SW Weekly Market Update 2 4

Weekly market update 17 October – Dollar pared gains, while riskier assets rallied after FOMC minutes cemented expectations of a Fed taper by the end of this year

Weekly market update 17 October – Dollar pared gains, while riskier assets rallied after FOMC minutes cemented expectations of a Fed taper by the end of this year

1. The US Dollar snapped a 5-week winning streak as investors shifted their gaze to riskier assets following the release of FOMC minutes indicating that the Federal Reserve is going to start tapering by this year. On the data front, optimism prevails in the market with a 0.7% month-on-month increase in retail sales as well as a good earnings season, with big banks in America reporting quarterly reports, smashing analyst estimates. The 3 stock indexes are also on track to book gains while the US10Y Treasury Yield remained slightly below a recent four-month high of 1.596%. However, optimism is capped by the spread of the Delta variant, supply chain shortages, and reduced labor force participation rates which continue to dim the pace of consumer spending into 2022. Earnings season will continue next week where investors would be awaiting a slew of earnings reports from large-cap companies such as Tesla, Johnson & Johnson and Procter & Gamble, etc. A mixed sentiment on the dollar is expected heading into the last two weeks of October. Other notable publications include the Markit PMI survey, which should reflect a solid pace of expansion, supported by growth in the manufacturing and service sectors, while Industrial Production numbers should reflect modest growth in factory activities.

2. The British pound appreciated against the U.S. Dollar to above the $1.37 level in mid-October, amid expectations that the Bank of England (BOE) will possibly be raising interest rates much sooner than was previously expected. BOE Governor Andrew Bailey warned of a “very damaging period” of inflation unless policymakers take actions to mitigate it. The FTSE 100 gained 1.9% to close the week near a 20-month high of 7,234 points this week. That said, rising energy prices and a shortage of workers remain at the back of investors’ minds as they could dim the economic outlook. For the week ahead, notable publications include the CPI data which would reflect the state of inflation in the British economy, and retail sales data as a gauge of consumer spending. Elsewhere, as we approach mid-October, the Euro continued trading near its weakest level since 2020. Mounting inflationary pressures remain a key concern for the market, despite ECB President Christine Lagarde’s attempts to assuage any fears, saying that surging energy prices and supply shortages should be transitory. However, the ECB is still expected to hike rates by 10bps by the end-2022. On the data front, the Eurozone trade surplus shrunk to EUR 4.8 billion in August 2021, and the ZEW Economic sentiment index fell for the fifth consecutive month to 21 in October 2021, reflecting investors’ concerns in the Eurozone. Looking ahead, investors will be watching the PMI data from Germany and France, along with the Euro zone’s consumer confidence, final inflation, and construction output data.

3. The Aussie outperformed against the greenback in the past week, appreciating to above the $0.73 last week, buoyed by rising commodity prices. Additionally, rising vaccination rates and easing of COVID-19 pandemic-related restrictions supported improved economic sentiment, after nearly 4 months of lockdowns. The Kiwi also outperformed the greenback, trading above $0.706. The Reserve Bank of New Zealand recently took a more hawkish stance, raising rates and signaling further tightening to come, despite the ongoing COVID-19 pandemic. Commodity currencies generally performed well as investors switched to riskier assets. Similarly, Crude oil prices rose to $82.28 last week, fuelled by persistent supply bottlenecks and a shortage of natural gas in Europe and Asia. Gold, on the other hand, saw a drop in its price to below $1,770 per troy ounce last week amid a stronger U.S. dollar and higher U.S. Treasury yields.

Salzworth Asset Management