Stock markets endured a severe sell-off yesterday as a fear of higher interest rates in the US, combined with political uncertainty in Italy and poor US-China relations prompted dealers to dump stocks. 

The Dow Jones and the S&P 500 both lost over 3%, and the NASDAQ 100 lost over 4%, and the VIX hit its highest level since April. We are seeing losses in excess of 3% in Asian stock markets.

The US 2-year yield hit its highest level since 2008, and it is worth noting the 10-year yield reached a seven year high the previous day. The moves in the yields suggest that traders are anticipating the Federal Reserve to continue tightening monetary policy. The US central bank hiked rate three times this year, and dealers are pricing in a high probability of a hike in December too. There is chatter of three more hikes in 2019 also.

The prospect of higher interest rates has left trader worried, as it means higher borrowing costs for companies and individuals. Homebuilders are under pressure as mortgage rates are likely to increase. Retailers are suffering for the same reason.

President Trump criticised the Fed for hiking rates, and claimed they are going ‘loco’. Mr Trump was implying the intense sell-off in stocks was the fault of the Fed, and ignoring the fact that he started the trade spat with China.

The EU have proposed on technology companies as a way to ensure the tech giants pay a fairer proportion of taxes. According to the EU commission, the move would generate £4.4 billion in tax revenue. The Irish and Czech governments, amongst others, have deemed the tax unfair as it target a certain industry, given that Ireland and the Czech Republic have relatively low corporation tax rates and strong technology sectors it is hardly a surprise they are against the move. The EU said the new tax might be ready by Christmas, but given the UK exit from the bloc, it could be implemented by the end of 2019. This put pressure on Amazon, Google and Facebook.     

The Italian government continues to be at odds with the EU. The administration in Rome is keen to press ahead and rise public spending, and in turn the deficit, in an effort to try and boost economic output. The cost of borrowing for the Italian government has risen this week, and Moody’s, the credit rating agency, will be monitoring the situation. Any downgrades to Italian debt could cause yields to rise further and potentially spark another round of the eurozone debt crisis.  

Oil sold-off heavily yesterday after it was announced that Saudi Arabia would supply India with four million barrels of oil next month – when the US sanctions on Iran are implemented. The oil market was been strong recently due to fears about supply concerns, and the update prompted selling.  Hurricane Michael in the US has already caused the closure of some of the operations in the Gulf of Mexico, and there could be further disruption to supply. Last night, the American Petroleum Institute revealed a build of 9.75 million barrels, while traders were expecting a build of 2.62 million barrels.  The Energy Information Administration will release the latest US oil inventory data at 4pm (UK time), and we are likely to see a jump in volatility.

Sterling will be in focus today as we from a UK central banker, Gertjan Vlieghe, at 11:45am (UK time).  

At 1.30pm (UK time), the US will release the September CPI report, and the consensus estimate is 2.4%, which would be a fall from 2.7% in August. The core CPI report is tipped to be 2.3%, up from 2.2% in the previous month.  

EUR/USD – has been diving lower since late September but if it holds below the 1.1510/00 region, it could pave the way for the 1.1632 – the 100-day moving average, to be retested. A break below the 1.1510/00 area, could pave the way for 1.1300 region to be tested.

GBP/USD – has broadly been pushing higher since mid-August and if the positive move continues it could target the 1.3300 region. A break below 1.3000 could put 1.2895 on the radar.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8700. A bounce back could run into resistance at 0.8839 or 0.8900.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found in the 112.15 region.

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