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Daily Wrap Up 20 September 2022

20 Sep 2022 05:01 PM

Risk off sentiment circulates, USD/CAD jumps

Traders are in risk off mode as central banks are in focus this week. The Swedish central bank lifted rates by 100% rates today, and the Federal Reserve and the Bank of England are expected to deliver large rate hikes tomorrow and on Thursday, respectively. The Fed watch tool is pricing in an 82% chance of a 75 basis points hike from the Fed, and if that is the case, that would make it three in a row. The bond market is reflecting the expectations of higher rates as the US 10-year yield hit 3.59%, its highest mark in over a decade. Bond yields in the UK, Germany and France are rising too, also reflecting the view that more monetary tightening is on its way. European stock markets ended in the red, and US stocks are lower too. It seems that traditional US equities are playing catch up with respect to the recent market sell off as the Dow Jones is underperforming against the NASDAQ, which is strange seeing as tech companies typically come off worse when yields rise.

The rise in US yields has driven up the US dollar again as traders are positioning themselves ahead of tomorrow’s Fed update. Of the major currencies, the greenback is the clear outperformer of the group as dealers are confident in the Fed’s ability and the desire to tighten rates. Gilt yields are up too, but worries about rising debt and high inflation are preventing the pound from undergoing a major rally. Several eurozone countries are heavily indebted and some are very reliant on Russia for energy, so that is acting as a cap on the single currency. USD/CAD hit its highest mark in almost two years as Canadian CPI dropped to 7% from 7.6%. The Swiss Franc is largely higher amid a wider risk-off mood in the market. Rising bond yields and fears about more rate hikes are weighing on stocks and metals. The Swiss franc has a track record of rallying during times of uncertainty and that is what we are seeing today.

Gold is down again as the mixture of higher yields and a rally in the US dollar are hurting the metal. Even though, gold is down it is still above the two year low it printed last week. It is possible the overall risk off mood in the markets is limiting gold’s losses. Industrial commodities like copper, silver, Brent crude and WTI are lower due to the overall downbeat mood in the markets.

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