Asian bourses are trading subdued following on from the losses on Wall Street where duration sensitive stocks underperformed and US Treasury yields climbed after a firm US CPI print and poor 30-year US Treasury Bond auction.
On the inflation front, the +6.2% Y/Y US CPI print, the highest since 1982, helped US inflation breakevens rally to new cycle peaks. On the front-end of the US curve, Fed Funds futures now fully price a 25bp hike by July ’22 as it remains challenging to predict how far or for how long the various ‘transitory’ factors will boost inflation. There is an increasing indication that inflationary pressures are increasing, indicating that inflation will persist elevated for much longer than Fed policymakers expect.
Traders should pay close attention to global rates dynamics as volatility in the Bond market increases amid growing inflation fears for the coming months. As short-term and long-term keeps rising, it could force participants to quickly hedge some of their exposure on the Tech sector, USD and rate-sensitive positions. Note, today’s trade is expected to be tamer given the Veterans Day holiday in the US. Also, worth keeping a close eye on the EM rate complex as the China/Evergrande theme is back on the radar. Reports note China is planning to manage a “controlled implosion” of Evergrande by selling off some of the Company assets to Chinese companies and limiting damage faced by businesses and households involved with its operations.
