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Daily Wrap Up 29 September 2022

29 Sep 2022 04:32 PM

Stocks plunge on recession fears

Stock markets are being clobbered as fears of further interest rate hikes are prompting traders to cut and run. James Bullard of the Federal Reserve said there is a higher risk of a recession and that interest rates will probably remain higher for longer, which would be the worst of both worlds. Typically, central banks lower rates when economies are cooling, but we are in a unique scenario where inflation is rising, and growth is dropping. Bullard’s comments were not a total surprise, but they still managed ramp up selling pressure. It is worth pointing out that equities were already lower prior to the central banker’s speech, but things have gone from bad to worse in the past couple of hours. It is interesting that the comments had a major impact on stocks, but bond yields have not moved that much. Even though Bullard suggested that rates would remain higher for longer than originally predicted, there has not been a corresponding jump in yields. It is possible that traders are diverting their funds from equities to bonds, and as a result, yields are not surging. Earlier this week, the US 10-year yield hit 4%, its highest mark in 14 years, despite the fall in the yield, it remains in the longer-term upward trend, and should that trend continue, it might retest that level in the next few sessions.

The British pound has undergone a major rally today in the wake of the painful losses it saw earlier this week. On Monday, it fell to a record low versus the US dollar, and yesterday it declined as the Bank of England were forced to intervene in the gilt market – the move was seen as a sign of weakness. Sterling’s surge has weighed on the US dollar today, as dealers switched from a relatively expensive currency to a relatively cheap one.

Gold is lower this afternoon as the rise in yields is hurting the asset. The metal fell to a two-year low this week and therefore it has lost some credibility, so some investors who are seeking out lower risk assets are turning to government bonds. It says a lot about the bearish sentiment surrounding gold that it makes muster a rally when stocks are tumbling, and the US dollar is lower.

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