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Market Briefing: Risk Appetite Remains Depressed, Containing Trading Ranges in Currency Markets

Markets look intent on extending yesterday’s slump, with major equity indices poised for a weaker open and the dollar remaining stable on robust demand for safe-haven assets. Currency traders, bracing for weak corporate earnings, hawkish Fed minutes, and still-firm inflation data, are avoiding taking strongly-directional positions, staying close to home where possible.

The pound is weaker after the Bank of England broadened its emergency buying to include index-linked gilts. In a statement setting out the details, the Bank said “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to UK financial stability”. The move came after turmoil—sparked by Chancellor Kwasi Kwarteng’s economic plans—worsened yesterday, with inflation-indexed bond yields surging by the most on record.

Earlier data showed unemployment in the United Kingdom falling to the lowest levels since 1974, with the inactivity rate—which measures people out of work and not looking for jobs—rising to the highest on record. The number of people in full-time schooling or with long-term illnesses climbed in August, deepening a labour shortage that has pushed wages and general price levels higher since the onset of the pandemic in 2020. Markets expect the central bank to raise rates by 100 basis points when it meets next in November.

The euro is caught in a very tight trading range, failing to generate sustained gains on unconfirmed reports that German chancellor Olaf Scholz had signalled support for a joint issuance of European Union debt to fund measures against the energy crisis. Markets have long waited for some form of safe asset provision from the bloc itself, but have been repeatedly disappointed, with last year’s rollout of the Recovery and Resilience Facility hamstrung by delays and procedural problems.

The Canadian dollar is trading near a post-pandemic low, fading on deepening recession fears, falling oil prices, and an unstoppable greenback. Maple-flavoured two-year Canadian bonds are yielding 25 basis points less than their US equivalents and ten-years are almost 50 points lower as investors bet Canada’s terribly-indebted household sector will support lower growth and weaker policy settings in the years ahead. That, or traders are simply recovering from too much turkey at yesterday’s Thanksgiving celebrations.

Tomorrow’s Fed minutes should show the central bank remains willing to inflict pain on the economy in its fight against inflation – but there are signs a rhetorical thaw is coming. In speeches yesterday, both vice chair Lael Brainard and Chicago president Charles Evans pointed to signs of easing price pressures and growing spillover risks, suggesting that policymakers might begin putting the conditions in place for a post-December pause in the tightening cycle.

Thursday’s US consumer price index report looms as the next big catalyst in currency markets. Markets expect all-items inflation to fall to 8.1 percent year-on-year in September, down from 8.3 percent in the prior month as weaker gasoline prices lower the headline print. With costs rising in services sectors, core measure is forecast to show an acceleration to 6.5 percent from 6.3 percent previously. Policymakers will find little comfort – with oil prices stabilizing and price pressures broadening, inflation rates could tick higher in coming months, remaining far above target levels.

Karl Schamotta, Chief Market Strategist

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