The Markets Feel Like They’re in Liquidation Mode as the House Moves to Oust Speaker McCarthy

Also, updates on five-year T-notes, silver, crude oil, and Japanese yen futures

This Morning’s Five Futures in Focus:

1. Nasdaq 100 E-mini Futures (/NQ): -0.90%
2. 5-Year T-Note Futures (/ZF): -0.07%
3. Silver Futures (/SI): -0.84%
4. Crude Oil Futures (/CL): -0.01%
5. Japanese Yen Futures (/6J): -0.15%

Markets feel like they’ve been in a bit of a liquidation mode, with a strong push higher by the U.S.dollar and nearly everything else selling off in recent days. The bond market remains the tail that wags the dog, continuing to be led by the long-end of the curve. Efforts by Republican members of congress to oust Speaker Kevin McCarthy of the house are drawing into focus concerns raised by rating agencies that U.S. governance has deteriorated in recent years; the continuing resolution struck over the weekend funded the government for only 45 days, meaning we have another potential shutdown looming in November.

After some earlier gains sparked by optimism over lawmakers averting a government shutdown, equity futures are slipping into the red. S&P 500 futures (/ESZ3) are down a shade under 0.2% as Treasury yields rise and the dollar gains against its peers. With traders squarely focused on rate hike bets, all eyes will be on Federal Reserve Chair Jerome Powell later today when he speaks at a roundtable event. However, it’s unlikely he moves the needle far in either direction, as the higher-for-longer narrative bakes into expectations. After today, equity traders will wait for additional economic data, with the services purchasing managers' index, or PMI, due Wednesday and the non-farm payrolls report, or NFP, due Friday.

The bond selloff continues, with traders selling Treasuries across the curve. The 30-year yield (/ZBZ3) hit the highest level since 2007. Investors are listening to the warning signs flashed in the bond market, evidenced by the heavy selling seen overnight in the Asian and European sessions. Tomorrow’s numbers from the U.S. purchasing managers' index, or PMI, and Friday’s report on non-farm payrolls, or NFP, may shift the outlook for bets on a Federal Reserve interest-rate hike. But, in the meantime, it looks as though the threat of higher interest rates will carry the narrative for bond bears.

Silver prices (/SIZ3) are down again, about 0.89%, as precious metals investors assess the threat of further interest rate hikes and the long-term economic consequences from higher borrowing costs. While rate traders still have the base case scenario set for no more hikes, other markets are moving as though they are pricing in more tightening. A protracted Treasury market selloff is causing yields to surge to silver’s detriment. For now, it looks like bears are in firm control. The U.S. jobs report due later this week may change that calculus, but for now it doesn’t look like a good time to try to catch this falling knife.

U.S. crude oil futures (/CLX3) is nearly unchanged this morning at about $88.79 per barrel as prices steady after several down days. The Joint Ministerial Monitoring Committee, or JMMC, is scheduled to meet tomorrow, although analysts don’t expect OPEC+ members to commit to any policy changes. Meanwhile, Russia’s seaborne crude oil exports are at a three-month high, according to a Bloomberg report. U.S. inventory figures from the American Petroleum Institute, or API, will cross the wires today.

The Japanese Yen (/6JZ3) is slightly lower this morning and approaching the lowest levels since October 2022. A widening gap between yields for U.S. Treasuries and Japanese Government Bonds, or JGBs, is pressuring currency traders to ditch the yen. While an exit path for the Bank of Japan is in view, traders haven’t started to price the scenario into the bond of FX markets. Meanwhile, expectations for more Fed tightening are prevailing, which should weigh down /6J further.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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