Unexpected developments led to huge volatility on the money and debt markets. The U.K. government’s moves to lower taxes and facilitate budget spending almost led to a collapse of the debt market. The collapse indeed happened as some pension funds in the U.K. declared a margin call as 10-year U.K. Gilt yields soared to 4.5%. The Bank of England (BoE) launched a temporary limited QE program in response to the stop debt crisis in the country.
After this move, pension funds improved their funding ratio. It seems they had poor capital management oiling up debt pyramids, collateralising debt into new debt positions. So, when the debt market collapsed some of the funds failed to provide enough collateral to keep their positions. If the BoE will not interfere the sell-off could turn to an avalanche that would bury the U.K. debt market and further spread outside the U.K.
Remarkably, BoE is now making quite controversial moves as it is raising interest rates on the one hand and delivering loose monetary moves on the other. Such an unbalanced monetary policy may signal that the current monetary theory suggestions may edge its limits as high inflation is raging throughout the global economy. Most of the monetary officials in the U.S., the EU and some other countries undoubtedly point to a coming recession during this or the following year. This is very uncommon as usually optimistic monetary officials are not inclined to provide such a forecast, even in front of the close crisis.
It may seem that the upcoming crisis may turn into a devastating hurricane that may wreck economic fundamentals that officials are trying to find excuses for. The Bank of America warned its clients in a note that the U.S. needs a serious recession to get inflation back to the target at 2.0%. Further, it may indicate that the U.K. troubles are only the beginning as other heavily indebted countries with tolerance to inflation may face the same issues. So, the next spot for such issues may become the Eurozone with its above 10% inflation, Japan where the Bank of Japan is aching to get the debt yields curve under control. So, investors must be prepared that some countries, or even regions, may enter a severe debt crisis.
The S&P 500 broad market index continues to look down at the bottom of the aggressive downside formation gradually sliding towards a primary target at 3650-3750 points. A further slide to the extreme targets of 3400-3500 is highly likely. The long-term downside targets are intact at 2000-2200 points.
The oil market is waiting for the decisions from the Organisation of the Petroleum Exporting Countries and allies (OPEC+) that could be made during the next meeting of the cartel and its allies at the beginning of October. Rumors are circulating that the OPEC+ may cut crude production by 1 million barrels per day. Anyway, the market is balancing at the edge with high chances of a downturn. The primary downside target for the Brent crude benchmark is already met at$75-85 per barrel area. More extreme targets are dead ahead at $50-65 per barrel by November.
Gold prices jumped off their lows amid the correction of the Greenback and expectations of further escalation of the war in Ukraine. Gold prices remain under strong resistance level at $1680-1700 per troy ounce, waiting for a sign to continue down. The primary scenario suggests that prices may fall to $1350-1450 by the end of October.
There are no reasons to look at the short-term movements in the money market amid extreme volatility. Long-term movements are likely to be considered against the U.S. Dollar, but final technical picture to confirm it is yet to be formed.