Risk on mood dominates, US dollar sinks

Traders are in risk-on mood even though yesterday there was a rate hike from the ECB and hawkish commentary from Jerome Powell. Today, stock markets in Europe and the US are showing solid gains, the DAX is comfortably above 13,000 and the S&P 500 hit a two-week high. The US 10-year yield has dipped to 3.27%, despite the suggestions of more rate hikes from the Fed yesterday. It appears the pullback in yields has paved the way for the equity bullish to enter the fold. It is a similar situation in Europe where all the major indices are up at least 1%. Judging by the moves in stock markets, you would not think the European Central Bank hiked rates to 1.25% yesterday. It is possible that dealers are getting used to the idea of interest rates being increased, and elevated bond yields. 

Optimism is running through the markets as a whole, and that is reflected by the rise seen in commodities. Earlier this week, China revealed a major slowdown in imports and exports, and that indicated that worldwide demand was falling. Not only has copper clawed back all of the losses it incurred, it hit its highest mark in almost two weeks. Silver hit a three-week high. WTI and Brent crude have made strong recoveries from the eight-month lows that were registered yesterday. Despite the strong risk-on mood in the markets, gold is rallying too thanks to the fall in the US dollar.

Lately, the greenback has acted as a flight to quality play, and now that sentiment has turned positive again, the dollar is down 0.5%. Even though the dollar is enduring a large loss, it has pulled back roughly half of the ground it lost earlier today. At the greenback’s lowest point, EUR/USD traded north of 1.0100 – its highest mark in three weeks. It says a lot about the euro when its major driver is US dollar weakness. The single currency is down versus the Swiss franc, the Australian dollar, and the New Zealand dollar. The Canadian dollar is under pressure because of the country’s disappointing jobs data, as 39,700 jobs were lost in August, and the unemployment rate jumped to 5.4% from 4.9%.