There was a sense of déjà vu on the markets today, with the steep fall in risk-assets being reminiscent of those sell-offs witnessed in October. With the Dow falling 600 points and the NASDAQ slumping nearly 2.8%, US equities continued the recent theme of not doing anything by halves as traders reduced positions on continued uncertainty over the growth story going forward.
A stronger US Dollar, a sliding oil price and doubts over the ability of companies to maintain their profit margins once interest rates rise further were some just of the reasons that ‘feathers were ruffled’ on markets today. Add to this the ongoing trade uncertainty between China and the US and it becomes apparent that negative stories were forefront in the minds of investors with nothing much in the way of positive news to balance the sentiment.
The oil price continues to make headlines, this time for being down for a record 11th straight session. WTI (West Texas Intermediate) was down 2% to fall below US$59 per barrel with indications being that recent output increases by the major producers have left the market oversupplied. Russia and Saudi Arabia have hinted at future production cuts, and while this gave a short-lived intra-day bounce to oil, for the moment it seems traders are focusing on other supply factors such as record US output.
It was a strong day for the US Dollar as the greenback traded above 16-month highs on growing anticipation of a December rate move by the Fed. It was an across the board move higher by the USD, and with the Fed Funds Futures implying a greater than 75% chance that we will see an interest rate rise in December, this continues to put a spotlight on the contrasting Monetary Policy position of the US versus most other parts of the world.
The stronger USD lead to significant weakness among the other majors, with the Euro sliding to its lows for 2018 below the 1.1240 level. Should the risk-off sentiment persist then a test of the Fibonacci support at 1.1187 can’t be ruled out near-term.
Sterling tumbled nearly 1% based both on USD appreciation and growing concern that a market-pleasing Brexit deal is no sure-thing, with progress over the Irish border stalling progress. The GBPUSD rate has slipped below 1.29 and it will take some positive Brexit headlines for the currency to reclaim the 1.30 handle.
The Australian Dollar followed global equities lower to slip below the 0.72 level, as traders increased long-USD positions and reduced exposure to higher risk assets. Similarly, the NZDUSD rate lost 0.4% with both the AUD and NZD feeling the effects of lower commodity prices.
Another asset to feel the effects of the rising USD was Gold, with the precious metal falling to a 4-week low of US$1202 per ounce.
How the gold price and the other majors perform for the remainder of the week will depend upon the US Dollar and whether this currency maintains its ‘bid tone’ as we see key economic releases in the US over coming days.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies