21st August - Sticking Plaster Fails To Hold
Yesterday, I wrote that the US Treasury's announcement to buy back bonds could backfire and further damage the already fragile confidence in the US economy. I described it as a sticking plaster on a gaping wound. Yesterday saw bond yields rise, pulling back over 60% of the move made on Wednesday with no sign of stopping; the sticking plaster has almost fallen off within one session.
Wednesday's move was not because the buybacks had begun; it was a reaction to the news and a change in expectations. Yesterday's move was proof that there is still very little confidence in the US economy, and a lot more will need to be done to give support to US bonds. Even if the US Treasury succeeds in its goal of reducing bond yields, this then causes an issue for the FOMC and pits these two institutions against one another. Higher bond yields are a way for the Fed to see pressure put on inflation without actively raising interest rates, so yields being manipulated lower means there is more chance the Fed will have to act. Having two key institutions in an economy have opposite goals does not tend to end well for the currency, so once again, this is not a good sign for the USD.
Following on from Trump's announcement that there would be an 'economic D-Day' against Iran on Wednesday, oil continued to rise yesterday with Brent reaching $94.60 and US Oil reaching $85.10. Brent is now dangerously close to returning to $100 per barrel, as the market is now confident there will be a longer conflict and the Strait of Hormuz will stay closed for a while yet. This is further bad news for central banks across the world looking for help in managing inflation.
Forex
USD is the only place to start. After a huge move on Wednesday, the dollar consolidated yesterday but is moving lower early this morning. There was always likely to be a pause after such a move. The key now is whether the move continues after it has had its rest, or whether the move has now been priced in. With such a lack of confidence around the US economy, I would expect to see further falls as we move towards the end of the month.
The CHF gave back some of its gains yesterday as the market seemed to acknowledge that such a sharp move on Wednesday may have been exaggerated. The JPY also had a tough day as capital moved away from the two normally safe-haven currencies, while also fighting the added headwind of oil prices pushing down on an economy that relies heavily on imports for its oil supply. The fact that metals continued to rise yesterday gives us an indication that any safe-haven demand that the Yen may have picked up on Wednesday had already left by the end of the day yesterday.
The AUD, NZD, and CAD all saw support from rising metals and oil prices, while the EUR and GBP were relatively flat on the day as the focus was elsewhere.
Indices
Yesterday was a heavy session for the US indices, with all three major indices falling. The Dow was the worst off, falling 1.29%, while the S&P fell 0.85% and the Nasdaq fell 0.88%. The story of the day was Walmart, which posted its worst day in over 4 years as it announced a miss for US comparable sales and disappointed with both Q3 and full-year earnings guidance. The stock fell 9% from close to close, and as one of the largest physical retailers in the US, this caused a ripple effect across the market. The implications of the release spread further than just Walmart's sector; however, Walmart is seen as a good guide to US consumer spending as a whole in the US, so negative results are yet another data point to damage already waning confidence in the US economy.
Precious Metals
A mixed day for metals saw Gold stay flat for the day at $4,520, while Silver rose 1.75% to close at $68.10. Both have continued to move higher this morning, indicating there is still momentum in the move for metals. Silver's industrial uses have given it a boost over the course of the week, with the Gold-Silver ratio compressing to around 67 from 70 on Monday. Silver is gaining from both industrial demand and the safe-haven push at the same time. While it is generally considered to be Gold's more volatile cousin, this week's performance is nonetheless impressive to watch.
The metals move shows no signs of stopping, with all of the negative news piling onto the US economy at present. It seems as though this move does still have a way to go. The all-time highs for both metals (from the first quarter of this year) are still some way off, but if metals continue at this pace, who is to say that we can't test these again as we get closer to 2027?
Today's Market Drivers
EUR & GBP Flash PMIs, 8:15am to 9:30am, UK time - A number of separate releases to make up the Flash PMIs for the EUR & GBP are scheduled for this morning. They will not have a huge effect on the currencies but will give us a guide as to each economy's current strengths.
Fallout From US Treasury Announcement - The main focus of markets will be the fallout from the bonds announcement, and how investors want to position themselves for the weekend.
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