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Tuesday, 27 July 2021

US real yields fall to record low amid growth concerns

Returns on US bonds that investors earn after inflation have reached record lows, as concerns grow over the sustainability of the economic recovery, according to the Financial Times. As of Monday, the real yield on 10-year bonds fell further into negative territory, reaching a record -1.127%.

The US bond market has gone into reverse in recent weeks, having suffered a sharp sell-off earlier this year on fears of rising inflation. But despite inflation now accelerating at a pace not seen in over a decade, investors have piled back into bonds sending yields falling from almost 1.75% to less than 1.3% over the past four months.

Analysts are split as to why investors are going long on bonds despite increasing concern that the Federal Reserve may tighten policy in response to rising inflation. Weak summer trading and investor positioning have been held up as possible reasons, but the recent rapid spread of the delta variant has some speculating that worries about the fate of the economic recovery may now be pushing investors into safer assets.

Eurodollar futures seem to be bearing this out: Just a few weeks ago, market watchers were getting nervous that the Fed would take a hawkish turn to combat inflation, but moves in the eurodollar futures market suggest that traders may now be dialling back their expectations for higher interest rates in the years ahead, the FT reports. Eurodollars futures, which investors use to speculate on future interest rate changes, have surged over the past three months, suggesting that traders now think the Fed will be less aggressive in how it unwinds its stimulus program and raises interest rates.

In other financial news worth knowing about this morning:

  • Global M&A Watch: Ins. giant Aon and Willis Towers Watson have called-off their USD 30 bn+ merger due to an “impasse” with the US Department of Justice, the Wall Street Journal reports. The transaction would have created the country’s biggest ins. broker, but will now not go ahead after the government last month filed an antitrust lawsuit to block the merger, arguing that it would eliminate competition and result in higher prices.
  • Is Amazon getting into the crypto industry? Bitcoin briefly jumped above USD 40k yesterday, its highest level since mid-June, driven by expectations that retail giant Amazon could soon be getting involved in crypto. A recent job posting that seeks a “Digital Currency and Blockchain Product Lead” led analysts to question whether Amazon will accept Bitcoin as a payment method. The currency jump was also due to “over-leveraged shorts,” says an analyst. The story got digital ink in Bloomberg and the Wall Street Journal.
  • Saudi Arabia has cancelled the sale of a stake in its Ras Al Khair plant — one of the world’s biggest desalination plants — in what Bloomberg is calling a setback for the kingdom’s privatization plans. The government, which was looking to raise USD 2 bn by selling a 60% stake, blamed the pandemic, but potential bidders said that its age, outdated tech, and poor environmental standards made it an unattractive investment.
  • Bahrain needs to take “urgent” action to repair its finances, the IMF’s Bahrain mission chief Ali Al Eyd told Bloomberg. Despite the recovery of oil prices, the country’s budget deficit is expected to continue widening until at least 2026, and will likely need an “urgent fiscal adjustment” after it fully recovers from the pandemic, he said.

Down

EGX30

10,697

-0.5% (YTD: -1.4%)

None

USD (CBE)

Buy 15.64

Sell 15.74

None

USD at CIB

Buy 15.64

Sell 15.74

None

Interest rates CBE

8.25% deposit

9.25% lending

Up

Tadawul

10,897

+0.2% (YTD: +25.4%)

Up

ADX

7,169

+0.9% (YTD: +42.1%)

Down

DFM

2,758

-0.6% (YTD: +10.7%)

Up

S&P 500

4,422

+0.2% (YTD: +17.7%)

None

FTSE 100

7,025

-% (YTD: +8.7%)

Up

Brent crude

USD 74.50

+0.5%

Up

Natural gas (Nymex)

USD 4.10

+1.0%

Down

Gold

USD 1,803.40

-0.1%

Up

BTC

USD 37,314

+8.2% (as of midnight)

THE CLOSING BELL-

The EGX30 fell 0.5% at today’s close on turnover of EGP 1.73 bn (30.1% above the 90-day average). Regional investors were net buyers. The index is down 1.4% YTD.

In the green: GB Auto (+3.0%), Ezz Steel (+1.6%) and CI Capital (+1.6%).

In the red: Emaar Misr (-2.9%), Amoc (-2.2%) and Edita (-2.2%).

Asian markets are mixed in early trading this morning, while futures are suggesting that European shares will see early gains and the US markets will open in the red later today.

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