The US dollar started strong during European trading but later weakened after a disappointing ADP employment report. The report showed a loss of 33,000 jobs instead of the expected increase of 95,000. This raised concerns ahead of the upcoming non-farm payrolls report. Additionally, a new US trade deal with Vietnam, which includes a 20% tariff, added pressure on the dollar, suggesting potential challenges in the market. Gold prices went up by $19, and US 10-year Treasury yields increased by 3.6 basis points to 4.28%. WTI crude oil rose by $1.95, ending at $67.40. The S&P 500 index climbed 0.5%, with the Canadian dollar performing well while the British pound struggled. Delays in US budget votes also shook the market, showing that some House members are firmly against spending cuts. Despite this, risk trades improved, as stocks rose after a Dallas Fed survey revealed plans to reduce US oil rigs. In the UK, gilt yields rose after the government reversed austerity plans in the welfare system. Concerns regarding fiscal issues tied to Exchequer Reeves led to a 130-pip drop in the pound. Although the pound partially rebounded, this trend is important to watch. We are facing a situation where unexpected economic data is changing market expectations quickly. The disappointing ADP numbers sent a strong warning that the labor market might be weakening faster than anticipated. A loss of 33,000 jobs against the expected gain indicates deeper issues that could undermine confidence in job growth, contributing to the dollar’s decline. With the non-farm payrolls report on the horizon, markets are usually cautious. However, this time the reaction was stronger. The disappointing data implied more significant fragility in the economy. This situation prompted traders in derivatives tied to short-term rates to lower their yield expectations, while making it harder to justify hedging in equity markets. There’s also the trade policy shift with Vietnam to consider. Tariffs rarely act alone. A 20% tariff introduces broader uncertainty, affecting not only specific goods but also prompting discussions about supply chain changes and increased costs for businesses that have only recently adapted after past disruptions. These factors are vital for traders in rates and volatility markets. In the energy market, prices surged. The Dallas Fed survey highlighted tighter expectations regarding US rig counts, reinforcing the supply squeeze narrative. WTI oil prices rose sharply, and if this trend continues, the impact on inflation becomes more pronounced. Rising Treasury yields might reflect this situation, indicating potential long-term inflation rather than an updated view of growth. In index futures, the S&P’s gains aligned with improved sentiment in equity-linked volatility products. It’s important to note that these gains happened despite ongoing political challenges in Washington. Continuous budget delays and opposition in the House maintain fiscal uncertainty, risking further negative impacts on confidence in US assets and complicating future responses from businesses and agencies. In the UK, notable movements occurred in the gilt market after some policy plans were reversed. Eliminating austerity assumptions led the bond market to question how spending will be funded, triggering a sell-off in the pound. The currency’s partial recovery appeared more mechanical than a true signal of confidence returning. Expect ongoing discussions surrounding the Exchequer and fiscal credibility to influence swap spread pricing and volatility in the near future. From our perspective, protective strategies are becoming important again, especially in areas sensitive to rate changes and short-term adjustments. The recent moves in commodities and currency indicate that these are not just temporary reactions but signs of growing complexities in the market. The near term may see strong responses to minor surprises, and this reality will shape how we manage our investments.

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