Risk-Covering, Weekend Edition

Risk starts the day on the backfoot, continuing yesterday afternoon’s slide as market participants cut risk heading into the weekend, a common tactic during times of heightened geopolitical tension.

In addition to the preparation of Israel’s operation on the ground in Gaza, a US warship intercepted Yemeni (Houthi rebel) missiles yesterday that were headed towards Israel, according to the Pentagon. US military bases in Iraq and Syria also came under some attack.

As a result, Oil has crossed $90/barrel, Gold is within earshot of $2000/oz, bitcoin hovering around $30,000 while the USD remains essentially unchanged against a basket of currencies.

Further complicating matters are Fed Chair Powell’s comments yesterday at the Economic Club of New York that open the door to more rate hikes. While he said there is evidence that current policy is not “too tight” and that “additional evidence of strong economy may merit hiking,” he also countered with a common theme that has been shared by multiple Fed officials lately: the rise of Treasury yields in the market is doing the Fed’s job for them.

Many in the market are partially attributing this move due to the tandem effect of the Fed’s continued unwinding of their balance sheet as well as the US Treasury’s significant acceleration of new issuance.

Effectively, the market is being flooded with supply causing yields to move higher and general volatility in the Treasury market. Indeed, the 10-year Treasury remains a few short steps away from touching the 5% psychological level not seen since 2007.

EUR/USD is close to unchanged on the day as the German Producer Price Index comes in lower than expected. Next Thursday’s ECB rate decision is being priced as a major market mover by the options market, with one-week options eyeing their strongest levels in a month.

USD/CAD is lower on the day buoyed by the continued move higher in oil prices. August retail sales dropped by 0.1% as expected but increased when excluding autos. All eyes are on next Wednesday's Bank of Canada rate decision.

GBP/USD is close-to-unchanged on the day even as all the retail sales figures today disappoint expectations. With the year-over-year figure dropping to –1% versus the 0.2% drop that was expected. Even so, the UK 30-year bond yield rose to the highest since 1998.

USD/MXN is close to unchanged on the day as retail sales figures disappoint. The year-over-year metric came in at 3.2%, 1.2% below expectations and a drop of almost 2% from the prior reading. The next bit of data to keep an eye on will be Tuesday’s bi-weekly CPI readings.

USD/BRL is slightly lower on the day buoyed by higher oil prices. Petrobras announced plans to raise diesel prices but reduce gasoline prices, with the net effect potentially being a decrease in future inflation readings according to one analyst.