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Market Briefing: Markets Stabilize After Yesterday’s Whiplash-Inducing Session

Markets are calming, but remain distinctly depressed after yesterday’s extraordinarily-turbulent session. Ten-year British gilts were yielding more than 4.5 percent and their US equivalents were paying 4 percent before the Bank of England stepped in to “carry out temporary purchases” of long-term bonds, sending rates tumbling back to 4.2 and 3.7 percent, respectively.

Trading in the pound remains highly volatile, with the cable interbank rate approaching 1.09 before tumbling this morning when Prime Minister Liz Truss doubled down on her government’s policies in a series of remarkably ill-informed interviews with local BBC radio stations. Asked if she would consider reversing course on tax cuts and government borrowing, she said, “I’m very clear the government has done the right thing. This is the right plan”. Markets — which expect further central bank intervention in the month ahead — would beg to differ.

Although North American equity indices are positioned for a slightly stronger open, commodity prices are still in defensive territory and the dollar is grinding higher.

NATO formally blamed leaks in the Nord Stream pipelines on “deliberate, reckless, and irresponsible acts of sabotage,” saying “Any deliberate attack against Allies’ critical infrastructure would be met with a united and determined response”. The euro traded sideways, with investors long ago having resigned themselves to a cold and expensive winter.

Oil prices remain weak despite growing rumours of an OPEC+ production cut at next week’s meeting. Traders are expecting an agreement to reduce output by 500,000 – 1,000,000 barrels per day, but this is believed insufficient to offset slower global demand conditions. West Texas Intermediate is going for $82 a barrel and Brent is trading closer to $89, down sharply from levels reached earlier this year.

The Canadian dollar is clawing its way back, with the exchange rate climbing roughly half a percentage point from yesterday’s low as US yields fall. With investors expecting the Bank of Canada to reverse course sooner than the Federal Reserve, US two year government bonds are paying 35 basis points more than their Canadian equivalents, while ten years are at a 60-point premium.

The Chinese renminbi is up almost 0.5 percent after reports suggested the People’s Bank of China had instructed state-owned banks to sell dollars in offshore markets. The exchange rate is down more than 3.5 percent this month, and looks set to continue its decline as the country’s economic performance and interest rate gaps widen relative to the United States.

Initial applications for unemployment benefits are expected to tick slightly higher, with jobless claims rising to 215,000 last week from 213,000 in the prior week. Evidence of a labour market slowdown remains effectively non-existent in the run-up to next week’s non-farm payrolls report.

A second reading of second quarter gross domestic product is projected to show a 0.6-percent annualized contraction, unchanged from the first estimate.

Federal Reserve speakers include St. Louis’ James Bullard, Cleveland’s Loretta Mester, and San Francisco’s Mary Daly.

China will release its official and Caixin September purchasing manager surveys this evening, with sentiment levels in the world’s second largest economy likely to influence equity and commodity markets overnight.

Karl Schamotta, Chief Market Strategist

USD doldrums continue
Canadian jobs growth tops expectations, but details point to slowdown ahead
The peso’s bull run has run out of steam.
The fiscal outlook still looks favourable.
Canada's economy is slowing.
Nearshoring hopes look overdone.