Yields carry on higher helping USD to a new peak

Headlines

* Lagarde says ECB rates to stay restrictive as long as needed

* 10-year US Treasury yield hits fresh top, highest level since October 2007

* Dollar hits November highs as euro breaks down through 1.06

*Oil treads water, gold drops below 200-day SMA amid Fed, global concerns

FX: USD posted a fresh six-and-a-half month high as yields climbed again to new 16-year peaks. Dollar gains are looking increasingly stretched but the Fed’s hawkish hold contrasts with dovish outcomes from other major central banks like the BoE, SNB and BoJ last week. The long-term Fib level of the September 2022 decline at 105.38 now turns support. As does the March high and year-to-date top at 105.88.

EUR broke down through the 1.06 support zone. The concrete bear trend and channel remain firmly in play. The next major support sits around 1.05. Germany’s September IFO business survey improved modestly. But the data points to broad softness in Europe’s major economy. Even relatively hawkish comments from ECB President Lagarde couldn’t stop the selling. This is because the ECB already signalled rates are at the terminal.

GBP is testing the 1.22 handle as the long-term downtrend continues. This comes after the BoE held rates last week. PMI data on Friday then painted a grim picture. Indeed, stagflation concerns are picking up with inflation still at 6%. There is little on the risk calendar this week and little near-term technical support now we are decisively through the May lows. But the oversold daily RSI warns we could see at least some consolidation.

USD/JPY popped higher to fresh cycle highs. The yen hit near 11-month lows on upward pressure from US Treasury yields. Dovish comments from BoJ Governor Ueda also hurt. He said the goal of achieving 2% inflation accompanied by wage gains hasn’t yet “come in sight”. Resistance is big figures ahead of last October’s high at 151.94. Verbal intervention, if not outright intervention, should ratchet higher.

AUD continues to track sideways above 0.64. Chinese economic concerns have eased but downside risks remain. Wednesday’s CPI release will show us if the RBA’s worries over the jump in services inflation are justified.  CAD is reliant on external factors as there is very little on the data tap this week. Gains in oil are being offset by soft stock market trends. The major trades back around the 200-dat SMA at 1.3458.

Stocks: US equities rebounded as the major indices posted their first gains in four sessions. The benchmark S&P 500 added 0.4% to settle at 4337. The tech-heavy Nasdaq finished 0.46% higher at 14768. The Dow underperformed, closing up 0.13% at 34,006. The bounce in equities came in spite of rising borrowing costs. Higher bond yields mean it costs more to borrow which can hurt growth stocks. The megacap tech stocks especially have driven markets gains this year.

Asian futures are mixed. APAC stocks traded with a mostly negative bias to kick off the final trading week of the quarter. The Chinese property sector was in the spotlight again as Evergrande cancelled its creditor meeting and scrapped its debt restructuring plan.

Gold succumbed to rising yields again. Sellers took the precious metal just below the 200-day SMA at $1925. But last week’s low at $1913 is still holding. Below here is the mid-September bottom at $1901.

Market Thoughts – Divergence ahead

In the space of two weeks, three major central banks have made policy decisions that all seemed on a knife edge that they could have gone either way. The FOMC unanimously chose to keep its policy rate unchanged. But policymakers went out of their way to suggest it may raise rates again at its next meeting. The Bank of England also held its hand. However, the voting was split nearly down the middle, and the peak rate may be in with data depressed. The previous week, the ECB raised rates, despite weakening economic growth.

The deepening uncertainty around what officials were going to do is not hard to understand. It is linked to increasing doubt about what they ought to do. Signals from both price pressures and economic activity are becoming harder to read. That increases the scope for error. It also raises the chance that major central banks will diverge after a synchronised tightening path of rate hikes for more than a year. One other reason for divergence is also because supply-side drivers of inflation — from pandemic dislocations to Russia’s energy and commodity price wars — have eased. That means the main price risks are now domestic. Divergences here potentially mean FX volatility.

Chart of the Day – Dow bounces off 200-day SMA

Last week ended with both equities and bonds lower following the Fed's hawkish message with rates staying higher for longer. This is to deal with inflation while the strong economy lifted the longer end of the US yield curve. This week's key event risks to monitor are the UAW wage negotiations, gasoline prices and more jitters around a potential US government shutdown.

We’ve seen style rotation recently in stocks. That means value outperforming growth and the VIX creeping higher. For the Dow, prices have dipped below a long-held support/resistance level at 34,281. The index touched the 200-day SMA at 33,810 yesterday but buyers stepped in. If we lose this, shorts will target 33,705 and 33,610. 

(Sources: vantagemarkets.com)