Nervous Market Action Ahead of the FOMC

Markets kicked off a crucial FOMC-focused week with widespread losses yesterday, as the US Dollar found fresh demand, before a late session reversal. Price action reflects the nerves in the market ahead of the Fed this week. Market pricing has swung in favour of a hawkish outcome from the Fed, following the recent August CPI report which showed consumer prices rose again in the US last month. With the market now pricing in a larger 75bps hike, as well as the roughly 30% probability of a larger 100bps move, equities markets and the broader risk complex were seen in trouble. Along with the fall in key indices, Bitcoin was seen trading to its lowest levels since early 2021 while commodities prices tumbled also.

Key Factors for Today

- USD softens ahead of FOMC tomorrow following initial strength yesterday
- Choppy action in equities markets
- Bitcoin hits lowest level since early 2021
- GBP leads in FX as UK traders return
- RBA minutes show bank remains hawkish though concerns over house prices
- JPY weakens on reduced safe-haven demand
- Metals and oil stabilise following USD weakness

Coming Up

- CAD Canadian CPI
- USD US Building permits & Housing starts
- EUR Eurozone current account + ECB’s Lagarde speaks

Choppy Action in Equities Reflects Nerves Ahead of FOMC

It was a tricky start to the week for equities markets. Indices around the globe came under pressure initially yesterday firstly from the ongoing lift in the US Dollar and secondly from troubling comments from President Biden. A CBS interview with the president, which aired on Sunday night, saw Biden confirming to a reporter that the US military would intervene if China attacked Taiwan. China immediately lodged a complaint with the US over the comments while risk sentiment was rocked amidst an uptick in tensions between the US and China.

Porsche IPO Details

Volkswagen outlined details of its upcoming Porsche IPO following news that the company will spin-off the iconic carline into its own entity. The IPO will see Porsche valued at roughly $75 billion, split across 911 million shares – an homage to the iconic Porsche 911.

GBP Leads in FX

In FX, a slightly softer tone to the Dollar today has seen GBP move into pole position. GBP markets were offline yesterday due to a state holiday for the Queen’s funeral. Looking ahead this week, UK traders are bracing for further tightening from the BOE on Thursday with at least a further 50bps of tightening expected.

Hawkish RBA Minutes

The RBA minutes overnight confirmed the RBA’s hawkish outlook. The bank’s members were seen focusing on elevated inflation, both domestic and global, and the need to combat rising prices. The bank was, however, seen fretting over the downside impact the tightening was having (and is expected to have) on house prices and broader economic activity.

JPY Weaker on Tuesday

The better tone to risk markets on Tuesday has seen JPY as the weakest performer so far today. The currency is softening due to reduced safe-haven flows. However, this dynamic can shift very quickly if we see any USD strength creeping in today, creating headwinds for risk markets.

Metals & Oil Stabilise

In the metals and commodities space, the late-session USD weakness which emerged yesterday has helped underpin metals prices. Both gold and silver saw better bids, despite an overall muted session. Oil prices were seen rebounding yesterday also. Crude futures rallied off the lows and are now potentially putting in a double bottom against the current September lows, suggesting potential for further upside near-term.