Quantitative tightening (QT) is about to commence.  The Central Bank has solidified plans for trimming its $9 trillion balance sheet starting June 1 by replacing its maturing Treasury and mortgage bonds holdings only in excess of the monthly runoff cap.

Questions persist about how much liquidity will drain from different parts of the system and where the crunch points could be.

Tax receipts have been higher than expected however it is widely accepted QT will shift supply dynamics.

Some believe the overnight rate could soar as was the case in 2019 at the end of the last QT episode.  Others believe as Treasuries roll off its balance sheet, the government will need to borrow more via its public debt auctions.  While others believe the foreign exchange swap markets may be affected in a way that curtails overseas demand.

Perhaps the only certainty to write, there will be a disruption in the normal operation of the Treasury market from last 12-13 years which was extremely abnormal that had a profound impact on all markets.

Monetary unknowns were a major reason for yesterday’s selloff as the NASDAQ fell another 4.7%.   Markets hate uncertainty and the uncertainty around the largest market parameter (interest rates) is at historical proportions.  Fear is always more powerful than greed.

Yesterday I commented the Treasury Department may prohibit Russia from paying their upcoming debt obligations even though Russia has the dollar funds to do so.  Treasury Secretary Yellen confirmed such policy which all but ensures a Russian sovereign debt default by month’s end.

Was this another catalyst for yesterday’s selloff?  The integrity of the plumbing of the global financial system has perhaps been challenged.

Buyers for the American Treasuries are already sparse.  Will such policy further scare investors, a fear partially echoed above?

Writing more pedestrian, markets were spooked yesterday by another large retail earnings disappointment, the result of higher transportation and labor costs which crushed margins.  Target plunged almost 25%, the worst rout since 1987.  Tuesday, Wal-Mart suffered a similar fate but only fell about 12% which was also the worst decline since 1987.

Retail sales are not faltering.  However, expenses are surging.  These expenses lower margins which amplified by a higher interest required to discount present and future cashflows plus lofty valuations and limited liquidity is kryptonite for markets.

It is a perfect storm.

What will happen today?

Last night the foreign markets were down.  London was down 2.35%, Paris down 2.01% and Frankfurt down 1.86%.  China was up 0.36%, Japan down 1.86%  and Hang Seng down 2.54%.

Futures have recouped about half of their early morning losses and are down about 1% on earnings and interest rate fears.  The 10-year is up 13/32 to yield 2.83%.


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