The rates market sell-off has extended, albeit losing some steam. While the GBP inflation narrative grabbed the headlines, USD rates dynamics indicate it is more a repricing of monetary policy. Only the ECB is distancing itself from the hawkish turn, at least with some success as steady EGB spreads and wider UST/Bund suggests.
Markets are trying to bounce and the dollar is marginally off its highs after a decidedly risk-off Tuesday. Concerns about rising bond yields, power outages in China and the looming debt-ceiling crisis continue weighing on markets. These themes and appearances from central bankers are in focus.
EUR/USD is hovering below 1.17 and has just created new yearly lows. This potentially opens the door for a move lowe to the 1.1424 region. GBP/USD is trading around 1.3550, barely recovering after hitting the lowest since January. Gold tumbled well below $1,750. The yieldless precious metal succumbed to the rise on returns in Treasuries.
Fed Chair Jerome Powell testified before Congress, repeating his stance that inflation has risen more than anticipated and that his employment threshold to taper has been “all but met.” Powell, who faces opposition to his reappointment, will speak again on Wednesday alongside peers from the UK and Europe.
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Debt ceiling: Treasury Janet Yellen warned that the US would hit the current debt limit by October 18, resulting in default and a financial crisis. Efforts to suspend or raise the law have failed so far. Ongoing discussions in Washington can be expected until such an agreement is reached.
Energy: China is working to relieve the demand for electricity and avoid power outages that disrupted industrial production in the northeast. Concerns about the impact of this crisis to the global contributed to the damp mood.
Evergrande: Beijing continues grappling with the Evergrande’s grand outstanding debt. The country’s second-largest property developer is set to miss more debt payments, yet fears of a broader financial crisis have eased.
Japanese leadership: Former foreign minister Fumio Kishida won the leadership in Japan’s LDP party and is set to become Prime Minister in the next few days. He is considered a moderate and has experience in various positions.
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Brexit: France and the UK are clashing on fishing licenses in a re-run of a previous clash. The Northern Irish protocol continues lingering. Apart from dollar strength and Brexit issues, cable continues suffering from shortages at petrol stations in various parts of Britain. Bank of England Governor Andrew BAiley’s hawkish comments did little to boost the pound. Bailey speaks again on Wednesday.
European Central Bank President Christine Lagarde is set to speak alongside Powell and Bailey later in the day. On Tuesday, Lagarde shrugged off inflation concerns. Investors await news about the scale of the ECB’s bond buys.
Cryptocurrencies: Bitcoin is trading around $42,000, Ethereum is below $3,000 and Ada at around $2.10. Values of digital assets fell on Tuesday and are bouncing on Wednesday, in a reaction correlated with broader markets.
Flows: The third quarter ends on Thursday and money managers could begin adjusting their portfolios already on Wednesday, potentially causing jitters in markets. This could lead to definite spikes in volatility which could possibly be felt across the markets.
SOURCES: ING, FXSTREET