that the storm is headed for the third
most-populous U.S. state sent cruise line and insurance stocks plunging,
while natural gas slid, and orange juice, sugar, and cotton surged.
With Texas still reeling from Hurricane Harvey, the Federal Emergency
Management Agency is expected to run out of money by the end of the week, according to a Senate aide, piling pressure on Congress to provide funding.
Debt-ceiling fears
Investors at the four-week Treasury-bill auction in Tuesday's
session demanded the highest compensation since September 2008 to hedge
against the risk politicians will fail to raise America’s borrowing
capacity before the U.S. reaches its debt limit. The Treasury sold $20
billion of four-week bills at 1.30 percent, a rate described by Thomas
Simons at Jefferies LLC as “ghastly.” Some House Republicans are
considering suspending the debt ceiling altogether as part of the initial Hurricane Harvey disaster aid bill, according to two people familiar with the discussions.
Risk off
The
looming hurricane, the debt-ceiling battle, and nuclear threats from
North Korea have triggered a risk-off tone in global markets. The
S&P 500 Index closed the session 0.8 percent lower, with futures on
the bourse little changed this morning. The Stoxx Europe 600 Index
retreated after most equities in Asia slid, while Japan’s Topix index
reversed earlier losses to end up 0.1 percent in the black. The euro
shrugged off an unexpected drop in German factory orders. Spot gold was
up almost a fifth of a percent at $1,340.19 per ounce.
Brexit barriers
U.K. Prime Minister Theresa May’s Brexit strategy faced a double blow,
after a top European Union official suggested trade talks are unlikely
to commence next month, while the opposition Labour Party is preparing
to block May’s plan for a post-Brexit legal regime in London. The prime
minister also suffered the leak of a draft plan for tough new
immigration rules that would deter all but highly-skilled EU workers
from entering the country after it exits the trading bloc, The Guardian
reported. May has little room for maneuver: The U.K. economy is
grappling with a continuing slowdown in services in consumer-facing sectors, while trade isn't boosting growth despite the protracted slump in the pound.