Financial Market Sell-Off

September 20, 2021

Investors are worrying the Congress will this time fail to raise the debt ceiling, whose limit will be reached during October. Many earlier games of chicken over raising the debt ceiling have always been averted, but political divisiveness has never been so raw since the convention of debt ceilings were adopted. The consequence of not resolving this matter would be a default of the U.S. government. A more immediate but less consequential deadline looms at end-September over how much spending to budget in the coming fiscal year. It will also soon be crunch time over President Biden’s tax and spending proposals.

Another area of uncertainty involves the outcomes of many monetary policy reviews this week, including those of the Federal Reserve, Bank of Japan, and Bank of England. The UN General Assembly session opens this week. Canadian parliamentary elections are being held today, and German voters go to the polls next weekend. Amid this stew of potential shocks, financial markets today have experienced considerable downside pressure.

In the first ten minutes of U.S. equity trading today, the DOW, Nasdaq, and S&P fell 1.4%, 1.6%, and 0.9%. Stock market losses in Europe exceed 2.0% so far in Germany, France, Italy, Switzerland and Spain, and the British Ftse has lost 1.6%. Markets in the Pacific Rim have been spared by holiday closures in Japan, China, Taiwan, and South Korea, but elsewhere share prices tumbled 3.3% in Hong Kong, 2.1% in Australia, and about 1% in India, Indonesia and Singapore.

Sovereign debt prices soared, depressing 10-year yields by six basis points in Canada, four bps in the United States, Germany, and Great Britain, three basis points in France, and two bps in Italy.

The price of West Texas Intermediate oil slumped 2.3% overnight, while safe haven buying sent gold up 0.5% but depressed silver to more than a 1-year low.

The dollar has benefited from this mess, rising 0.2% overnight on a weighted basis. The dollar strengthened 0.4% against sterling, 0.6% versus the Canadian dollar, 0.2% vis-a-vis the Swiss franc and Aussie dollar and 0.1% relative to the euro but fell 0.3% against the Japanese yen.

Canadian elections didn’t have to be called this early, having previously been held in 2019. Prime Minister Justin Trudeau is seeking a stronger mandate so that he can impose more effective measure to contain Covid and move the economy past its current malaise. There is always a risk when calling snap elections of eliciting a voter backlash for acting political. Polls in Germany meantime suggest that the next Chancellor of Europe’s largest economy will be a Social Democrat and involve a shift in party power.

German producer price inflation accelerated 1.6 percentage points to 12.0% in August, its highest since December 1974. Energy costs were 24% above year-earlier levels.

CPI inflation in Hong Kong fell from a 6-month high of 3.7% in July to a 2-month low of 1.6% last month.

Spain’s trade deficit ballooned from EUR 310 million in July 2020 to EUR 1.6 billion in July 2021.

Polish industrial production dropped 2.5% last month on top of July’s monthly slide of 3.9%. A 12-month 13.2% rate of increase was down from 44.2% in April. Polish producer price inflation rose another 1.1 percentage points in August to 9.5%, most in 125 months and up from 0.1% last December.

New Zealand’s service sector purchasing managers index slumped sharply in August to a 16-month low of 35.6 from readings of 55.9 in July and 61.2 in April. New Covid containment measures were the cause.

In the United States, over 200o deaths from Covid were reported yesterday, and the number of new inflation, which rose just less than 150k is fast approaching the 700,000 level.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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