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Global Markets Selloff on Hawkish Outlook

US Treasurys and equities sold off today following hawkish commentary from a voting member of the Fed.  This morning, Fed Bank of Boston President Eric Rosengren at a conference in Massachusetts stated his belief that there is currently enough data to support a gradual increase in borrowing rates, although he did not clarify a precise timing for any action.  Rosengren specifically weighed in on the commercial real estate market, warning that asset prices had been rapidly rising over the past five years and are due for a downturn.  His remarks come one day after ECB President Mario Draghi unsettled markets by announcing that plans to extend ECB’s asset purchase program were not discussed at their most recent meeting.  Market wagering on a September Fed rate hike jumped to 38%, more than double the projected likelihood from Wednesday, while there is now a greater than 60% market bet on a Fed move by year end.  It looks like equities will break their 2-month streak of daily changes under 1%, as all major stock indexes are currently trading down almost 2%.  Treasury prices are similarly tumbling, with the yield on the 10-year note sitting at a two month high of 1.67%.               

Markets abroad reacted in similar fashion as European equities and emerging market assets touched their lowest levels since the Brexit referendum, while the yield on Germany’s 10-year Bund rose into positive territory for the first time since July.  In Asia, markets closed down on the day following the release of China’s CPI data, which showed consumer inflation up 1.3% YoY in August, the slowest pace since October 2015.  Adding the to the negative sentiment, North Korea conducted its fifth and most powerful nuclear test overnight, after which its government announced the ability to mount warheads to missiles.  Leaders from around the world voiced their displeasure with the action, deeming it another violation of the UN Security Council and calling for an emergency meeting later today.

Oil gave back the majority of its gains from yesterday as the historical weekly drop in U.S. oil rigs was tagged as a one-off situation related to Tropical Storm Hermine.  Both WTI and Brent crude prices fell more than 3.5% on the day.  All three major U.S. stock indexes continue to trade down near 2%, while Treasury yields and swap rates are up 2-9 bps in a bear steepening pattern.

 

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