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US dollar catches a bid on rising US yields

Usually, there would be a move out of the stock market into the bond market, but due to recent events and possibly month-end rebalancing, we have a situation where that model is not working. Coronavirus and politics seem to be the causes of the worst possible risk events, so hopefully, we can get a handle on both things and get back to normal economic dynamics.


Market Brief

During her testimony yesterday the Treasury secretary Yellen said that the US government will run out of money on Oct. 18, which sets an uncomfortably close deadline to get past the political brinkmanship and has caused equity markets to react negatively. In the forex markets the US dollar caught a bid and having cleared significant weekly resistance, the US dollar index now has more upside potential with the $94.50 level within reach. The greenback is rising with the 10-year yields but the stock market sell-off along with a move out of bonds is not usual market dynamics.


Investors reacted to a surge in US government bond yields by slashing shares on Wall Street, causing Asian stock markets in the following session to tumble too. A sharp rise in Treasury yields led investors to shift away from tech shares, battering ARK Invest, the flagship fund of star stock picker Cathie Wood. Among major indices, the benchmark S&P 500 fell 2.8%, its worst drop since May, and the tech-heavy Nasdaq fell 2.8%, its worst drop since March. The New York Stock Exchange saw decliners outnumber advancers by 4 to 1.

Following on from last week’s risk event now known as 'Evergrande Monday', last night the market learned the Evergrande Group announced it was selling its stake in Shengjing Bank for 9.9 billion yuan ($1.5 billion), giving investors cheer in the Asia-Pac session and resulted in Hong Kong's Hang Seng index reversing early losses.


At the London open the shift from the US dollar into the Australian dollar has seen bids get lifted in the Aussie and a noticeable decline in the euro.


The EURAUD recently found resistance at the 1.6200 level and has significant support from the daily 200 ema and the double bottom at 1.5900. A positive outcome to the Evergrande saga would lift investor confidence in China which ultimately benefits the Australian dollar.


The price of WTI crude futures fell 2% to below $74 a barrel on Wednesday and Brent crude came down to test support, after touching a new yearly high in the previous session. Investors are worried about a big economic slowdown in China at a time in which Coronavirus cases remain elevated throughout the world. This combination of risks seems to be causing fuel demand to wane, except for the UK who remains in a continued panic buying spree for fuel.


Today’s sessions close with more central bank speakers, so I am assuming that the volatility will remain low until they have said their piece.


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