BoE Alarm Bells, Brainard's Caution, PC Woes - What's Moving Markets

By Geoffrey Smith

Investing.com -- The Bank of England sounds the alarm again over the state of the U.K.'s pension industry. Russia renews its missile attacks on Ukrainian cities amid expectations that the West will increase its supplies of air defense weapons. Stocks are headed lower on fears about the war spreading and hurting the global economy. Two Fed officials introduce just a smidgeon of caution into their talk about future rate hikes, and oil is slumping as the prospect of global recession grows. Here's what you need to know in financial markets on Tuesday, 11th October.

1. Bank of England widens interventions, sees "material risk to U.K. financial stability"

The Bank of England extended its intervention in the U.K. government bond market, citing a “material risk to U.K. financial stability”, in the clearest warning yet that the sharp rise in market interest rates is increasing stress in the financial system.

The Bank said it will use its current 65 billion pound market stabilization operations to buy index-linked Gilts as well as their conventional equivalents, indicating that what it called a “fire-sale dynamic” had reached the safest part of the U.K. investment universe, as pension funds scramble to raise collateral for their bets on interest rate derivatives. The Pensions and Life Savings Association issued a statement assuring pensioners that their assets were safe.

The pound fell as low as $1.10 before stabilizing, while the yield on benchmark 10-Year Gilts rose another 3 basis points to 4.50%. U.K. stocks led the rest of Europe downward, the FTSE All Share index falling 1.2%.

The Bank said on Monday it wants to switch to supporting the system through repos rather than outright purchases from Friday, which would help its control of the domestic money supply and, ultimately, inflation. Analysts said the morning’s announcement casts doubt on its ability to make that switch as planned.

2. Russia resumes missile attacks on Ukrainian cities

Russia continued its missile attacks on largely civilian targets in Ukraine, ahead of a conversation between Ukrainian President Volodymyr Zelenskyy with the G-7 bloc of nations.

Zelenskyy is expected to renew his calls for more sophisticated air defense systems, and is likely to receive a more sympathetic hearing after a day in which at least 11 civilians were killed and dozens more injured in strikes that targeted Ukraine’s power and water supplies.

U.S. President Joe Biden said the attacks showed the “sheer brutality” of Russia’s invasion, which is now being led by a general who practised the same tactics in Syria.

The UN will publicly debate a resolution later condemning the annexation of four Ukrainian provinces after sham referendums, and after rejecting Russian appeals for a vote to be held in secret.

3. Stocks set to open lower; chipmakers in spotlight after PC shipment news

U.S. stock markets are set to open lower again, amid continued fretting that the Federal Reserve will continue to raise interest rates until something breaks (the U.K. pension industry being the obvious candidate at the moment).

By 06:20 ET, Dow Jones futures were down 199 points or 0.7%, while S&P 500 futures were down 0.8%, and Nasdaq 100 futures were down by the same amount, drawing little consolation from an uptick in the NFIB survey of small business confidence.

Stocks likely to be in focus later include PayPal (NASDAQ:PYPL), as it struggles to defuse a fracas over its initiative to fine people for spreading misinformation. Also in the spotlight are chipmakers, which are again under pressure after data from industry consultants showed an alarming 20% drop in PC shipments on the year. While PCs no longer account for the bulk of semiconductor demand, they still nonetheless embody the lurch in consumer spending patterns away from consumer durables as pandemic effects fade.

4. Brainard, Evans hint at risk of policy mistake; Harker, Mester speeches eyed

Was that a hint of a blink from the Fed? Bond markets may not be buying it yet, but Vice-Chair Lael Brainard and Chicago Fed President Charles Evans both warned, if not very loudly, of the risks of the central bank overshooting with its interest rate hikes as it tries to rein in rampant inflation.

Brainard warned that the Fed’s tightening is being amplified by those of other central banks, slowing global demand.

“The combined effect of concurrent global tightening is larger than the sum of its parts,” she noted, only hours after Evans had acknowledged the risks of tightening too far. Brainard warned that the time lags involved in policy transmission mean that the main impact of the Fed’s action so far is not yet reflected in the current economic situation.

Philadelphia Fed President Patrick Harker and Cleveland’s Loretta Mester headline Tuesday’s Fed-speak.

5. Oil slumps on demand fears

Crude oil prices fell on fears that the world is, after all, heading for a recession that will kill demand.

By 06:30 ET, U.S. crude futures were down 2.4% at $88.94 a barrel, while Brent futures were down 2.1% at $94.13 a barrel.

The market has largely shrugged off inconclusive attempts by the U.S. and Europe to construct a price cap for Russian oil exports, but is more concerned about the impact of an ever-more intense war on the European economy, which would send big ripples through both China and the U.S.

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