Headlines

*RBA surprises with quarter-point hike, stocks fly

*DXY falls further as 10-year Treasury yields drop below 3.6%

*Oil holds onto gains amid OPEC+ supply cut report, gold jumps above $1700

*Asian stocks notched firm gains after strong Wall Street performance

FX: USD is attempting to nurse yesterday’s losses but has fallen below 112 on the DXY. Weaker than expected ISM Manufacturing and positive risk appetite are seeing sellers in the world’s reserve currency. Support is 110.78.

GBP is gaining for a sixth straight session to its best levels in over a week. Recent outperformance in cyclical currencies sees cable trade with a 1.13 handle. This also comes after the UK government’s U-turn on its plan to abolish the 45p top tax rate. EUR is looking to break above recent highs. The early September low at 0.9863 is initial resistance.

USD/JPY traded to a high of 145.32 before easing to close at 144.53. AUD sank on the surprise RBA smaller rate hike but has regained those losses. It faces resistance around 0.6530.  USD/CAD failed to hold above 1.38 and fell sharply below 1.36 as oil remained buoyant.  

Stocks: US equities enjoyed their biggest daily increases since August. The benchmark S&P500 index closed up 2.6% while the tech-heavy Nasdaq added 2.4%.  The Vix dropped back to just above 30. But it remains elevated with the long-term average around 20.

APAC stocks were unfazed by North Korea’s latest missile launch. A decline in the dollar and yields boosted risk sentiment. The ASX 200 gained as commodity-related sectors led broad gains. Stocks were further helped after the RBA’s smaller than expected 25bp rate increase. The Nikkei 225 recorded its best session in more than six months, after the latest Tokyo CPI printed in line.

The Euro Stoxx 50 future is up +1.5% after the cash market closed up 0.7% yesterday.  US equity futures are pointing green with the major futures up over 1%.

Market Thoughts – U-turns helps risk markets

When politicians get involved in markets, it is very hard to predict what might happen. But the gloom surrounding risk assets has been lifted, at least for now. The UK government backtracked on one of its fiscal plans which was quite unexpected after the PM’s doubling down less than 24 hours earlier. Chancellor Kwarteng is now also set to bring forward the medium-term fiscal plan this month, which was previously set for release in late November.

The scrapping of the tax cut was small beer, only 5% of total costs. But the symbolism of decision makers being more receptive to the wider party and the markets is significant. The U-turn sent global interest rates sharply lower, which comes on the back of the BoE’s intervention last week. Cable is nearing key resistance just above 1.14.

Chart of the Day – AUD/USD tries to break higher

Markets are desperate for a pivot in the global rate hiking cycle. And the first one came overnight from the RBA who only raised rates by 25bps. Concerns are growing over the global outlook and the lagged effects of tighter financial conditions. Higher rates and price pressures are bearing down on household budgets. But further rate hikes are likely as the bank remains committed to retuning inflation to its 2-3% target. Policymakers see inflation a little above 4% next year.

The aussie has been hit by global forces and poor risk sentiment in the last few weeks. It posted a two-year low last week at 0.6363. But prices have been trading between 0.64 and 0.65 more recently. The improved risk mood is now pushing the aussie above the range high around 0.6530. Strong resistance above sits at 0.6681 with an initial barrier at 0.6612.