By Craig Erlam
Economic fears swept through the markets on Monday, with the UK taking a particular drubbing as the pound hit a record low against the dollar.
Friday’s mini-budget has gone down like a lead balloon, much like the pound again Monday morning, and serious questions are already being asked about the economic competency of the new government.
So much so that markets are factoring in a strong chance of a substantial emergency rate hike from the BoE in order to shore up the currency and confidence in the markets.
Desperate times call for desperate measures but when the wound is so self-inflicted and terms such as “behaving like an emerging market currency” are being thrown around, I’m not sure we should be hoping the central bank will fix everything.
A policy U-turn could be more effective in stabilising the currency, even reversing a large portion of the losses, but the political damage is done and I’m not convinced the government will do it, regardless.
The backlash may be far more fierce than they were expecting, but I think they may choose to stand by their gamble.
The one stock index in the green in Europe on Monday has been the FTSE MIB.
This comes after the far right secured a majority victory in the Italian election on Sunday which could deliver some political stability in a country that so often lacks it.
Time will tell whether the parties can actually deliver on the economy in a way that many before them have failed to do, but we’re certainly seeing some short-term relief in the markets.
Oil slips further
Economic woes continue to weigh on oil prices, with Brent and WTI off around 1% again Monday and trading at pre-invasion levels.
With more and more central banks being forced to take extraordinary measures no matter the cost to the economy, demand is going to take a hit which could help rebalance the oil market.
Of course, OPEC+ has made its position on this perfectly clear and should it wait until the next scheduled meeting on 5 October, I expect there’ll be a big discussion about further cuts.
Rising yields hit gold prices again
Gold hit new two-and-a-half-year lows Monday as the dollar got off to a strong start to the week.
Rising yields around the world continue to weigh heavily on the yellow metal, despite the risk-aversion we continue to see.
Once we see yields stabilise, we may see more appetite for gold, but in the meantime, it just isn’t there. It saw some support in the morning around $1,625, but if yields keep rising, I can’t imagine that will hold for long.
Bitcoin showing resilience
Bitcoin is once again showing some resilience despite the mood in the broader markets being quite pessimistic. It’s flat on the day after making decent gains earlier in the session.
The backdrop remains challenging for risk assets though and despite the resilience we’ve repeatedly seen, it could still come under further pressure putting substantial support around $17,500-18,500 at risk.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.