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Daily Wrap Up 28 October 2021

28 Oct 2021 04:31 PM

US dollar slumps, Wall Street rallies

US stock markets are up following the news the US economy grew by only 2% in the third quarter, while economists were expecting a reading of 2.6%. The growth achieved in the three month period was a major step down from the 6.7% posted in the previous quarter. Equity traders appear to be falling into the bad habit that subpar news for the economy is good news for stocks, in that the Federal Reserve have less of an incentive to bring forward the date for any planned rate hikes. The price action in the US government bond yields is interesting to say the least, the 10-year yield is up fractionally, while the 30-year yield has dropped below the 20-year yield for the first-time in 20 years – this implies the bond market is predicting a decline in the US economy in the longer run.

The pessimistic outlook is putting major pressure on the US dollar. To make matters worse for the greenback, the euro is driving higher in the wake of the European Central Bank meeting. As expected, monetary policy was left on hold. Christine Lagarde, the ECB chief, said the rising inflation will last longer than originally expected – which sounds like the recent commentary from the Fed and the Bank of England. Lagarde anticipates that output in the eurozone will top the pre-pandemic level by the end of the year, this seems like a tall order given the cooling of services and manufacturing in the bloc. Despite the higher cost of living, the central banker believes the pressures will ease in 2022. A combination of the firmer euro and the downbeat US dollar has driven EUR/USD up by 0.6%.

The US dollar index has dropped to its lowest mark in over four weeks and that has assisted gold and copper – the metals are benefitting from the fact they are traded in dollars. Gold is off the high of the session as the US dollar has pulled back some of its earlier losses. Typically, there is a strong inverse relationship between the yellow metal and the greenback, and it is a little concerning that gold hasn’t retested last week’s high even though the dollar is enduring a major loss. It is possible the rally in US stocks has redirected funds away form gold as the commodity usually underperforms when stock markets jump. Keep in mind the S&P 500 is less than 0.3% from its all time high, so that speaks volumes about the risk appetite in the markets. The mood on this side of the Atlantic is less optimistic as the DAX is down 0.2%, and the FTSE 100 is marginally in the red. The British index has been pulled into negative territory by the fall in energy stocks as Brent crude is down 0.7%.

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