Overnight markets see dollar steady as gold hits record highs
The US dollar held steady near five-week lows during overnight trading, providing a mixed backdrop for global markets. However, the standout performer was gold, which surged to a record $3,508.00 an ounce on growing expectations of Federal Reserve (Fed) rate cuts.
Markets are now pricing in an 89% probability of a 25 basis point rate cut in September. This aggressive pricing reflects investor confidence that the Fed will begin its easing cycle this month, supporting precious metals demand.
Friday’s non-farm payrolls (NFPs) report will be crucial in determining whether markets consider a larger rate cut. Any signs of labour market weakness could prompt speculation about a more aggressive 50 basis point reduction.
The precious metals rally has been further boosted by concerns about Fed independence. President Trump’s efforts to oust Fed Governor Lisa Cook and criticism of chairman Powell have heightened worries about political pressure on the central bank.
UK bond yields reach 27-year peaks amid fiscal concerns
UK government borrowing costs have surged dramatically, with 30-year gilt yields hitting their highest level since 1998 at close to 5.66%. This represents a significant escalation from the Liz Truss mini-budget crisis of 2022, when yields peaked just shy of 4.70%.
The selloff in UK bonds reflects growing investor concerns about the government’s fiscal position. Chancellor Rachel Reeves faces the challenge of filling a fiscal black hole estimated at up to £51 billion ahead of the autumn budget.
Rising borrowing costs will make the chancellor’s task even more difficult, as higher yields increase the cost of servicing government debt. This creates a vicious cycle where fiscal concerns drive up borrowing costs, which in turn worsen the fiscal position.
The bond market turmoil isn’t isolated to the UK, with French and German 30-year yields also hitting their highest levels since 2011. However, UK bonds are underperforming, with 30-year French yields below 4.5% and US Treasury yields under 5%.
Pound extends losses below key support levels
Sterling has extended its decline, falling more than 1% to trade below $1.34 in its biggest daily drop for two months. The British pound’s weakness represents a significant break of key technical support levels that traders had been watching closely.
The currency’s decline against the euro has been particularly notable, with the single currency rising its most in over a month against sterling. This divergence highlights specific concerns about UK assets rather than broad US dollar strength.
Forex trading opportunities are emerging as the pound tests critical support levels. The simultaneous decline in both gilts and sterling is generally viewed as a negative signal for UK confidence.
Technical analysis suggests further downside risks for the pound if current support levels fail to hold. Traders should monitor key levels closely for potential breakdown scenarios.
FTSE 100 shows resilience despite broader selloff
The FTSE 100 has demonstrated relative resilience, falling only 0.6% despite the broader selloff in UK assets. This outperformance reflects the international nature of many blue-chip companies, which benefit from the weaker pound.
Multinational exporters including Unilever and Shell are among the best performers, as their overseas earnings become more valuable when translated back to sterling. Healthcare giants AstraZeneca and GlaxoSmithKline (GSK) are also outperforming amid the flight to defensive stocks.
The FTSE 250, which is more domestically focused, has suffered more severely, falling over 1% to hit two-month lows. Companies on the midcap index typically need to import materials and are negatively impacted by currency weakness.
Bond proxy stocks including utilities National Grid and SSE have declined alongside consumer staples like Reckitt Benckiser. Higher bond yields make the returns offered by these traditionally defensive sectors less attractive to investors.
Individual share movers and sector performance
Several individual companies have made notable moves following corporate updates. Oxford Nanopore initially surged 8% after reporting a narrower-than-expected loss but has since reversed gains to trade 4% lower.
Payments company Wise has gained 4% after Goldman Sachs reiterated its buy recommendation with an increased price target. The fintech sector continues to attract analyst attention despite broader market volatility.
Ithaca Energy plunged 17% in its biggest drop on record after investors sold shares at a discount. The oil and gas explorer’s decline highlights ongoing volatility in the energy sector despite higher oil trading prices.
Tobacco giant British American Tobacco (BAT) is under pressure following a rare downgrade to underperform from RBC Capital Markets. Analysts cited concerns about profit expectations for the company’s new categories business being “seriously overblown”.
