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Market fears remain, Brexit in focus still

As markets have been gripped by increased fear we consider the outlook on forex, equities and commodities this week. We also look at the latest developments in Brexit.

Although there are a myriad of factors that could be attributed to the recent market sell-off, the basis probably does lie at the door of fear over inflation. With the US firing on all cylinders and (at or around full employment) the market has been wondering for months when the Phillips Curve would finally kick in to throw wages higher and stoke the fires of inflation. Yields spiked higher recently to multi-year highs on these fears. However, the payrolls report shows that earnings are not sustainably strong yet, whilst US CPI included a downside surprise last week. It is interesting to see current expectations (according to Bloomberg) suggest headline inflation has peaked and will be stable around 2.2% to 2.3% throughout much of the next 12 months. The market is record short on US Treasuries (in substantial size) and at some stage there could be a sizeable short-squeeze that would pull yields back lower again. In addition to inflation expected to tail off next year is also a tail off in growth expectations. Donald Trump has spent much of the past week goading the Fed about making a mistake on tightening (and incredibly that he knows more than them). If inflation does indeed remain subdued then there is a possibility that the Fed may actually pull the reins a touch on its tightening. This could be a signal that all these record shorts on Treasuries need to induce a bout of covering and a decline in yields. Dollar strength that has been a feature of recent weeks looks less certain now. On a short covering of Treasuries the dollar correction of the past week could be small fry in comparison.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.