Geopolitical Tensions, Better US Retail Sales & the UK Autumn Budget

The sell-off in the US Dollar looks to have paused for now, as has the rally in equities. Despite the US government pushing the line that the missile which killed two in Poland was accidentally fired from Ukraine, tensions remain elevated. While NATO leaders have said there is no need for any NATO retaliation, the heavy missile assault on Ukraine by Russia this week shows that the war is far from over.

Attention turns back to the UK today with the new UK budget due to be delivered. BOE governor Bailey yesterday criticised the government for failing to spark growth on the back of the pandemic and warned that “the picture does not look good” ahead of Chancellor hunt’s delivery today. On the back of record inflation in the UK last month there are fresh fears for the UK economy ahead of the budget.

Key Factors for Today

• USD sell off pauses on back of stronger-than-expected US retail sales
• Risk sentiment weakens following Polish missile event & better US data
• GBP leading in FX ahead of UK budget – UK gilt markets stabilise
• More Fed speakers due today, commentary turning more dovish
• Oil and metals soften as USD drop pauses – oil falls despite huge EIA deficit reported

Coming Up

• GBP – UK Autumn Budget
• USD – Philly Fed Manufacturing
• USD – Fed’s Bowman, Mester & Jefferson speak

Equities Slip Back On Geopolitical Tensions & USD Stabilisation

Equities markets have paused for now with some losing ground yesterday. European stock markets slipped back on fresh fears around the Russia-Ukraine conflict on the back of heavy shelling by Russia and the Poland missile event. US stocks were weaker on the back of a dismal quarterly outlook from retail giant Target which hurt sentiment. A stronger than expected set of US retail sales also curtailed upside momentum in equities sentiment, throwing a spanner in the works for those banking on a smaller US rate hike in December.

UK Budget in Focus – GBP Stronger

In FX, GBP is leading the way today. Comments from BOE governor Bailey yesterday regarding improvements in the gilt market, which are now back to pre mini-budget levels, have perhaps raised hopes that the budget will not be as austere as previously signalled. If Hunt is able to deliver a balanced and credible budget, inspiring hope for the UK economy, this could see GBP gaining further near-term. However, if Hunt is seen sticking to the harsher elements of the budget this might weaken sentiment near-term.

Fedspeak Tilted Towards Smaller Hike

Fed’s Bowman, Mester and Jefferson speak today and their comments will be closely watched. Yesterday saw Fed’s Waller echo the recent view shared by other Fed members, saying that he would be happy with a smaller 50bps hike in December. With that view now baked in, further dovish comments won’t necessarily drive USD much lower unless we hear anything more aggressively dovish.

Metals & Oil Weaker as USD Sales Pause

In the metals and commodities space, both gold and silver have turned lower from the initial highs on the week as the USD sell off pauses. Both metals are still well up off the yearly lows for now though it will likely take a fresh downside surprise for USD to drive metals higher here. Crude oil prices have also turned lower this week with crude futures breaking down their lowest level since the final week of October. This comes despite the EIA reporting a huge 5.4 million barrel inventories deficit yesterday, well beyond the 2 million barrel deficit projected.