Asian-Pacific stock indices steady

US stock index futures edged higher in early European trade after Wall Street suffered its steepest selloff so far this month. Investors were rattled by a jump in US Treasury yields which completely unwound Wednesday's pullback. Yields dropped from multi-year highs after US Treasury Secretary Scott Bessent said that the Treasury would increase its purchases of long end government notes and bonds to over $4 billion per operation from $2 billion.

Source: TN Trader

Earlier this week, investors were reminded of the US's difficult fiscal situation as federal debt topped $40 trillion with no indication that there is any plan to slow its growth. Government debt has accelerated thanks to Covid, tax cuts, war and other spending commitments with interest payments likely to come in around $1.2 trillion this year.

Meanwhile, the yield on the 30-year Treasury bond topped 5.3% last week, its highest level since 2007, ominously just before the Great Financial Crisis. It was trading around 5.25% this morning, which, while off last week's highs, still suggests that investors are unimpressed by Mr Bessent's decision. This comes against a background of concerns over inflation, higher oil prices, government borrowing and the sheer supply of US debt.

It's also worth remembering that Mr Bessent's Treasury joined Japanese policymakers when they intervened last month to support the yen. The US was concerned that Japan was encouraging investors to repatriate funds to Japan's Government Pension Investment Fund in a bid to support the yen. This could have put even more upside pressure on Treasury yields as Japanese investors reduced their holdings of US government debt.

Retail giant Walmart added to the risk-off mood, plunging 9.2% yesterday. The sell off came despite quarterly beats on earnings and revenues, along with positive forward guidance. But investors were concerned by a slowdown in comparable sales and the prospect that customers were engaged in fuel-related cost saving.

Attention will turn to Nvidia's earnings on Wednesday and next week's Jackson Hole Economic Symposium. But today's session could be a big test of investor sentiment ahead of the weekend. This could be complicated by a significant options expiry.

European stock indices were on course to cap a turbulent week with a slightly more positive finish. Despite this, the major indices look set to post their worst weekly performance in nearly two months. The escalation in the US-Iran war, higher oil prices and inflation concerns are all factors weighing on equities.

This week's selloff marks a stark reversal for markets that had entered August riding a stellar second-quarter reporting season. But as with the US, European government bonds have sold off, taking yields, which move inversely to bond prices, up to multi-year highs. The German 10-year Bund yield hit 3.22%, its highest level since the European debt crisis in 2011.

Wednesday's shock intervention from the US Treasury to double its government bond repurchases at the long-end temporarily calmed the fixed-income panic. But hawkish noises from central bankers quickly reignited fears over inflation and raised rate hike prospects. Minutes from the Fed's last monetary policy meeting showed that FOMC members were prepared to hike rates this year if inflation stays elevated.

Meanwhile, European Central Bank (ECB) chief economist Philip Lane warned that Eurozone inflation near 3% remains unacceptable. Investors expect the ECB to raise rates next month. Also, the UK's FTSE 100 passed a major test when it bounced off support at 10,700. Will it soon revisit this level? Or can it now head higher for a retest of resistance at 11,000?

Source: TN Trader

The US dollar weakened further this morning against all the majors, with the cash Dollar Index down to a 13-week low under 98.30. US Treasury yields were steady overnight, having recouped all their losses from Wednesday after the US Treasury announced a doubling in its repurchases at the long end in an effort to curb elevated yields.

The dollar has come under pressure since the end of July. It sold off sharply after the US Treasury joined Japan's Ministry of Finance to support the yen. Then, a string of US data releases led to a sharp reduction in the probability of aggressive rate hikes from the Federal Reserve ahead of year-end. This included weak payroll numbers, a modest softening in inflation and a surprise drop in Retail Sales.

The probability that the Fed leaves rates unchanged after next month's FOMC meeting has risen to 65% from 50% just over a week ago. Meanwhile, there's still a 67% likelihood of at least one 25-basis point rate hike before year-end. At the same time, the US dollar is still finding some support on safe haven demand as the US-Iran war continues to fester away.

The Trump administration is preparing a sweeping economic package targeting Iranian banks, shipping registries, cash transfers and smuggling networks, due to be formally announced Monday. Earlier this morning the British pound hit its highest level in over six months against the US dollar. This was despite an unexpected jump in the UK government's net borrowing.

A large majority of economists polled by Reuters expect the Bank of England to hold rates at 3.75% for the rest of the year. This contrasts with the euro, where markets price 90-94% probability of a 25-basis-point ECB hike at next month's meeting.

Source: TN Trader

Gold made steady upside progress this morning having broken above $4,500 on Wednesday before pulling back yesterday morning. It extended its gains from earlier in the week and briefly topped $4,600 during the European session to hit a thirteen-week high. The precious metal has been given a boost by the weaker dollar which has come under relentless selling pressure since the end of July.

As the dollar began to fall, thanks to joint intervention by Japan and the US to support the yen, gold turned up off support which had been building around $4,000 throughout July. It then took off to the upside, and, as of this morning's print of $4,600, it has added 15% over the last three weeks.

There is some mild resistance at $4,600 and given how quickly gold has made up that 15% gain, it may need to back up and fill in, or at least have another period of consolidation, to build up enough momentum to push higher. The daily MACD isn't particularly overbought, but it is elevated. Nevertheless, current momentum is positive, and the weak dollar is supportive.

Source: TN Trader

Earlier this month, silver was having some difficulty breaking away from $65 per ounce. But it soared above this level on Wednesday thanks to the catalyst of the US dollar selloff. This came in the wake of the US Treasury's announcement that it was doubling its long bond repurchases with the obvious aim of driving down yields, and thereby the cost of borrowing, it hoped.

That hasn't worked out exactly as planned. But the dollar has continued to fall, no doubt because investors reckon that the Treasury will try again.

Earlier today, silver hit $70 per ounce, representing a gain of 23% from the end of last month. As with gold, it may need to consolidate a bit to gain enough momentum to smash through $70, but like gold, it is not overbought. But traders should keep a close eye on the US dollar, as any bounce back in the greenback could knock some of the stuffing out of silver and gold.

Source: TN Trader

Oil prices were a touch softer overnight. But they resumed their rally during this morning's European session. Front-month (October) Brent continues to test resistance around $94 per barrel. A break above here would put $100 back in traders' sights. Crude's recovery off lows hit earlier this month has been steadied and measured. Its daily MACD indicates positive upside momentum and is far from being even moderately overbought. That suggests that the path of least resistance remains upward.

Source: TN Trader

Certainly, the deterioration in US-Iranian relations, or should one say, the escalation in hostilities between the two, should continue to support prices. The Trump administration said it would impose its strictest ever economic sanctions on Iran to pressure it into accepting a nuclear deal, alongside threats of severe consequences for countries supporting Tehran. The Trump team must be pulling its collective hair out given that Iran still controls the Strait of Hormuz, despite claims to the contrary.

Meanwhile, Iran, along with China (a major buyer of Iranian crude) have dismissed the warnings over economic sanctions, whatever new ones there may be. On the flip side, recent surveys suggest that global oil demand growth has continued to soften, which probably explains why oil isn't already trading at $100 per barrel.

Bitcoin surged to a fresh three-month high this morning, closing in on $80,000. At the time of writing, it had added over 25% since the weekend, boosted by President Trump's call on policymakers to pass clear crypto regulation in the form of the Clarity Act which has stalled during its passage through Congress.

Bitcoin has, along with gold and silver, also benefitted from news that the US Treasury will more than double its purchases of longer-term government bonds, as yields on 10 and 30-year Treasuries hit multi-year highs last week. The story here is that investors are looking for long-term safety as government debt across the developed world continues to grow. This was brought into stark relief as US federal debt pushed above $40 trillion earlier this week.

There are no earnings of note today, with markets waiting on Nvidia after the close next Wednesday. President Trump is due on the wires again after tonight's close.

Goldman Sachs notes that last month hedge funds suffered their worst month of relative performance against the S&P 500 in twenty years. Many diversified away from AI positioning. Vice President Vance and Treasury Secretary Bessent both argue that economic pressure remains the best route to achieving US objectives concerning Iran.

Meanwhile, soaring grain prices point to what's being described as a perfect storm for winter food supply, just when consumers thought things couldn't get pricier. JPMorgan likened this week's bond-market intervention to paying your mortgage with your credit card, while yen intervention from the BoJ appears to have only turbo-charged the carry trade as investors double down on the currency.

The equity pullback has given bears some hope via this week's resumed bond-market rout, with the dollar feeling the pressure while metals and crypto emerge as the net winners. It remains to be seen whether the bulls can take back control ahead of the weekend.

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