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Daily Wrap Up 6 October 2021

6 Oct 2021 04:14 PM

Yields spike rattles stock markets

Stocks are enduring heavy losses today as a spike in government bond yields has sent a shock through the markets. The US 10-year yield hit 1.55%, its highest mark in one week, and the upward move in yields recently indicates the bond market is beginning to price in a tightening of policy from the Federal Reserve. In the past few hours, yields have cooled. Last week, the US 10-year yield traded at a three month high of 1.56%. There is a sense in the markets that if 1.56% is cleared, it could trigger another move lower in stocks. Equities typically suffer when there are concerns the Fed might look to trim its asset purchase scheme, hence why the FTSE 100 and the S&P 500 are down 0.9% and 0.4% respectively.

The possibility the Fed will taper its bound buying scheme is contingent on the continued rebound in the US economy. Today, the ADP employment report showed that 568,000 jobs were added last month and that easily topped the 425,000 that economists were expecting. It wasn’t all good news from the update, as the August report was revised down to 340,000 from 374,000. Nonetheless, it is clear the US labour market is improving and that fuels the chatter that the Fed are inching towards tapering. Friday’s non-farm payrolls will be of extra importance. The US dollar index is up almost 0.3% as the well received jobs data assisted the currency. EUR/USD has tumbled to its lowest level since June 2020, the bulk of the move was driven by the bullish run in the dollar, but disappointing data from Germany played a role too, as the euro is suffering against most major currencies. The German factory orders reading for August showed a drop of 7.7%, the weakest in 16 months.

The inverse relationship between gold and the greenback is playing out today as the commodity is in the red but its losses are being cushioned by the fact the asset is benefitting from the safe haven trade. Some dealers are redirecting their cash from equities to assets that are considered to be lower risk, such as gold. Bitcoin traded above $55,000, for the first time since May, as cryptocurrencies are trending higher again. Bitcoin and other digital currencies have gained ground lately as some investors are seeking out non-traditional assets.

WTI and Brent crude experienced a lot of volatility today. The energy contracts registered new multi-year highs as supply concerns circulated, but the sell off in the natural gas market promoted profit taking. The EIA energy report showed that US oil and gasoline inventories increased by 2.34 million barrels and 3.25 million barrels respectively – both readings showed a surprise build in stockpiles – so that put extra pressure on oil.

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