Markets in Red on Friday

The main US indices closed substantially down, giving European equities a bad handover Friday. The tech-heavy Nasdaq Composite led the way downhill, losing 1.4%, followed by the broader S&P 500, which sank 1.1%, and the blue-chip Dow Jones Industrial Average, which dropped 0.6% to settle at its lowest level in two months.

Earlier today, statistics from China revealed that retail sales increased by 5.4% on an annual basis in August, above the market forecast of 3.5%. In addition, versus experts’ expectations of 3.8% growth, industrial production increased by 4.2% over the same time period. Despite these encouraging figures, the market sentiment is still negative.

Following this week’s scorching inflation data, investors are preparing for another significant interest rate rise by the Federal Reserve next week, likely to significantly slow down economic activity in the largest economy and key generator of growth in the world.

Soaring US yields

As a result, the 2-year yield continues its march higher, rising toward the psychological 4% level, while the 10-year US yield approached its cycle highs at 3.5%. Markets are predicting a 100 basis point rate rise with a 26% chance, according to the CME Group’s FedWatch Tool.

Meanwhile, the World Bank’s top economist, Indermit Gill, expressed concern about “generalized stagflation,” a period of weak growth and rising inflation, as both the World Bank and the International Monetary Fund issued warnings about an oncoming global economic downturn on Thursday.

Soaring yields have undermined the bullion, with gold decisively breaking below the psychological level of 1,700 USD, triggering stop losses and falling to the lowest level since April 2020 at 1,660 USD.

On the other hand, the USD failed to rise against the EUR as the pair continues trading near parity.

“The ECB bankers are not tired of underlining in their speeches how important decisive action is to control inflation successfully. That should limit the downside in EUR/USD.” Economists at Commerzbank think.

Later today, the Michigan consumer sentiment index for September is due, projected to improve slightly from 58.2 to 60.0.