Headlines

*GBP whipsaw after mixed messages from the Bank of England

*Yen weakens through September intervention level to 24-year low

* Oil declines for a third day as recession concerns rattle markets

*Asian stocks wallowed at two-year lows in Wednesday trade

FX: USD closed marginally higher on the day after sinking below 112.50. The Fed’s Mester, known as a hawk, noted the biggest policy risk is that the Fed does not hike enough. She does not expect the Fed to cut rates in 2023. US 10-year Treasury yields hovered below 4% as markets await tomorrow’s US CPI data.

GBP is volatile and being dragged around by the BoE moves in the gilt market. Cable dipped below 1.10 before bouncing on today’s FT report suggesting a willingness to extend gilt buying if needed.  EUR reclaimed the 0.97 level with price action dependent on the conflicting BoE headlines. USD/JPY is trading above September intervention territory. It moved beyond 146 for the first time since 1998.

The commodity dollar currencies are hovering around their recent lows amid the cautious risk tone and general commodity weakness. Gold failed to move above key support around $1674/76 and awaits US CPI.

Stocks: US equities fell for a fourth day in choppy trading, continuing their losses from last week. The S&P 500 closed the session down 0.65% after hitting its lowest level since November 2020. The Nasdaq 100 fell 1.1% touching its lowest level since July 2020. Late session selling in indices and bonds too was seen. This came in the wake of the BoE’s Bailey ultimatum for pension funds.

APAC stocks closed lower with the Hang Seng touching its lowest level since October 2011. Lockdown concerns and new export controls by the US are continuing to hurt markets. ASX 200 was rangebound and the Nikkei 225 lacked conviction.

The Euro Stoxx 50 futures are pointing to a lower open, down -0.2%, after the cash market closed with losses of 0.5%.  S&P 500 futures are in the green +0.4%.

Day Ahead – UK action and markets (Part II)

Markets are currently beholden to the Bank of England and their actions in the gilt market. Truth be told, it is not going well and is rattling major markets everywhere. The temporary buying of bonds by the bank is set to end on Friday. Yesterday’s intervention in another class of gilt had no desired effect. Governor Bailey then poured more fuel on the fire by saying the bank’s intervention will be temporary, having talked about systemic stability risk.

One analyst called Bailey’s words the “shortest suicide note in history”. Volatility in these normally rather obscure markets is spreading. The chances of possible spill-over effects are growing. There is a hint of moral hazard here. Bailey is being strict with pension funds whose practices caused the crisis initially. But it is a dangerous game with credibility in UK institutions sinking every day. (It feels like another U-turn is needed!)

Chart of the Day – USD/JPY inches higher

USD/JPY has hit multi-year highs again this morning at 146.38. All eyes have been on the previous intervention level in support of the yen above 145. That unspoken “line in the sand” has clearly been breached. As we have said before, unilateral intervention rarely works. “No intervention is better than bad intervention” comes to mind. Unless the fundamentals are pulling in the same direction, it is tough to engineer. The state of play is a hawkish Fed and a dovish BoJ.

We may get more verbal intervention although the speed of the move has certainly slowed which has been a prior cause of concern. It seems only a weaker dollar can change the dynamics of this major. Or perhaps a series of softer US CPI readings. The key upside level is now 147.67. The 21-day SMA is 144.29.