US Treasury auction bombs as bitcoin surges and Powell gets hawkish

The market has spent this week digesting the recent central bank meetings and trying to decide if we are at peak interest rates and risk can rally freely through to the end of the year, or if the thought of rate cuts is premature. Late on Thursday, Fed chair Jerome Powell said that the fight against inflation was not over, which caused bond yields to surge, and thew 10-year Treasury yield jumped by 13 basis points. The whipsaw price action in the bond market on the back of one speech by a Fed official highlight how much anxiety there is in markets right now. The positive correlation between bond prices (which move inversely to bond yields) and stock prices is maintained, and stocks slid on the back of Powell’s comments. The FX market, which has traded in a tight range this week, also reacted to the Powell comments and the dollar was higher across the board. After dipping to below 105.00 at the start of the week, the dollar index is now closing in on 106.00. Whether it gets above this level will be dependent on where bond yields go next. The new environment, where central banks are on pause, means that economic data is no longer the key driver of financial markets, instead the key driver could be Treasury auctions.

US Treasury auctions are the new economic data for traders

US government debt sales have been a key feature this week, with the US Treasury trying to sell $112bn in medium to long term debt this week. The bond market will be on the lookout for any signs that demand for the extra US debt that is being sold this year could meet sagging demand and on Thursday the news was not good. An auction of $24bn of 30-year Treasuries was not well received. Primary dealers ended up buying 24.7% of the debt on offer, more than double the average for the past year, and the yield thew Treasury had to pay to entice investors was also higher than the pre-auction level at 4.76%. Overall, this was about as bad an auction as you can get.  Interestingly it wasn’t all bad news and Wednesday’s auction of $40bn of 10-year debt went off without a hitch, with a high yield of 4.519%. Currently, 10-year yields are 4.53%, and have climbed since testing the water below 4.5% earlier this week. For now, the Treasury needs to watch out. Investors are willing to buy shorter term debt, but long-term debt is a harder sell. No wonder the Treasury changed its auction schedule for this quarter to reduce the amount of longer-term debt it is selling. If this becomes a feature in the market then we could see another bond market rout, which could limit the upside for stocks as we move into the end of the year. It could also be positive for the dollar. Debt auctions are the new economic data for traders and investors, and they have the potential to trigger intense bouts of volatility, as we saw late on Thursday.

Bitcoin rise, but can it last?

Elsewhere, bitcoin is rising sharply on Thursday and is back above the $30,000 mark, at one point it was up 6% to $37,000. This is significant since it means that Bitcoin is now back above the level where it traded before the May 5th, 2022, crash of TerraUSD, the last crypto currency crisis. Sentiment towards crypto is receiving a boost from the potential approval of a Bitcoin ETF by the SEC, the US regulator, after more than a decade of deliberation. The regulator is unlikely to grant approval this month, however analysts at Bloomberg now believe that there is a 90% chance of an approval by January 10th next year. If the Bitcoin ETF is approved, then it could open the door to a wider range of investors trading crypto currency. Some analysts believe that the potential SEC approval is already in the price. They also argue that a Bitcoin ETF may not actually bring more capital into crypto, and instead they foresee a shifting around of capital, with those already invested in crypto preferring to trade the ETF. Either way, regardless of what happens at the SEC and the approval of a Bitcoin ETF, we don’t think that it will have a major impact on the boarder financial market at this stage. We would only foresee a situation where the Bitcoin ETF does impact financial markets if there is a large influx of fresh capital into this new product. For now, we can’t see people ditching their S&P 500 ETFs in preference for the Bitcoin ETF, no matter what the crypto bulls say to the contrary.

BOE economist talks dovish

Elsewhere, in a sign that the major central banks could take a diverging path from here, the Bank of England’s Chief Economist has hinted that UK interest rates have reached a peak. He was speaking on Tuesday, but the impact on the 10-year bond yield has been long-lasting. The 10-year Gilt yield is down some 13 basis points this week and is currently trading at 4.27%. This is a drop of more than 30 basis points in the past month. On Friday, the UK’s GDP report for Q3 is scheduled for release. The market is expecting a -0.1% decline in growth for the third quarter, however the BOE is a smidgen more upbeat, and is predicting a reading of 0%. The lead indicators suggest that the UK economy is weakening, and that jobs growth is not as strong as it was. Thus, it would be a major surprise if UK growth is stronger than expected. A reading of 0.2% could trigger a mini rally in the pound and a sell-off in UK bonds, causing yields to reverse some of this week’s decline in yields. However, a weak reading is more likely, in our view, which supports a more dovish stance from the BOE compared to the Fed in the coming months, and could weigh on the pound, as interest rate differentials once again dominates the world of G10 FX.

Weight loss drugs – the new AI for stock markets

Stocks were volatile on Thursday. US stocks sunk after comments from the Fed’s Powell and the news about the 30-year auction. However, earlier in the day the FTSE 100 was up by 0.6%, after Astra Zeneca jumped on the weight loss drug bandwagon. Weight loss drugs like Wegovy are being called the financial market’s new AI stocks, after large gains in healthcare stocks that produce them for example Novo Nordisk, which is up 45% so far this year. Astra Zeneca has entered a licensing agreement with China’s Eccogene for an oral medicine that is similar in its effects to Wegovy and Ozempic. It is a positive development for the FTSE 100, which is considered a home to companies that are relics of previous eras. The FTSE is usually receiving criticism for its lack of world beating companies and a lack of innovation; however, Astra Zeneca stands as a beacon of light. The fact its obesity medicine is in a pill form, could also make it more attractive than Wegovy and Ozempic, which have to be injected. Astra Zeneca’s share price is up nearly 3% on Thursday, but the stock could rally further after declining more than 12% in the last 6 months, alongside the broader healthcare sector. If Astra Zeneca does stage a meaningful rally, then it could boost sentiment towards the overall FTSE 100.