Markets Rally As Sentiment Improves

Asian shares rose on Tuesday, tracking the positive overnight cues from Wall Street as global sentiment improved. Robust corporate earnings coupled with normality returning to UK markets following the mini-budget saga has rekindled investor risk appetite. In Europe, stock futures point to a higher open along with US markets. Given how the economic calendar is relatively light this week, sentiment may be driven by earnings with Goldman Sachs and Netflix under the spotlight later in the day. A positive set of numbers for the third quarter could boost risk appetite further, sending Wall Street higher.

Looking at currencies, the dollar lost ground against its major peers thanks to the risk-on environment while gold inched higher. Sterling has appreciated against all G10 currencies this week after the UK government scrapped most of the mini-budget in a dramatic U-turn. In other news, China delayed the release of GDP and other economic data that was scheduled for release Tuesday morning as the Communist Party’s leadership gathered.

Pound rises on dramatic budget U-turn

In the latest developments revolving around the UK government's mini-budget, Liz Truss apologised for going “too far too fast” with economic reforms. This comes after the new Chancellor delivered an emergency statement yesterday that practically reversed almost all of the original  tax cuts.

Although markets initially offered a muted reaction to the statement, the pound later appreciated as some calm and stability returned to the UK gilt market. Jeremy Hunt stated that the tax changes would raise an extra £32 billion. But there is still a gap in the UK’s finances that will need to be filled either by tax rises or public spending cuts. Then the question may be how will the former impact on households who are already dealing with an income squeeze and rising borrowing rates. Whether the government's U-turn will be enough to conclude this saga and fully calm markets from the recent chaos, time will tell.

It may be wise to keep a close eye on the UK’s latest inflation figures published on Wednesday. Inflation is expected to remain unchanged at 9.9% YoY. A hot CPI report could fuel expectations around the BoE moving ahead with a supersized rate hike in November.

In regard to the pound, it has been on a rollercoaster ride over the past few weeks but prices seem to be pushing higher. A break back above 1.1400 could trigger a push towards 1.1500. Should prices struggle to move higher, bears are likely to target 1.0925 and 1.0850, respectively.

Commodity spotlight – Gold

Gold seems to be drawing some strength from a softer dollar this week with prices trading around $1656 as of writing. Nevertheless, the path of least resistance points south with Fed rate hike expectations and rising Treasury yields capping upside gains. Should prices slip back below $1640, this could open a path toward $1615 and $1600. A break back above $1675 would encourage bulls to target the psychological $1700 level.