Daily Wrap Up 06 September 2022

6 Sep 2022 05:00 PM

USD surges, Europe outperforms

European stock markets closed higher as they built on the rebound that began late last week. The rise in bond yields did not deter equity traders from their bullish move. The UK 10-year yield traded above 3% for the first time since 2014 and the bund – the German 10-year bond – hit 1.6%, its highest mark since late June. The upbeat mood in Europe flies in the face of downbeat data as German factory orders fell by 1.1% in July, the largest drop in three months. The UK construction PMI report for August was 49.2, a slight improvement on the 48.9 registered in July, but it was the second consecutive monthly contraction.

US stocks saw a jump in volatility when the ISM services were released as fears about more large rate hikes from the Fed rippled through the markets. The headline service report was 56.9, up slightly from 56.7 and it topped the 55.4 forecast. The internal metrics of the update were mostly encouraging too as employment and new orders edged up to 50.2 and 61.8 respectively, this indicates that demand is strong. The prices paid metric cooled from 72.3 to 71.5, which is a step in the right direction, but prices are still stubbornly high, and that might lead to more big rate hikes from the Fed. Speculation about further monetary tightening from the Federal Reserve has driven the US dollar to a new 20-year high. EUR/USD traded below the 0.9900 mark, and USD/JPY traded at a mark last seen in 1998. Gold was up on the day this morning by the renewed rally in the US dollar has shunted the asset into the red. The rally in US bond yields are also hurting gold as some investors seeking lower risk assets might be enticed by the higher yields.

The jump in UK yields is boosting the pound, but also playing into the mix is short covering as sterling took a hammering in the past few sessions. Liz Truss in the new British Prime Minister, and she faces an uphill battle as the country is facing a cost-of-living crisis, and there is a possibility of a trade war with the EU too. The Reserve Bank of Australia lifted interest rates by 50-basis points to 2.35%, meeting forecasts. The bank indicated they will continue to lift rates to bring down inflation, despite the rate hike, the Australian dollar is weaker across the board as it seems that traders are not confident the RBA is up to the task of bringing down CPI.

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