September 28, 2022
In my note yesterday, we talked about the pivotal moment for global markets and economies. And it was manifested in the price of the global benchmarks for stocks and interest rates — which is the S&P 500 and the U.S. 10-year Treasury yield.
A revisit of June lows in U.S. stocks, and the rise to 4% in the U.S. ten-year government bond yield appeared to be the pain tolerance for the global financial system stability.
That pain, in this case, is the effect of increasing debt servicing costs on bloated global government debt, and the related capital flight from around the world, and into the United States (relative safety).
As of yesterday afternoon, it looked like the breaking point.
And with that, we suggested that we may (should) get a response from the Fed today. We didn't. But early this morning, the pain was relieved (for the moment) by another major central bank: the Bank of England.
After a doubling of the government bond yields in England over the past month, and a collapsing currency, the Bank of England was forced to restart QE this morning.
The European Central Bank did the same back in June, after watching yields in the fiscally fragile euro zone countries spike to over 4%. Just after they ended QE, they were forced to restart it.
By the way, that decision by the ECB back in June, in addition to the subsequent commitment to QE by the Bank of Japan, put a bottom in for global stocks and lead to a sharp 19% rebound).
So, this is central banks coming to the rescue (again), to (in this case) avert a global sovereign debt crisis. They are going back to the well, of printing money/intervening to maintain stability in markets.
This continues to support the point we've discussed all along the way: The financial system is too fragile to extract global liquidity, and sovereign debt is too bloated to endure higher interest rates (i.e. higher debt servicing costs).
With that in mind, as we've also discussed along the way, QE and low rates are like Hotel California. "You can check out, but you can never leave." We have another confirming data point now, in the Bank of England response.
How did markets respond to today's intervention …
Yields on UK government bond yields collapsed 50 basis points!
Yields on Italian 10-year bonds were sniffing around 5%, before dropping back to 4.58% (still above the June highs).
And U.S. yields dropped back to 3.70% after trading above 4% overnight.
Is 4% in the global bond benchmark the "uncle point" for markets?
Lower yields (less pain) equals higher stocks.
With that, the S&P 500 was up big on the day, first breaching the June lows, and then reversing 3% higher.