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Daily Wrap Up 21 September 2022

21 Sep 2022 05:26 PM

Stocks and USD rally as traders await Fed

All eyes are on the Fed and the central bank is expected to hike interest rates by 0.75%. It seems that equity traders are squaring up their positions ahead of the interest rate decision as the S&P 500 has pulled back some of the ground it lost last night. Bond yields have cooled, and the US 10-yer yield is currently 3.55%, down from the 3.59% registered yesterday. It appears that US equity and bond markets were pricing in another large rate hike yesterday, and today there is a bit of a reversal. By contrast, the US dollar is going from strength to strength as we approach the Fed meeting. EUR/USD is close to the 20-year low that was registered earlier this month and GBP/USD fell to a new 37-year low.

This morning, the Russian government ramped up its rhetoric in relation to the war in Ukraine. Moscow essentially warned that it considers occupied regions of Ukraine to fall under Russia sovereignty, and any attempt to remove Russian forces from the regions could be construed as an act of war. The prospect of a nuclear attack in Europe is hanging over the euro. Sterling is weak also as there are ongoing worries about the health of the UK economy as the government’s new energy cap scheme could cost roughly £100 billion per year. The UK already has high levels of debt and borrowing costs are rising – gilt yields are gaining - so more debt is likely to compound the negative sentiment hanging over sterling.

Despite the robust gains seen in the US dollar, gold and silver are up on the session. Last week, gold fell to a two year low, and that was driven by an increase in yields and a jump in the US dollar. The longer-term trend for gold is lower so today’s rebound could just be short covering in advance of the Fed decision. Oil saw a lot of volatility today as at one point it was up over 2% due to worries about supply levels on account of the heightened tensions from Russia, but it has since dropped into negative territory.

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