While European markets managed to eke out a gain yesterday, the slow rise in bond yields continued to act as a drag on US markets which closed lower for the second day in succession, as the US 10-year yield hit another new multiyear high above 4.2%.
This continued rise in yields has remained a drag on markets in Asia, as investors continue to worry about the prospects for growth and earnings against a backdrop of rising interest rates, and is expected to bleed into a lower European open later this morning.
The pound initially underwent a modest rebound and UK gilt yields slipped back after UK PM Liz Truss announced she was stepping down yesterday, making history as the shortest serving PM in British history.
While this brought about a brief respite to the political risk premium it didn’t last very long given the realisation that it is hard to see how any replacement will be able to coalesce around any form of unity of policy in this carnival of chaos of a government.
The pound soon briefly pushed above 1.1300 before slipping back, while UK gilt yields fell to 3.76%, close to their lowest levels this month before finishing the day higher.
The reality is that the Conservative party in its current form is so riven by partisanship that anyone who takes over, even Rishi Sunak who appears to be favourite, as is widely being predicted, there will always be those working in the background to undermine him.
If, as is being speculated, Boris Johnson was to make a return then we really would be through the looking glass, however even here there are reports that any leadership bid could be thwarted by the 1922 Committee.
On the plus side we probably won’t have to wait very long to know the outcome with the final two candidates potentially being announced as soon as next Monday, with a new leader in place by October 28th.
On the monetary policy side, the Bank of England indicated that a substantial rate rise was on the way in two weeks’ time with the only question being whether we see a 75bps rate rise, or a move by 100bps.
On the data front we have the latest retail sales numbers for September, along with the latest public sector borrowing numbers, which was the centrepiece of the recent market turmoil.
No one was expecting great things from UK August retail sales, which was just as well, given that they tanked -1.6%, which probably means that even with the UK economy avoiding a contraction in Q2, we’ll probably see one in Q3, unless we get a Lazarus like rebound in consumer spending in September.
Last week’s BRC retail sales numbers for September might be a decent bellwether, rising as they did by 1.8%, however given that they also showed an increase of 0.5% in August, in contrast to the ONS numbers, it’s probably a coin toss as to whether we see a rebound in today’s September numbers.
With the period including the extra bank holiday for Queen Elizabeth II’s funeral it’s hard to predict which way they might go with expectations for a decline of -0.5%.
The rebound in yields wasn’t just confined to UK gilts, the US 10-year yield hit its highest level since 2008 above 4.2%, while the pullback in the pound was a result of US dollar gains, with the Japanese yen sinking to fresh 32-year lows above 150 for the first time since August 1990.
EUR/USD – still in broader downtrend with resistance just below the 50-day SMA and trend line resistance from the highs earlier this year. Finding some selling interest at the 0.9875 area. The bias remains for further losses towards 0.9000, while below 1.0000.
GBP/USD – ran out of steam at the 1.1380 area yesterday. While below the 1.1440 area and the 50-day SMA the bias remains for further weakness. We need to see a move above the 1.1500 area to stabilise. Interim support at 1.1150, and the lows last week at the 1.0920 area. A move below 1.0920 opens up a return to the 1.0800 area.
EUR/GBP – ran out of steam just below 0.8770, slipping back to the 0.8670 area. The key support remains back at the 0.8570 level and 100-day SMA. A break of 0.8650 and the 50-day SMA, could well signal further declines towards 0.8490 and the 200-day SMA.
USD/JPY – pushed through the 150.00 area with the next resistance at 152.30. Decent support at the 147.70 area which was the 1998 peaks. Now trading at its highest levels since September 1990.
