Fallout from Archegos continues, Treasury yields rise again, and sorting out the Suez bill.
Details are emerging of the efforts made last week to manage the collapse of Archegos Capital Management, with global investment banks' entreaties to cooperate ending in hostilities. The failure of those efforts has led to a clear split between banks that say they mostly escaped the fallout – Goldman Sachs Group Inc. and Deutsche Bank AG — and those reporting significant losses. Japan's biggest lender, Mitsubishi UFJ Financial Group Inc., this morning joined the growing list of firms warning of potential losses tied to "a U.S. client." Archegos' total positions may have topped $50 billion, so there may be some time before this unwind is over.
The worst quarter for U.S. Treasuries since 2016 is coming to a close with the yield on the 10-year note above 1.75%. Banks had warned that there could be extra selling at the end of the quarter with heavy volumes overnight in Asia pointing to technical factors behind the move out in yields. There may also be a structural element to this morning's levels as investors digest President Joe Biden's latest vaccine plans and how they could lead to an even more rapid opening of the economy.
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The Suez Canal has reopened to shipping after the week-long hold up caused by the grounding of the Ever Given container ship. Authorities in Egypt said it will only take days to move the backlog of vessels waiting to traverse the channel. What will take longer is sorting out who has to foot the bill for all the losses incurred during the blockage. One analyst said the issue of who pays is an "Armageddon type scenario" for insurers.
While there is a lot of movement in bonds this morning, global equity markets continue to be fairly quiet. Overnight the MSCI Asia Pacific Index slipped 0.1% while Japan's Topix index closed 0.8% lower. In Europe, the Stoxx 600 Index was 0.4% higher by 5:50 a.m. Eastern Time with cyclical stocks performing well. S&P 500 futures pointed to almost no change at the open, oil was slightly lower as traders awaited the latest OPEC meeting, and gold was under $1,700 an ounce.
The FHFA House Price Index and the S&P CoreLogic Home Price Index are both updated for January at 9:00 a.m. Consumer Confidence is at 10:00 a.m. Fed Vice Chair for Supervision Randal Quarles and New York Fed President John Williams speak later. BioNTech SE, Blackberry Ltd. and Lululemon Athletica Inc. are among the companies reporting results.
What we've been reading
Here's what caught our eye over the last 24 hours.
And finally, here’s what Joe's interested in this morning
A thing you hear from time to time is that the Fed has set interest rates "artificially" low. This is impossible and illogical, however, because to call something artificial implies that there's some otherwise natural level of overnight interest rates that would exist. But the short-term rate is specifically a policy instrument. To call the choice artificial is as logical as saying the legal drinking age is artificially low. Since the legal drinking age is by definition a policy choice set by politicians, there can never be a natural legal drinking age. Of course you can say it's too low based on some set of trade-offs about who is responsible enough to drink and at what age. But that's a different question altogether than whether it's artificial.
A related thing you often hear is that the Fed may, from time to time, attempt to suppress interest rates. For example, with the 10-year back on the March this morning to over 1.75%, there's sure to be more talk about whether the Fed will try to push it down. But the Fed can't suppress rates either because that implies that there's some natural level rates would otherwise go to. However, since the Fed either explicitly (at the short end) or implicitly (at the long end) controls the entire curve, there's no natural level of rates for the Fed to push back again.
In the end, all there is are choices and trade-offs, based on various conditions (most notably unemployment or inflation). But whether we're talking about Powell's commitment to keeping rates low until we get back to maximum employment (perhaps tolerating higher inflation) or Volcker's commitment to keep rates high until inflation was crushed (causing unemployment to remain elevated), there's nothing natural about either approach or level.
Joe Weisenthal is an editor at Bloomberg.
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