US Open Note – Growth concerns bring risk-off into play; dollar's slide halts

Stocks falter as risk-off returns

Better-than-expected corporate earnings have been a boon to stock markets this month, with Southwest and American airlines flagging today that even the hardest-hit industries by the pandemic can still stand on their feet despite the energy crisis.

Nevertheless, below the surface global economic warnings are still flashing red. The pandemic’s nasty supply shocks will probably keep fueling global inflation pressures for longer and businesses such as Unilever, will not hesitate to transfer costs onto consumers during the next months. Fed Board Member Christopher Walker, who recently called for a more aggressive policy response next year, said today that the next five months will be critical for examining whether inflation is transitory. Therefore, the Fed will probably become more specific about its monetary strategy in the coming months.

China’s factors are adding to these worries as a potential fallout by the indebted Evergrande is now looking more likely given the company’s continuous failure to secure cash ahead of its 30-day deadline, which expires at the end of this week.

Basic materials faltered on China’s renewed concerns, leading the pan-European STOXX 600 index into the negative territory, while US stock indices also opened with moderate losses.

Commodity currencies drift lower

In FX markets, investors opted for safe-haven currencies, adding some footing under the US dollar and the yen after days of declines. For the same reason, and perhaps with the help of some profit-taking, the rally in commodity currencies took a breather, though marginally, pressing aussie/dollar and kiwi/dollar below 0.7500 and 0.7200 respectively.

A speech by the RBA governor at 19:00 GMT could raise extra volatility in the Australian dollar as the central bank faces pressures to review its framework in the way the Fed and the ECB have conducted.

US jobless claims drop to fresh lows, but dollar not impressed

Turning to the calendar, US initial jobless claims continued to hit new post-pandemic lows, reflecting a tightening labor market. The number of people applying for unemployment benefits in the week ending October 9 retreated to 290k – the lowest since March 2020 - from 296k previously, beating expectations of a 300k increase. The dollar, however, could barely move on the news since bond tapering is already a done deal this year.

Euro/dollar and pound/dollar remained stable but lower on the day at 1.1642 and 1.3799 respectively following the job stats. Dollar/yen could not capitalize either, extending today’s slide to a fresh weekly low of 113.81. On the other hand, falling oil prices assisted dollar/loonie to rebound from the key 1.2300 support level.

In metals, gold is nearing the crucial resistance of 1,795, a break of which could spark stronger bullish extensions.

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