To misquote Lenin, there are years where nothing happens and weeks where years happen – we’re in one of those weeks now. Global bond yields are surging, wreaking havoc across portfolios and across asset classes.
The UK has been the focus – the steep sell-off in gilts in the wake of the mini-Budget well documented by now. After some respite early doors on Tuesday the selling continued yesterday as gilts yields rose again to fresh multi-years highs across all tenors. The 30yr gilt yield jumped above 5% for the first time since 2002. The 10yr rose above 4.5%, and is ticking up now, whilst the 2yr has nudged close to 4.7%.
The IMF weighed into the situation in the UK, castigating the government for, in the words of Ray Dalio, its fiscal policy ‘blunder’. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said in a pointed rebuke to the Chancellor. “It is important that fiscal policy does not work at cross purposes to monetary policy.” The UK and IMF have history. And it’s curious how silent the IMF was during the pandemic when all the unfunded spending by the previous chancellor was being dished out to all and sundry. Remember this situation was made in 2020.
Now you can argue that monetary and fiscal policy should not be at odds, but the thinking might be that whilst the Bank of England tackles the ‘flation bit, the government can tackle the stag’ bit. I think the point we’ve been trying to make against the reckless Budget is two-fold: whilst they don’t need to be doing exactly the same thing, they shouldn’t pulling in entirely different directions. One of the reasons for the explosion in gilts is the sovereign premium – markets holding their noses at unfunded, untargeted tax cuts - the other is just simply that the market thinks the Budget is going to force the Bank into much more tightening than it had planned, because the fiscal bit is likely to push the ‘flation bit too far. More tightening hits households and makes companies less competitive as they try to raise funds for growth – countering the tax cuts. Better to wait to control the inflation before doing the dash for growth. Not least because if the Bank does need to go to 6% then you have a nightmare in the mortgage market as people won’t be able to refinance deals and first time buyers get locked out (all else equal prices will come down, but I think you just end up with a stagnant market with no sellers) countering any economic or political advantage you might have enjoyed otherwise. As ever, it’s a fine balancing act and it’s clear the government misjudged its footing.
Bank of England chief economist Huw Pill underlined the point. "We have all seen recent, significant fiscal news in the past few days …that has had significant market consequences – as well as significant implications for the macro-outlook – including, but not exclusively, those coming by asset markets.”
He concluded: "On the back of all that... I think it's hard not to draw the conclusion that all this will require a significant monetary policy response." Pill also said the Bank wouldn’t stop gilt sales, which seemed to add to the pressure in the UK bond market.
GS: "We now expect the BoE to deliver a 100bp hike in each Nov and Dec (vs 75bp before)...While a big intra-meeting rate hike is possible...we believe that hawkish BoE commentary and a large move at the Nov meeting is more likely".
It’s not confined to the UK by any means, though the moves here have been much swifter and larger since Friday. Some decent eco data and consumer confidence numbers, plus a slew of comments from various Fed speakers, hit the US Treasury market and yields surged to fresh multi-year highs. Back to this good news is bad news for the market since it only provides ongoing cover for the Fed to keep on hiking until it all breaks. The 10yr Treasury yield rose above 4%.
In FX, GBPUSD slipped post the IMF comments, dropping back to the low 1.06 area. China’s yuan fell to its lowest since 2008. EURUSD made a fresh 20-year low at 0.9536. USDJPY is near its 24-year high at 144.
Stocks have slumped early Wednesday amid the bond carnage. The FTSE 100 declined as much as 2% before paring losses a touch with just about every stock in the red, whilst the FTSE declined also by 2%. Rate hike worries are the chief driver of the losses and it’s hard to see where you are supposed to hide – cash if you can get 4-5% on a 2yr gilt? I think a lot of people are clinging to equities because there just isn’t much else on offer, but they don’t want to be there.
The DAX slid over 1.6% to below 12,000 after the German GfK consumer climate index fell to –42.5 in October, a huge fall from the –36.8% in September and another record low. ECB chief Lagarde said they’ll keep hiking in the coming meetings. Asian markets were lower with the Hang Seng off by more than three percent – more property market worries.
DAX cracked at YTD lows and now below the 50% retracement of its move up from the pandemic low.
Rising rates hit the US market as the S&P 500 made a fresh 2022 low and the Dow fell further into a bear market. The Nasdaq composite managed to eke out a 0.25% rise for the day, but remains down 33% from its highs whilst the S&P 500 is 24% below its peak. US markets are now facing technical breakdowns at some very key levels, with the S&P 500 at a YTD low and testing its 200-week moving average. Apple is down after ditching its planned iPhone boost due to lack of demand – about 7% of the market.
Vix keeps motoring out of the pattern – we are now setting up for the capitulation, but stocks likely need to make another leg lower. Earnings season approaches – will it be the final pillar holding up equities to tumble?
Brent futures are weaker in early trading, just a touch above the Monday low. Goldman on how it got its $140 target wrong: “What we failed to appreciate is the extent to which regional prices for commodities denominated in local currencies could diverge on a global basis.” Meanwhile reports yesterday pointed to Russia calling on OPEC+ to cut production by as much as 1m bpd.
Gold is back down to test its 50% level at $1,613 – as real rates climb. US 10yr TIPS at 1.66% in the chart below. If real rates keep rising we could yet see the $1,500 area tested.
RISK DISCLOSURE STATEMENT In consideration of Safecap Limited (“Safecap”) agreeing to enter into over-the-counter (“OTC”) contracts for differences (“CFDs”) and spot foreign exchange contracts (“Spot FX Contracts”) with the undersigned (hereinafter referred to as the “Customer”, “you”, “your”), Customer acknowledges, understands and agrees that: 1. Trading Is Very Speculative and Risky. Trading CFDs and Spot FX Contracts is highly speculative and is suitable only for those customers who (a) understand and are willing to assume the economic, legal and other risks involved, and (b) are financially able to assume losses significantly in excess of margin or deposits. Neither CFDs nor Spot FX Contracts are appropriate investments for retirement funds. Customer represents, warrants and agrees that Customer understands these risks, is willing and able, financially and otherwise, to assume the risks of trading CFDs and Spot FX Contracts and that the loss of Customer’s entire Account balance will not change Customer’s lifestyle. 2. High Leverage And Low Margin Can Lead To Quick Losses. A high degree of leverage is associated with both CFDs and Spot FX Contracts, which generally involves a small deposit relative to the size of the Transaction. This can be both advantageous and disadvantageous. A small price movement in your favour can provide a high return on the deposit, however, a small price movement against you may result in significant losses which could exceed the money placed on deposit. Such losses can occur quickly. 3. Margin Requirements. Customer must maintain the minimum margin requirement on their open positions at all times. It is Customer's responsibility to monitor his/her Account balance. Safecap has the right to liquidate any or all open positions whenever the minimum margin requirement is not maintained and this may result in Customer’s CFDs or Spot FX Contracts being closed at a loss for which you will be liable. 4. Cash Settlement. CFD and Spot FX Contracts can only be settled in cash. 5. Conflicts of Interest. Safecap is the counterparty to all Transactions entered into under the Customer Agreement and, as such, Safecap’s interests may be in conflict with yours. Our conflicts of interest policy is available at Safecap website. 6. OTC Transactions. When trading CFDs or Spot FX Contracts with us, such Transactions will not be executed on a recognized or designated investment exchange and are known as OTC transactions. All positions entered into with us must be closed with us and cannot be closed with any other entity. OTC transactions may involve greater risk than investing in on-exchange contracts because there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of the position arising from an OTC transaction or to assess the exposure to risk. Bid Prices and Ask Prices need not be quoted by us, based on best execution policies applicable in the market. There is no central clearing and no guarantee by any other party of Safecap’s payment obligations to the Customer. Customer must look only to Safecap for performance of all contracts in Customer’s Account and for return of any Margin or collateral. 7. CFDs and Spot FX Contracts. Trading CFDs and Spot FX Contracts carries a high degree of risk. The gearing or leverage often obtainable in such trading means that a relatively small market movement can lead to a proportionately much larger movement in the value of your liability. You should be aware of the implications of this, in particular, the Margin requirements. 8. Prices, Margin And Valuations Are Set By Safecap And May Be Different From Prices Reported Elsewhere. Safecap will provide prices to be used in trading, valuation of Customer positions and determination of Margin requirements in accordance with its Trading Policies and Procedures and Market Information Sheets. The performance of your CFD or Spot FX Contract will depend on the prices set by Safecap and market fluctuations in the underlying asset to which your contract relates. Our prices for a given market are calculated by reference to the price of the relevant underlying asset which we obtain from third party external reference sources or exchanges. For our Spot FX Contracts, we obtain price data from wholesale market participants. Although Safecap expects that these prices will be reasonably related to prices available in the market, Safecap’s prices may vary from prices available to banks and other market participants. Safecap has considerable discretion in setting and collecting Margin. Safecap is authorized to convert funds in Customer’s Account for margin into and from such foreign currency at a rate of exchange determined by Safecap in its sole discretion on the basis of then-prevailing money market rates. 9. Extent of Losses. Where you short a market and the price rises, it is possible that the extent of your losses may not become clear until the position has been closed. You must undertake sufficient analysis prior to entering into a Transaction to ensure you are able to support the extent of the risk arising. 10. Rights to Underlying Assets. You have no rights or obligations in respect of the underlying instruments or assets relating to your CFDs or Spot FX Contracts. 11. Currency Risk. Where the CFD or Spot FX Contract is settled in a currency other than your base currency, the value of your return may be affected by its conversion into the base currency. 12. One Click Trading And Immediate Execution. Safecap’s Online Trading System provide immediate transmission of Customer’s Order once Customer enters the notional amount and clicks “Buy/Sell.” This means that there is no opportunity to review the Order after clicking “Buy/Sell” and Market Orders cannot be cancelled. This feature may be different from other trading systems you have used. Customer should utilize the Demo Trading System to become familiar with the Online Trading System before actually trading online with Safecap. Customer acknowledges and agrees that by using Safecap’s Online Trading System, Customer agrees to the one-click system and accepts the risk of this immediate transmission feature. 13. Telephone Orders And Immediate Execution. Market Orders executed through the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done” following Customer’s placing of an Order. Upon such confirmation of the telephone operator, Customer has bought or sold and cannot cancel the Market Order. By placing Market Orders through the Safecap Trading Desk, Customer agrees to such immediate execution and accepts the risk of this immediate execution feature. 14. Safecap Is Not An Adviser Or A Fiduciary To Customer. Where Safecap provides generic market recommendations, such generic recommendations do not constitute a personal recommendation or investment advice and have not considered any of your personal circumstances or your investment objectives, nor is it an offer to buy or sell, or the solicitation of an offer to buy or sell, any Foreign Exchange Contracts or Cross Currency Contracts. Each decision by Customer to enter into a CFD or Spot FX Contract with Safecap and each decision as to whether a transaction is appropriate or proper for Customer is an independent decision by Customer. Safecap is not acting as an advisor or serving as a fiduciary to Customer. Customer agrees that Safecap has no fiduciary duty to Customer and no liability in connection with and is not responsible for any liabilities, claims, damages, costs and expenses, including attorneys’ fees, incurred in connection with Customer following Safecap’s generic trading recommendations or taking or not taking any action based upon any generic recommendation or information provided by Safecap. In case Customer requires Safecap to provide with any investment advice, a separate agreement need to be signed between Safecap and the Customer in which the scope of the advice will be specifically defined. 15. Recommendations Are Not Guaranteed. The generic market recommendations provided by Safecap are based solely on the judgment of Safecap’s personnel and should be considered as such. Customer acknowledges that it enters into any Transactions relying on its own judgment. Any market recommendations provided are generic only and may or may not be consistent with the market positions or intentions of Safecap and/or its affiliates. The generic market recommendations of Safecap are based upon information believed to be reliable, but Safecap cannot and does not guarantee the accuracy or completeness thereof or represent that following such generic recommendations will reduce or eliminate the risk inherent in trading CFDS and/or Spot FX Contracts. 16. No Guarantees Of Profit. There are no guarantees of profit nor of avoiding losses when trading CFDs and Spot FX Contracts. Customer has received no such guarantees from Safecap or from any of its representatives. Customer is aware of the risks inherent in trading CFDs and Spot FX Contracts and is financially able to bear such risks and withstand any losses incurred. 17. Customer May Not Be Able To Close Open Positions. Due to market conditions which may cause any unusual market price fluctuations, or other circumstances Safecap may be unable to close out Customer’s position at the price specified by Customer and Customer agrees that Safecap will bear no liability for a failure to do so. 18. Internet Trading. When Customer trades online (via the internet), Safecap shall not be liable for any claims, losses, damages, costs or expenses, caused, directly or indirectly, by any malfunction or failure of any transmission, communication system, computer facility or trading software, whether belonging to Safecap, Customer, any exchange or any settlement or clearing system. 19. Telephone Orders. 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These prevailing market prices will be the prices, which are ultimately reflected on the Customer statements. This may or may not adversely affect the Customer’s realized and unrealized gains and losses. 21. Compensation. Safecap participates in the Investor Compensation Fund for clients of Investment Firms regulated in the Republic of Cyprus. Customers will be entitled to compensation under the Investor Compensation Fund where we are unable to meet our duties and obligations arising from your claim. Any compensation provided to you by the Investor Compensation Fund shall not exceed twenty thousand Euro (20.000). This applies to your aggregate claims against us. TRADING POLICIES AND PROCEDURES 1. INTRODUCTION Safecap’s Trading Policies and Procedures are an integral part of your Customer Agreement. It is your responsibility to carefully read these Trading Policies and Procedures and to inform Safecap of any questions or objections that you may have regarding them before entering each and every Transaction. You agree, represent, warrant and certify that you understand and accept Safecap’s Trading Policies and Procedures, as set forth here and as may be amended from time to time by Safecap, in its sole discretion, and you agree to comply with Safecap’s Trading Policies and Procedures. Terms capitalized in these Trading Policies and Procedures are defined in the Glossary as found on Safecap website. 2. TRADING HOURS All references to Safecap’s hours of trading are in Greenwich Mean Time (“GMT”) using 24-hour format. Safecap normally provides access for trading CFDs and Spot FX Contracts via the Website from 21:00 GMT on Sunday to 21:00 GMT on Friday. Please refer to our “Instruments Table” for additional information. Safecap reserves the right to suspend or modify its trading hours at any time and on such an event will inform Customers in advance on a best efforts basis of any changes in its trading hours. Following submission of an Order, it is the sole responsibility of Customer to remain available for Order and Fill confirmations, and other communications regarding Customer’s Account until all open Orders are completed. Thereafter, Customer must monitor Customer’s Account frequently when Customer has Open Positions in the Account. 3. BEST EXECUTION 1. Safecap is authorized and regulated by Cyprus Securities and Exchange Commission. We are required to take all reasonable steps to obtain the best possible result when executing client Orders. We are required to have an execution policy and to provide our clients with appropriate information in relation to our execution policy. Where you place Orders with us, the execution factors that we consider and their relative importance is as set out below: 1. Price. The relative importance we attach is “high”. 2. Speed. The relative importance we attach is “high”. 3. Likelihood of execution and settlement. The relative importance we attach is “high”. 4. Size. The relative importance we attach is “high”. 2. We are the principal to every Order you place with us and therefore we are the only execution venue. 4. ORDERS 1. Orders Placement. All Orders must be placed through the Safecap Online Trading System or by telephone to the Safecap Trading Desk. Telephone Orders are accepted in the sole discretion of Safecap. 2. Types of Orders Accepted. Some of the types of Orders Safecap accepts include, but are not limited to: 1. Good till Canceled (“GTC”) - An Order (other than a Market Order), that by its terms is effective until filled or canceled by Customer. GTC Orders do not automatically cancel at the end of the Business Day on which they are placed. 2. Limit - An Order (other than a Market Order) to buy or sell the identified market at a specified price. A Limit Order to buy generally will be executed when the Ask Price equals or falls below the Bid Price that you specify in the Limit Order. A Limit Order to sell generally will be executed when the Bid Price equals or exceeds the As Price that you specify in the Limit Order. 3. Market - An Order to buy or sell the identified market at the current market price that Safecap provides either via the Online Trading System or over the telephone through one of the dealers. An Order to buy is executed at the current market Ask Price and an Order to sell is executed at the current market Bid Price. 4. One Cancels the Other (“OCO”)- An Order that is linked to another Order. If one of the Orders is executed, the other will be automatically cancelled. 5. Stop Loss - A Stop Loss Order is an instruction to buy or sell a market at a price which is worse than the opening price of an open position (or worse than the prevailing price when applying the Stop Loss Order to an already open position). It can be used to help protect against losses. Please note that because of market gapping, the best available price that may be achieved could be materially different to the price set on the Stop Loss Order and as such, Stop Loss Orders are not guaranteed to take effect at the price for which they are set. 6. Trailing Stop - A Trailing Stop is the same as a Stop Loss Order with the only difference being that, instead of setting a price at which the Order is activated, the Trailing Stop Order is activated at a fixed distance from the market price. For example, if Customer has purchased a long open position and the market Ask Price increases, the Trailing Stop price will also increase and will trail behind the market Ask Price at the fixed distance set by Customer. If the market Ask Price then decreases, the Trailing Stop price will remain fixed at its last position and if the market Ask Price reaches the Trailing Stop price, the Order will be executed. Please note that because of market gapping, the best available price that may be achieved could be materially different to the price set on the Trailing Stop Order and as such, Trailing Stop Orders are not guaranteed to take effect at the fixed distance for which they are set. 3. One Click Order Entry/One Click Execution of Market Orders. 1. Electronic Order entry for Market Orders equals Order execution. To enter an online Order, Customer must access the Markets window, then click on “BUY/SELL” for the relevant market. A new window will appear in which the Customer enters the price and lot size. The Order is filled shortly after the Customer hits the OK button provided the Customer has sufficient funds in his Account. Orders may fail for several reasons including changing dealer prices, insufficient margin, unspecified lot size or unanticipated technical difficulties. 2. One-Click Trading. To use one-click trading, Customer must go to the “Settings” menu and choose “View and Edit”. Customer should check the “One-Click Trading” box. To enter an online Order with one-click trading, the Customer must access the Markets window and enter the price and lot size. The Order is filled shortly after the Customer clicks the BUY/SELL button provided the Customer has sufficient funds in his Account. Orders may fail for several reasons including changing dealer prices, insufficient margin, unspecified lot size or unanticipated technical difficulties. One-Click Trading can also be used when closing positions. 3. Immediate Execution of Orders Through the Safecap Trading Desk. Orders executed over the telephone with the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done.” At that point Customer has bought or sold and cannot cancel the Order. When placing Orders through the Safecap Trading Desk, Customer acknowledges and agrees to such immediate execution and accepts the risk of trading in this way. 4. Order Cancellation. Non-Market Orders may be cancelled via the Safecap Online Trading System. However, there is no guarantee that Customer will be able to cancel an Order before it has been executed and Safecap shall have no liability for any claims, losses, damages, costs or expenses, including legal fees, arising directly or indirectly out of the failure of such Order to be cancelled. 4. Terms of Acceptance for Orders - It is Customer’s sole responsibility to clearly indicate the terms of an Order when entered, whether it is a Market Order, Limit Order, Stop Loss Order or any other type of Order, including the relevant price and lot size. Customer acknowledges and agrees that, despite our best efforts, the price at which execution occurs may be materially different to the price specified in your Order. This may result from sudden price movements in the underlying market that are beyond our control. Safecap shall have no liability for failure to execute Orders. Safecap shall have the right, but not the obligation, to reject any Order in whole or in part prior to execution, or to cancel any Order, where Customer’s Account contains Margin that is insufficient to support the entire Order or where such Order is illegal or otherwise improper. 5. Confirmation of Execution - Transactions executed online will be confirmed online in the Open Positions window and Deal Blotter in the dealing console, which is updated online as each Transaction is executed. Telephone Orders are confirmed orally and online in the Deal Blotter and Open Positions window immediately once the Order is executed. Confirmation of execution and statements of Accounts for Customer shall be deemed correct, conclusive and binding upon Customer if not objected to immediately by email if Orders were placed through Safecap’s Online Trading System or by telephone to the Safecap Trading Desk if Orders were placed by telephone, and such objection must be confirmed in writing within five (5) days after the day on which such objection was first raised. In cases where the prevailing market represents prices different from the prices posted by Safecap, Safecap will attempt, on a best efforts basis and in good faith, to execute Market Orders on or close to the prevailing market prices. This may or may not adversely affect Customer’s Realized and Unrealized Gains and Losses. 5. CUSTOMER ACCOUNTS AND INITIAL DEPOSITS 1. Documents. Before you can place an Order with Safecap, you must read and accept the Customer Agreement, including the Risk Disclosure Statement and these Trading Policies and Procedures and all applicable addenda, you must deposit sufficient clear funds in your Account and your Customer Registration Form and all accompanying documents must be approved by Safecap. Upon the approval of your registration, you will be notified by e-mail. Safecap may, in its sole discretion, request that in addition to online acceptance of the Customer Agreement, Customer must complete and submit any signed documents so required by Safecap, including but not limited to the Customer Agreement and Risk Disclosure Statement. 2. Currency of Accounts. All Account balances will be calculated and reported only in U.S. Dollars. 6. MARGIN REQUIREMENTS Customer shall provide and maintain Margin in accordance with the terms of the Customer Agreement to secure Customer’s obligations to Safecap. Margin includes Required Margin for Open Positions, which is based on (i) the Opening Margin Requirement; (ii) the Minimum Margin Requirement; (iii) the market value of Open Positions; and (iv) any additional amount as Safecap, in its sole discretion, believes is prudent to require. Customer must maintain the Minimum Margin Requirement on their Open Positions at all times. Safecap has the right to liquidate any or all Open Positions whenever the Minimum Margin Requirement is not maintained. 7. MARGIN CALLS Safecap maintains the right to liquidate Customer positions as set out above and is under no obligation to make calls for margin. However, Customer will receive an automatic margin call notification when logged in to the Online Trading System if the Account Equity in the Online Trading System equals to or falls below 100% of the minimum margin needed to open the position(s) held (the minimum margin needed to open position(s) is referred to in the Online Trading System as ‘Used Margin’). In addition, Safecap may contact Customer and request that Customer deposit additional Collateral to secure Customer’s obligations to Safecap. Any call for additional margin without exercising the rights to liquidate Customer positions shall not be deemed precedent for future calls act as a waiver of liquidation rights by Safecap. Safecap may allow the Customer to maintain Open Positions even if the Customer has not met one or more Margin payment which is/ are due, in Safecap’s sole discretion and upon approval by the Risk Committee. 8. LIQUIDATION LEVEL Subject to all additional rights of Safecap under the Customer Agreement, in the event that the liquid funds in the Customer Account should, at any time equal or fall below 20% of the Used Margin for Customer’s Account in the aggregate, Safecap will have the right but not the obligation to close any part of or all of Customer’s Open Positions. Any failure by Safecap to enforce its rights hereunder shall not be deemed as a waiver of such rights by Safecap. Safecap may contact the Customer via the means designated by the Customer to make a call for Margin in order to secure Customer’s obligations to Safecap but is not obliged to do so. Any call for Margin without exercising the rights to liquidate Customer positions shall not be deemed a precedent for future conduct and Safecap maintains the right to liquidate Customer Positions without calling Margin. 9. WITHDRAWALS Payments from a Customer Account require a withdrawal request form signed by all required account holders and submitted in writing to Safecap. The withdrawal process requires a minimum of three (3) Business Days from receipt of the withdrawal request to the issuance of payment. Safecap will transfer any funds owing to you to your nominated bank account. Only funds owing to you and not being utilized for margin purposes or any other obligations to Safecap may be withdrawn. If a withdrawal request is for funds in excess of those funds that are available for withdrawal, Safecap will not comply with the request and the Customer will be notified accordingly. I / WE HAVE READ, UNDERSTOOD AND AGREE TO THE RISK DISCLOSURE STATEMENT AND THE TRADING POLICIES AND PROCEDURES SET OUT ABOVE