Risk assets under pressure from higher interest rates

Hussein Sayed, Chief Market Strategist at FXTM, comments on the Chinese equities taking a big hit.

Chinese equities took a big hit after traders returned from a week-long holiday. Efforts by the People’s Bank of China to free more than $100 billion in liquidity through cutting the reserve requirement ratio were not enough to offset the fear of slowing growth, the escalated trade dispute, and the rise in U.S. interest rates.

The CSI 300 fell 3.6 percent late morning led by the technology sector as investors had the chance to respond to reports claiming that Chinese intelligence agents planted microchips to hack big tech firms and U.S. government agencies.

Risk assets may continue to be under pressure with future markets indicating a lower open to European stocks today. Increasing geopolitical risks, Brexit negotiations, the U.S.-China trade dispute, and U.S. mid-term elections are all sources of uncertainty.

However, in my opinion, the biggest threat to the U.S. bull market remains the rise in U.S. interest rates. Last week’s selloff in Treasuries took the 10-year yields to 3.25 percent, a level last seen in April 2011.

The longer-term 30-year yields climbed to 3.42 percent, the highest since July 2014. The U.S. has $230 billion worth of debt auction this week, and if this caused a further rally in yields, investors might start considering pulling back from riskier assets as risk-free ones are beginning to look very attractive.

Friday’s non-farm payrolls report proved to be mixed, with job creation in September coming well below expectations at 134,000 vs the anticipated 185,000.

However, the August figure was revised higher by 69,000, and the unemployment rate fell to a 50-year-low of 3.7 percent. The wage growth component of the report which has become a key indicator for inflation grew 0.3 percent in September and 2.8 percent Y-o-Y. Overall the report suggests that the labor market continues to tighten and the Fed needs to continue raising rates to manage the booming economy.

In currency markets, the Dollar was slightly higher against its peers. Euro and Sterling traders need to keep focusing on politics and interest rate differentials. Italy’s Deputy Prime Minister Luigi Di Maio intends to stick to plans to increase the budget deficit in 2019. If Rome and Brussels continue to clash over Italy’s budgetary plans, expect to see a renewed selloff in Italian assets and the Euro.

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

The FXTM brand provides international brokerage services and gives access to the global currency markets, offering trading in forex, precious metals, Share CFDs, ETF CFDs, and CFDs on Commodity Futures. Trading is available via the MT4 and MT5 platforms with spreads starting from just 1.3 on Standard trading accounts and from 0.1 on ECN trading accounts. Bespoke trading support and services are provided based on each client’s needs and ambitions - from novices, to experienced traders and institutional investors. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), with licence number 185/12 and licensed by the SA FSB with FSP number 46614. Forextime UK Limited is licensed with the UK FCA, number 777911. FT Global Limited is regulated by the International Financial Services Commission (IFSC) with license numbers IFSC/60/345/TS and IFSC/60/345/APM.

Any opinions expressed here are the author’s own.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© Opinion 2018