The financial markets saw a boost last week with the release of strong US employment data, aligning market expectations with the Federal Reserve’s monetary policy outlook. The possibility of a 50bps rate cut in November has now been ruled out, with traders now anticipating two more standard 25bps cuts this year, in line with the Fed’s dot plot.
The Dollar ended the week as the strongest performing currency, with funds flowing heavily from bonds into stock markets, driving up Treasury yields and lifting the DOW to a new record close. The surge in the 10-year yield counteracted the typical “risk-on” sentiment’s negative impact on the greenback.
The Canadian Dollar emerged as the second strongest currency, largely due to the significant rally in oil prices. The escalating tensions in the Middle East present a serious threat to global oil supply, impacting not only the Canadian Dollar but also global inflation, monetary policy, and financial markets in the short term. The Australian Dollar followed as the third strongest currency, but it appeared to lose some momentum towards the end of the week.
Conversely, the Yen struggled as the weakest currency, with New Japanese Prime Minister Shigeru Ishiba’s dovish pivot on monetary policy and the rise in US and European yields putting pressure on the currency. The New Zealand dollar also languished near the bottom, with expectations of a 50bps rate cut from the Reserve Bank of New Zealand. The Swiss Franc also found itself among the weakest performers after the new Swiss National Bank Chair, Martin Schlegel, outlined a dovish stance.
The Euro and Sterling settled in the middle positions, with the European Central Bank unified on a potential rate cut in October, contrasting with the Bank of England’s internal division among top officials offering conflicting views on monetary policy.
The possibility of a 50bps rate cut by the Federal Reserve in November has been eliminated following robust September non-farm payroll data. The DOW reached a record close, with funds moving out of Treasury bonds and driving the 10-year yield to rise sharply. The Dollar Index rebounded strongly, hinting at a bullish trend reversal.
Looking ahead, the market expects a 25bps cut at the FOMC meeting on November 7, with an 80.2% chance of another 25bps cut in December. The technical analysis suggests that DOW is maintaining near term bullishness, with a focus on key resistance levels for confirmation of further upside potential.
Oil prices surged last week, with WTI crude marking its biggest weekly gain since March 2023 amid escalating tensions in the Middle East. The threat of a major disruption in global oil supplies looms large, with the potential for an Israeli strike on Iran’s oil infrastructure presenting a significant risk. The rally in oil prices has been somewhat tempered by the expectation of OPEC+ intervention to stabilize the market.
In conclusion, the financial markets are experiencing significant shifts driven by economic data, geopolitical tensions, and central bank policies. Investors must carefully monitor these developments to navigate the evolving landscape effectively.
