Daily Wrap Up 22 August 2022

22 Aug 2022 05:18 PM

EUR/USD prints new 20-year low, equities sink

Dealers are dumping stocks this afternoon for fear that central banks will stick to their plans to keep hiking interest rates, even though economies are cooling. Joachim Nagel, the president of the Bundesbank, called on the ECB to keep tightening monetary policy even if fears about a recession in Germany increase. Tomorrow, the flash readings of German manufacturing and services PMIs will be posted, and the updates should give us a gauge of economic activity in the largest economy in Europe. The latest manufacturing and services readings were 49.3 and 49.7, respectively. If the measure comes in at 50.0 or below, that denotes negative growth, so the sectors are contracting, and that is likely to stoke recession fears. As a result of the comments from Mr Nagel, bund yields are up, and the DAX has slumped 2.3%.

There are renewed worries the Fed might lift interest rates by 0.75% next month, which would be three 75-basis points hikes in four months. Keep in mind, the US economy is in a technical recession. The US 10-year yield moved above 3% and it appears that bond traders predict further rate increases from the US central bank. The breach of the 3% level, has sped up the selling on Wall Street as that level has a track record of triggering volatility in equities. Traditional stocks are not coming under as much selling pressure as the Dow Jones is 1.3% lower, while on the otherhood, the tech-focused NASDAQ 100 is down 2.1%.

It has been yet another great day for the US dollar because of chatter the Federal Reserve might look to do another big rate hike next month. A mixture of euro weakness and US dollar strength has driven EUR/USD back below parity, a short while ago the currency pair printed a fresh twenty-year low. Rising gas prices and continued uncertainty about future energy supplies are weighing on the single currency.

Gold often rallies when stocks take a plunge, but lately the US dollar is acting as a safe-haven asset too and that is inflicting pain on gold. Also playing into the mix is the rise in bond yields. In a climate of rising yields and interest rates, the yellow metal is less attractive to some investors. Oil dropped quickly at lunchtime, but it has pulled back some of those losses as Saudi Arabia announced it might curb output to stabilise prices.

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