Tuesday saw the US yield curve become inverted once more, sending equities lower. Many market commentators have been questioning whether this traditional recession warning from the bond markets continues to hold relevance in the current economic climate.

Despite the ongoing trade war with China, US economic data remains strong and while the Fed has made it clear they will do what is necessary to maintain the current economic expansion, they have also stated there is no ‘rule-book’ for trade wars. So would Wednesday’s focus still be on the bond market or would attention turn elsewhere?

Well to begin the day, it was all about Brexit. Several headlines were suggesting the UK government will ask the Queen to suspend parliament until October 14th, just days after having returned from their summer recess. This would effectively prevent any group of MPs from passing any laws to prevent the UK from exiting the EU without a deal on October 31st.

Deal or no deal, Boris Johnson is determined to fulfill the wish of the people and take the UK out of the EU. While the FTSE 100 was the only one of the major European bourses to show some early gains, GBP reacted poorly dropping from 1.2290 to 1.2157 against the USD and from 0.9019 to 0.9123 against the EUR. That aside FX was quiet during European hours.

For the US session, FX ended up being a function of equities. Stock markets rallied throughout the day mainly on the back of higher energy prices. The DJ closed up 1% while the S&P and Nasdaq also made gains.

GBP, having been sold off aggressively during the European session, did manage recovery with GBPUSD bouncing to 1.2240 before ending the day at 1.2210. EURUSD edged slowly lower finishing at 1.1080, while USDJPY benefitted from the rally in equities to close at 106.10.

Overall, a good day for the USD despite yields being at record lows. But the biggest mover and shaker on the day was…..Crypto!

Yes, having been almost forgotten in the volatility in other markets, crypto did what crypto does best. Blink and you would miss it but BTC dropped from $10,200 to $9,560 and ETH from $187 to $166! That’s a 10% move in about 30 minutes.

EURUSD hasn’t managed 10% for the year! Now with a move like that, you would expect an obvious catalyst. But aside from a large number of long BTC liquidations on one particular exchange, I don’t have much else to go on.

Another classic case of the market getting comfortable with current levels and then everyone heading for the exits at the same time.

I’ve made a point of noting how resilient BTC has been this month under the $10,000 level. Now it’s being put to the test.

With a late day move like ETH had today, it would be rude of me to look at much else from a technical perspective. Since the late July high around $363, ETH has now dropped over 50%. In a month.

I identified the real beginning of the move higher as being around the $141 level in early April and while there are various minor levels of support between today’s low around $166 and that $141 level, the chart looks pretty ugly. First the crash through $261. Then the failure to bounce back above $237. A break under $197.86, which I then described as being a real pivot level.

One brief move over that level before we get today’s sell-off, breaking the low from two weeks ago around $173.38. You never really know with crypto, but for now, the market is looking very soft.

David Hannigan
Author

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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