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Daily Wrap Up 20 October 2021

20 Oct 2021 04:47 PM

Wall Street rallies, sterling slides, Bitcoin booms

It has been a relatively quiet day in stock markets on both sides of the Atlantic. European indices are essentially flat on the session, while US equities are showing modest gains. Even though the US 10-year yield is above 1.64%, the S&P 500 is less than 1% away from its record high. It seems like a distant memory that traders were fearful of tapering by the Fed, and rising inflation. The corporate reporting season is now in focus.

Sterling is softer today in the wake of the dip in UK inflation. Headline CPI cooled from 3.2% to 3.1%, while economists were expecting it to hold steady. The core CPI reading came in at 2.9%, down from 3.1%. Some market participants feel the core report is a better gauge of actual demand as commodity prices are not included in the calculation. Lately we have heard relatively hawkish updates from members of the Bank of England such as Andrew Bailey and Michael Saunders, so that has been the driving force behind the pound. The CPI data this morning acted as an excuse to book profit on the pound. The BoE’s inflation target is 2%, so the fractional dip in CPI to 3.1% still puts it way ahead of their goal. Despite the CPI report, there is still a lot of speculation the bank will lift rates later this year.

In the past few weeks, the BoE has undergone a large U-turn with respect to inflation. It wasn’t that long ago the central bank was echoing the Fed by stating the rise in inflation would only be temporary. More recently the Mr Bailey announced that action needs to be taken to curb the rising costs of living. It feels as it the BoE would like to send out the message that rates will not remain near zero forever. If rates are lifted by 0.1-0.25%, it is unlikely to have much of an impact of the country’s rebound.

Bitcoin set a new all-time high by trading above $66,000. The digital currency has been trending higher recently and its media exposure jumped yesterday as the Proshares Bitcoin ETF began trading. Proshares has become the latest well established finance house to offer the digital currency to its clients – which adds to its credibility.

Gold and silver are enjoying solid gains thanks to the weakness in the US dollar. Just over one week ago, the greenback hit a one-year high but since then it has cooled. In the past few months, the dollar has experienced several reasonably large pullbacks, so the bearish move is not unusual. Even though you wouldn’t think it by looking at the dollar, there is still chatter the Fed might look to begin tapering in the next three months – perhaps it has already been baked into the price.

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