Swissquote – The collapse of risk appetite continued today with selling across the board. Global equity indices, crude, USD and bond yields are all weaker. The Shanghai composite fell 5.22% and the Nikkei declined 3.89%.
There is indiscriminate selling, rather than a traditional risk-off trade. Perhaps the clearest signal of a risk aversion trade is the decline of USDJPY, which had recently reconnected with interest-rate differentials but now decoupled.
Why Equity Sell-Off Spreads
Expectations of higher US inflation is the likely cause. This, plus strong growth, will push the Fed interest rate path higher. The Fed Fund rate remains under-priced compared to “dots.”
Repricing of the US yield curves has equity investors concerned that dot yields and stocks historically don’t move in tandem. Not helping is US President Trump’s statement blaming the Fed for the sell-off. “The Fed is making a mistake,” Trump told media, after the markets posted their biggest pullback in more than seven months. “I think the Fed has fallen on its head.”
Markets are clear that an independent central bank is critical to overall market stability.
Brexit Deal Could Push British Pound Higher
A recent statement from EU chief negotiator Michel Barnier says an agreement could be reached by next Wednesday: this pushed the British pound higher.
According to Barnier, 85% of the divorce is already agreed. Nevertheless, optimism might be short-lived as further uncertainty is coming. Prime Minister Theresa May is expected to submit the Brexit deal to Parliament in December – and the vote could go against her, as several of her own colleagues are willing to vote against the deal.
The key remaining issue is that of border checks and free frontiers between the UK and Ireland, keeping EU and UK negotiators in intense day and night talks. The deadline of 18 October, when the future EU–UK trade deal must be submitted to all remaining 27 EU members, is nearing.
The cable continues to gain ground this week (+0.53% week-to-date), approaching the 1.3245 USD range. The 3-months 25 delta risk-reversal jumped by 4.40% since the beginning of the week, signalling further optimism.
This article was provided by Swissquote. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein.
This document does not constitute a recommendation to sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investments.