February 8, 2018, by Lorcan Roche Kelly
Equity markets are still reeling from Monday’s sudden selloff as volatility fears take hold. Yesterday’s heavy selling into the U.S. close put the brakes on any potential recovery in Asia, with the MSCI Asia Pacific Index gaining only 0.2 percent, while Japan’s Topix index closed 0.9 percent higher as the yen weakened against the dollar. In Europe, the Stoxx 600 Index was 0.7 percent lower at 5:45 a.m. Eastern Time with real estate and mining shares leading the losses. S&P 500 futures were broadly unchanged.
The Senate is poised to pass a budget deal today which will avert a government shutdown, suspend the federal debt ceiling until March 1 2019 and add nearly $300 billion for government programs. The bipartisan bonhomie in the Senate has not been reflected in the House, where Minority Leader Nancy Pelosi spoke for more than eight hours yesterday on the need for legislation to protect young immigrants from deportation, a Democrat prerequisite to any budget deal. There is also opposition from members of the House Freedom Caucus due to the increase in domestic spending.
The Bank of England is set to leave interest rates unchanged at today’s monetary policy meeting, according to every economist surveyed by Bloomberg. Should some members of the 9-strong monetary policy committee vote to increase rates, that may have an effect on markets. What investors will be watching more closely will be the press conference at 7:30 a.m. where Governor Mark Carney will have a chance to explain the bank’s forecasts for the next three years and shed light on the period after the U.K.’s exit date from the European Union.
China’s currency weakened as much as 1.2 percent in Shanghai, the biggest move for the yuan since the 2015 devaluation, after the country reported a shock halving of its trade surplus. The selloff isn’t entirely unexpected as the currency’s climb to a two-year high in recent weeks had led to predictions that capital controls would start to loosen. Broader Chinese markets have been hit in the global equity turmoil, with the Shanghai Composite Index down more than 6 percent in last three sessions.
U.S. government debt remains under pressure, with the yield on the 10-year Treasury at 2.833 percent after a weak auction yesterday, and ahead of today’s $16 billion sale of 30-year obligations. Despite U.S. debt offering substantially higher yields than European or Japanese bonds, it’s less likely that overseas buyers will be out in force as costs to protect against foreign-exchange volatility are mounting. After this premium, a euro-area investor only gets a yield of about 0.46 percent from owning a 10-year Treasury.