The Daily Prophet: Blame the French for the Latest Selloff

Connecting the dots in global markets

Many days it's almost impossible to identify the precise reason -- or reasons -- why markets are up or down. Thursday was not one of those days. It was all France's fault.

A seemingly routine auction of 30-year French government bonds turned into anything but as traders put in fewer bids than many expected. Normally, that wouldn't be a big deal, but the global market has been on edge the last week as central bankers around the world step up their hawkish rhetoric. According to FTN Financial strategist Jim Vogel, it was "a small event" but one that the "new bearish sentiment is incapable of taking in stride." The selling was swift and severe, pushing yields higher across debt markets worldwide. Those in Germany rose to their highest in 18 months. Thoughts of contagion rattled equities amid concern higher rates would cut into the profitability of the many companies that binged on cheap debt the past decade. The dollar weakened as traders piled into euros on the prospect of juicer yields in the euro zone.

Judging by the comments of perhaps the most influential investor in bond markets these days, this latest selloff may not prove short-lived like so many before. Ten-year Treasury yields have risen to 2.37 percent from 2.12 percent at the start of last week, and may not stop until they get "toward 3 percent," DoubleLine Capital Chief Executive Officer Jeffrey Gundlach said in an e-mailed response to questions from Bloomberg News' Edward Bolingbroke, Liz Capo McCormick and John Gittelsohn. Many investors had been buying longer-dated sovereign bonds to hedge to their equity portfolios and "that's why this unwind is so ugly," said Peter Tchir, head of macro strategy at Brean Capital. "They are losing money on both the equity and debt side now."

It's seems that only last month everybody was touting European stocks -- because it was only last month. The combination of cheap stocks relative to those found in the U.S. and signs of an improving euro zone economy made the continent's equities irresistible to many. Based on recent performance, though, maybe the old cliché about how it's better to be a seller when everyone is buying is true. The Stoxx Europe 600 Index fell 0.7 percent Thursday as bond yields rose, bringing its decline since mid-May to about 4 percent. That compares with a drop of 0.45 percent for the MSCI All Country World Index. Also working against the region's equities is a stronger currency. The Bloomberg Euro Index is up 6.9 percent since mid-April, making the euro zone exports more expensive to foreign buyers. The European Central Bank said last month that the euro zone's current-account surplus -- the broadest measure of trade because it includes investments -- fell in April to its lowest level since early 2015.

Don't expect to be able to ride out the turbulence in markets in gold. That's because for the precious metal's top forecaster, bullion bulls are up against a clear and present danger -- the Federal Reserve, according to Bloomberg News' Susanne Barton and Ranjeetha Pakiam. The central bank's plan to raise interest rates again this year while potentially reducing its balance sheet is negative for the non-interest bearing asset, said Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas, which topped Bloomberg's gold accuracy rankings in the second quarter. He's among the most bearish forecasters, betting bullion will drop to $1,165 an ounce in the fourth quarter, from $1,225 on Thursday. Investors will face "a greater opportunity cost of holding gold" as Fed hikes drive real rates higher, Tchilinguirian said in an e-mail. Support from geopolitical events and hedging "are unlikely to affect our directionally negative view on gold for the year."

If you thought watching the daily gyrations in Bitcoin was fascinating, just take a look at what's happening the market for wheat. The commodity jumped 52 percent between mid-May and yesterday, only to tumble the most in six years Thursday. A measure of 60-day volatility rose to the highest since August 2015. The rally was underpinned mainly by intensifying drought in the High Plains combined with less acreage devoted to the crop. Much of Montana and the Dakotas were in moderate to extreme droughts as of June 27, and the area for all varieties of wheat planted for 2017 is the smallest since data started in 1919, according to Bloomberg News' Sydney Maki and Jeff Wilson, citing U.S. Department of Agriculture data. "U.S. wheat is pricing itself out of the world market," said Arlan Suderman, chief commodities economist at INTL FCStone. On Wednesday, Egypt, the top wheat buyer, was said to have purchased 410,000 metric tons from Russia and Romania in a tender, shunning U.S. supplies. 

Never mind the dollar, euro, yen or pound. The real action in the foreign-exchange market can be found in Pakistan. Yes, Pakistan. One day after falling the most in nine years, the nation's rupee rose the most in three years. On Wednesday, the currency plunged as the State Bank of Pakistan said the drop was "broadly aligned" with economic fundamentals and would help boost growth. The rupee then recovered somewhat as Finance Minister Ishaq Dar blamed miscommunication by "individuals" and institutions for the decline Wednesday, which he called "mind-boggling" because the country's foreign currency reserves are stable, according to Bloomberg News' Kamran Haider, Faseeh Mangi and Ismail Dilawar. "The Finance Ministry and the central bank are not on the same page," said Muzzammil Aslam, chief executive officer of EFG-Hermes Pakistan. "While the State Bank allowed yesterday's freefall, the finance minister appears to have a broader view of the things." A weak rupee boosts the cost of financing external debt and Dar "has to keep that in mind."

It's usually a fool's errand to try and use the monthly payroll report from ADP Research Institute, which doesn't track government hiring, to forecast the outcome of the Labor Department's all-important jobs report, but that doesn't stop many strategists from trying. On Wednesday, ADP said private payrolls rose by 158,000 last month, which was below the median estimate of economists for a gain of 188,000. Based on how much the ADP report has overestimated the Labor Department's report in recent months, economists should expect the government to say Friday that less than 100,000 jobs were created in June, according to the strategists at BMO Capital Markets. That compares with the median estimate of 178,000 jobs. The economists at FTN Financial come at it another way, observing that even though ADP's June report was weak, the May-June average is still 194,000, implying an above-consensus 241,000 reading for the Labor Department's jobs report for June. As they say, take your pick.  

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