Trading major markets have become something of a wild ride in the last few sessions. There are several factors behind this, however, primarily, it seems that bond markets have woken up to the prospect of the Federal Reserve tightening monetary policy. This is reverberating across major markets with key reactions seen in the US dollar (USD), precious metals, and Wall Street.
- Higher bond yields are USD positive and gold negative. The speed of the rise in yields negatively impacts indices, whilst also inducing a switch out of growth into value stocks.
- USD has broken out in a move that looks to have changed the medium-term outlook on major forex pairs.
- Equity markets have had a wobble, but are recovering once more in their medium-term ranges.
- USD strengthening is also weighing on precious metals.
Why are markets suddenly moving?
Bond yields have made a sudden and sharp move higher. It took almost 24 hours in the wake of the September FOMC meeting, but the US 10 year yield has increased by around 25 basis points (a quarter of a percentage point).
A more hawkish path of interest rate increases came out of the FOMC meeting. One hike could be seen in 2022 and three in 2023, compared with the suggestion (in the dot plots) of just the two hikes in 2023 previously. This has certainly driven bond yields higher (traders tend to sell bonds on the prospect of interest rates moving higher). However, there has also been a spike higher in the oil price that has played a role, with higher energy prices increasing inflationary pressures. Higher inflation also tends to result in bonds being sold and therefore yields moving higher.
Rising bond yields have a big knock-on impact on major markets:
- USD strengthens – there is a strong positive correlation between rising bond yields and a rising USD. A stronger USD is a key feature of major forex pairs now.
- Commodities decline – commodities priced in dollars fall on a stronger dollar. This is also linked with risk appetite too. Commodities tend to decline when risk appetite deteriorates. For Gold, there is a strong negative correlation with rising bond yields (and a rising dollar too). This has been especially the case with precious metals in recent days.
- Wall Street sells off but also shifts from growth into value – the broad market sees increased selling pressure and higher volatility. Within sectors, the higher growth stocks (typically seen in the NASDAQ) tend to underperform as their future cash flows are impacted by higher interest rates, whilst the highly expensive valuations also hit profit-taking. This also leads to a general flow out of growth and into value stocks, which are seen as cheaper and with the added extra of a dividend too.
The question is whether this increase in bond yields is set to continue? The technicals show a barrier between 1.55%/1.70% which may restrict the move higher, for now.
Forex – Decisive USD strengthening is breaking medium-term ranges
We have spoken previously at length about the medium-term ranges on major forex. This move on bond yields has now decisively broken some key ranges.
EUR/USD breaking below 1.1600/1.1665 is a key breakdown. Reaction on an oversold technical rally towards 1.1665 will be key. A failure around here would confirm the new breakdown. Our expectation would then be that the pair then builds a new medium-term trading range between 1.1400/1.1750.
GBP/USD breaking below 1.3570/1.3600 was a crucial move. This has now opened the old support band 1.3150/1.3300. We would be looking to use technical rallies towards 1.3570/1.3600 as a chance to sell.
USD/JPY is another range break, on a move above 111.65. However, there need to be a move above 112.30/40 which is a barrier that formed the highs in both 2019 and 2020. However, for now, we would look for unwinding moves into 110.80/111.65 to use as a chance to buy.
Indices increasingly choppy
We talked previously about indices losing their primary uptrends and developing medium-term trading ranges. This seems to have been confirmed by recent price action.
The S&P 500 futures (MT5 code: SP500ft) are solidifying support at 4290/4335 but the resistance of a lower high at 4470 is also strengthening. The market has become very choppy within the range. We favor buying into the weakness, as the corrections on Wall Street tend to only be around -5%/-6%. This drawdown from the 4548 all-time high has already been seen.
European markets are also choppy within ranges:
- DAX (MT5 code: GER30) ranging between 15,000/16,030. How the DAX reacts around the central pivot at 15,450/15,525 will determine the near term outlook. Currently, this is a band of resistance.
- FTSE 100 (MT5 code: UK100) is far more positively configured within its medium-term range 6810/7240. However, there is resistance around 7150/7195 for the bulls to open a test of 7240 again.
Commodities
The growing negative pressure on commodities from rising bond yields and a strengthening USD was something we discussed previously. This has resulted in some key breaks.
Gold (MT5 code: XAUUSD) has had one of the more contained of the moves, however, there is still a decisive move lower. The market has broken below the old pivot support band $1745/$1760 with consistent lower highs and lower lows. We believe that near-term rallies (this old support becoming new resistance) are a chance to sell for moves towards $1675/$1700.
Silver (MT5 code: XAGUSD) has made a similar move but has also broken below huge support at $21.65. Initial resistance is at $22.00, and we see a technical rally into resistance as a chance to sell. Breaching $21.65 has opened the next band of support $18.90/$19.60.
