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A broad based sell-off is sweeping across Europe as traders are worried about emerging market (EM) economies. 

Europe

The prospect of four rate hikes from the Federal Reserve in the next 12 months, is driving up US government bond yields. Traders are worried that EM counties will be hit by higher borrowing costs, and in turn it could damage their economies. The Indian rupee has reached another record low, and the Turkish lira is weaker too as investors are fearful we could be heading for an EM crisis.

Ted Baker shares have fallen today after the firm revealed a 3.2% fall in first-half pre-tax profit. The group had a number of write-downs to contend with, it incurred a charge of £600,000 in relation to House of Fraser going into administration, and the group took a £4.7 million charge due to restructuring. Stripping out the exceptional costs, the group would have posted a 3.5% rise in earnings. The fashion house confirmed that sales per square foot of store space dropped by 9%, and this underlines how tough it is on the high street. Online sales jumped by 24% and the department is increasingly becoming an ‘important component’ of the business. Consumer habits are changing drastically, and Ted Baker will need to focus on the e-commerce side of the business if it wants to stay competitive. The share price has been driving lower since March, and if the negative move continues it could retest the 2,000p mark.

Ferguson shares were higher this morning, but the stock has been dragged lower by the market wide sell-off. Peel Hunt upped its price target to 5980p, from 5,300p. Yesterday, Canaccord raised its price target for the frim to 6,400p from 6,300p. Earlier during the week, the group posted impressive results, but warned that trading in the UK is weak.

UK financials like Barclays, RBS, HSBC and Lloyds are in demand today as UK gilt yields are higher. An environment of rising yields helps banks as it increases their chances of making more money on loans. It appears the rising yields in the US have dragged the UK yields higher too, and uncertainty surrounding Brexit could weigh on UK gilts.

US

Stocks are in the red as the rising yields in US government bonds have prompted traders to be fearful about an EM crisis. The US 10-year Treasury note yield jumped to a level not seen since 2011, and this could put pressure on emerging market economies, which might trigger a global sell-off. The relatively high yield might encourage traders to swap stocks for bonds.

The US central bank could deliver four more rate hikes in the next year, and given the strong economic indicators this week, traders will be paying close attention to tomorrow’s non-farm payroll report. Yesterday, the ADP employment report jumped to a seven month high, and the ISM non-manufacturing update jumped to its highest level in 21 years. Today, the factory orders report increased by 2.3% which easily topped the 2.1% that economics were expecting, and the July report was revised from -0.8% to -0.5%.

Amazon and Apple shares are in the red after a report claimed that a chip discovered in the hardware of their products may have been used for surveillance by the Chinese government. The tech giants dispute the claim, but traders remain cautious nonetheless. Given the standoff between Washington DC and Beijing, the report is likely to cause a rift between the two administrations.  

FX

The US dollar index has pulled from the multi-week that was reached in the early hours of trading. The greenback has retreated in the afternoon, but given that the Federal Reserve could continue their hiking cycle over the next year, the recent upward trend is still intact.

GBP/USD has pushed higher on the back of the slide in the US dollar, and the prospect of Prime Minister May pushing for a UK-wide customs union with the EU. The move could solve the issue of the Irish boarder, and the Irish government welcomed the proposed plan. Volatility is expected to be low given the uncertainty surrounding Brexit, but if the pound holds above the 1.3000 mark, its outlook could remain positive.

EUR/USD has also higher due to the sell-off in the greenback. It has been a quiet day in terms of economic accouchements from the eurozone, so today’s move has been dollar driven. The euro dropped below the 1.1500 mark, which was worrying for the single currency, but it has since retaken the level, and if it can hold above that metric we could see further gains. 

Commodities

Gold remains muted even though we have seen major swings in the US dollar. The commodity is hanging around the $1,200 mark as always and the metal has hasn’t spent much time away from that metric in the past month. The downward trend that began in April is still in place and seeing as the market is pricing in a higher probability of a rate hike from the Federal Reserve in December, we could see pressure remain on the metal.

Oil has retreated from its recent high as traders lock in profits. It was revealed yesterday that Saudi Arabia and Russia decided in secret to raise output in September. The announcement prompted selling as the energy market has been strong recently, and it also removes some of the fear surrounding the sanctions on Iran that are due to kick in next month.

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