Euro volatility persists
The euro continues to see high levels of volatility more than 24 hours after the European Central Bank hiked interest rates by 50 basis points. There were two surprises in the ECB meeting, as it was a larger than expected rate hike, and the bank revealed the Transmission Protection Instrument, which is essentially a new form of a stimulus package, whereby government bonds are purchased to supress yields. By announcing this new initiative, the ECB are basically saying there are not able to commence a typical hiking cycle, like what the BoE is doing, as they want to ensure that sovereign bond yields do not accelerate in case it sparks a new debt crisis. Italy is highly indebted, even by eurozone standards, the last thing it needs is surge in borrowing costs. Traders suspect the ECB will have to act in a restrained manner and therefore the euro might not be as attractive as first thought when the 0.5% lift was announced. As a result, the euro is lower versus major currencies, and European stock markets posted modest gains. EUR/USD is in the red, but it is off the lows of the session, because of concerns about the health of the US economy. The flash reading of the US’s services sector swung from 52.7 in June to 47.0 in July. A reading below 50.0 denotes a contraction. This acted as a warning sign the country might be headed for a recession as services account for roughly 70% of GDP. Traditional US stocks are in the red because of the services data and the Dow Jones is down 0.15%, Snap’s slump of 38% is weighing on the NASDAQ, the index is 1.5% lower. The social media company posted EPS and revenue that missed forecasts, and it cautioned it might take on new staff at a slower rate.
It has been a very bullish two sessions for gold thanks to the weakness in the US dollar. At one point yesterday, it traded south of $1681, and it is now above $1730. The US 10-year yield has dropped below 2.8%, which speaks to fears about a possible recession, and given gold’s popularity as a flight-to-quality trade, the metal might be at the beginning of an uptrend.