Early Morning Call: dollar strengthens on prospects of rate hike, weaker economy

Equity market overview

Equity markets continued to fall overnight in the APAC region, led by tech stocks.

The Taiwan Stock Exchange dropped more than 4%. Its star stock, TSMC, plunged 8% as investors assessed the impact of new US export rules on the chipmaker.

Australia’s S&P/ASX 200 posted smaller losses.

Westpac consumer confidence dipped in October to 83.7, from 84.4 the previous month. According to Westpac chief economist, Bill Evans, the outcome would have been worse if the Reserve Bank of Australia (RBA) had not chosen to deliver a rate rise of only 25 basis points last week.

NAB business confidence fell by five points to five in September.

In Europe, indices opened in negative territory, extending losses in the previous session.

In the UK, BRC-KPMG retail sales monitor shows that retail sales in the United Kingdom increased by 1.8% on a like-for-like basis in September, hitting a seven-month high due to higher prices. Total retail sales rose by 2.2%. Sales volumes remained low as consumers continued to grapple with the cost-of-living crisis. As consumer confidence declines, people are avoiding large ticket items and are preparing for higher energy costs this winter.

The UK unemployment rate fell to 3.5% in August, from 3.6% in July. Claimant count change rose to 25.500 in September from 6,300 the previous month. According to the Institute for fiscal studies, UK chancellor Kwasi Kwarteng needs to make £62 billion of spending cuts or tax rises to stop public debt growing ever larger as a share of the economy. Interest rates for new long-term government borrowing rose to a 20-year high last month, after Kwarteng’s mini-budget spooked the markets.

Dollar strength

The dollar has strengthened on aggressive US tightening prospects. After falling to trendline support in the middle of last week, a move that coincided with the RBA decision to hike by only 25 basis points, the dollar index has been rising ever since, boosted first by a plethora of hawkish comments from Federal Reserve (Fed) policymakers, and the non-farm payrolls (NFP) report on Friday.

The course of the dollar is unlikely to change until the release of US consumer price index (CPI) on Thursday. Economists expect the headline figure to rise 8.1% in September year-on-year (YoY), down from 8.1% in August, while core CPI is expected to accelerate its pace to 6.5%.

Meanwhile the Japanese yen is nearing intervention level. USD/JPY (大口） is a whisker away from the ¥145.89 hit on 22 September.

Commodities

The strength of the dollar is, meanwhile, weighing on the commodity market.

After five straight sessions of gains, Oil - Brent Crude prices dipped 2% yesterday as recession fears and a potential fall in oil demand once again outweighed the supply concerns that followed OPEC+ decision to cut production by two million barrels per day from next month.

Precious metals continue to fall. Gold, silver and platinum trade at a one-week low.