Doom loop momentum builds

Sept 28 – Sometimes markets get up a head of steam and it becomes very difficult to slow the momentum, far less reverse it.

There’s a case to make that this is where markets – US, Asian, and global, across asset classes – find themselves, feeding off each other and accelerating self-fulfilling loops.

Right now, these are ‘doom’ loops – rising US bond yields, a rampant dollar, higher oil prices, tightening financial conditions, deepening growth fears, decreasing risk appetite, and increasingly fragile equity markets.

Wall Street’s performance on Wednesday illustrated this phenomenon – despite plunging the day before, it barely recovered any ground at all. Asian stocks barely clawed back any of the previous days’ losses either, and world stocks racked up a ninth straight decline.

These moves are unlikely to provide a springboard for Asian markets on Thursday, and beyond Australian retail sales there is nothing on the economic or policy calendar likely to do so either.

Recent rebounds in the S&P 500 have been sporadic and limited. The index has risen 0.5% or more only twice this month, and has not posted a gain of 1%. It has fallen at least 0.5% six times, three of those being 1% declines or more.

Meanwhile, US bond yields, the dollar, and oil all rose again on Wednesday, and Treasury yield spreads over other bonds widened. The 10-year US-Chinese spread is now 190 basis points, the widest since 2006, and the 2-year US-Japanese spread is well above 500 bps and pushing the dollar/yen closer to the 150.00 level.

Still no intervention from Japan though.

In China, the turmoil, intrigue, and uncertainty surrounding Evergrande is deepening, as Bloomberg reported on Wednesday that the company’s chairman had been placed under police surveillance.

The world’s most indebted developer with more than USD 300 billion in total liabilities is at the center of an unprecedented liquidity crisis in China’s property sector, which accounts for roughly a quarter of the economy.

China’s creaking property market is depressing world copper prices – often seen as a bellwether for the global economy – so Evergrande’s debt restructuring has implications far beyond China’s borders.

There are signs that Beijing’s steps to boost the economy in recent months may be having an effect. Profits at China’s industrial firms for the first eight months of the year fell 11.7%, but that was down from a 15.5% contraction for the first seven months.

A modest recovery may be underway. But it can take a long time for momentum to build or change course.

Here are key developments that could provide more direction to markets on Thursday:

– Australia retail sales (August)

– Germany CPI inflation (September, prelim)

– Fed Chair Jerome Powell speaks

(By Jamie McGeever; Editing by Josie Kao)