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Monthly Review: October 2021   US Fed Tapering and Interest Rates. Japan Elections.

   

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout November and beyond.

During the month of October, the US Congress approved the extension of the US Debt Ceiling and we had more clues from the US Federal Reserve that Inflation isn’t quite as “Transitory” as they wanted to believe.

On the very last day of the month, the incumbent government was reelected in Japan, removing the uncertainty and boosting the Nikkei.

Supply issues and labour shortages are causing inflation to rise far more than Central Banks might find comfortable so they may need to react by increasing interest rates sooner than expected.  The question we asked last month was: Which Central Bank will be the first to blink?  Russia.

These supply and inflation issues will almost certainly have an impact on upcoming retail sales figures and consumer confidence, especially with Christmas arriving soon. 

Crude Oil

 At the beginning of the COVID pandemic, the price of WTI and Brent Crude crashed due to a severe oversupply based on a severe lack of demand.  Once we figured out where to store all this excess oil, the price of Crude stayed low for many months as the demand was very slow to return to normal.

For months we almost ignored the supply and focussed on the demand.  However, the tables turned as we exited summer as demand was returning but supplies were short.Screenshot 2021-11-01 at 22.51.10

In October we saw Brent ranging from $78.40 to $86.50 based on the fact that a severe shortage of natural gas would have economies using oil-based systems for heating instead of natural gas.  This has artificially inflated the price of Crude, globally, and only the severity of the winter in the northern hemisphere will determine the direction of price.

JPY

From the last week of September and well into October, it was all about JPY weakness.Screenshot 2021-11-01 at 21.12.14

The Bank of Japan is in a position completely unlike any of its international counterparts, in that it is dealing with deflation (not inflation).  It also has the problem of its sovereign bond yields going in the opposite direction of US Bond yields.  These two factors, combined, has led to a devaluing of JPY which, is just how the newly re-elected government wants it.

Lower currency values mean more exports which is a critical factor for the Japanese economy.

USD

We started the month of October in anticipation of the US Non-Farm Payroll data and we had never seen the major players so divided on the prediction.  Some funds were predicting “zero” new jobs while Morgan Stanley were thinking 750K.  Even with this diversity, the market knew that anything above zero would be enough to get the US Federal Reserve to be serious about tapering and rising Interest Rates soon.

As it was, the data was poor…but it was enough.

Going into the new month, we will be watching Jerome Powell and the FOMC, on the 3rd of November, to hear the results of their decisions and get some clues as to when they might raise Interest rates next year.

Tapering and raising Interest Rates will increase the value of USD.

GBP

During October, we saw the UK Pound suffering against the COMDOLLS like AUD, NZD and CAD but mixed against the rest.

The Bank of England governor — Andrew Bailey — was bullish on the UK economy even in the face of labour shortages and supply problems for, well, almost everything.  He felt that the current spate of inflation was temporary but he has since changed his tune.

In the first week of November, we may see an Interest Rate rise or at least some idea as to when this might be coming which will likely bolster the value of GDP.

US Equities 

The chart tells the story as we see the huge falls in September share values, based on supply chain problems, uncertainty over the latest flavour of COVID, and confusion over Inflation.Screenshot 2021-11-01 at 18.26.49

When October came into being, all that investors noted were good to excellent and “better-than-expected” earnings reports, which spurred on a wave of renewed enthusiasm for the stock markets.

Going into November, we can see no end in sight to positive earnings calls, which should see continued record-setting levels.

European Equities

European Equities like the CAC40, ES35, and the newly expanded DAX40, showed us the same level of enthusiasm as the US Equities.  In the same way, we expect more positive news from Corporate Earnings Reports.

Asian Equities

The China A50 had been falling since May due to COVID suppressing normal productivity in manufacturing and logistics.  As well, the Chinese government policy of cracking down on various sectors has caused uncertainty and sent investors elsewhere.

October saw an attempt at a recovery but levels are consolidating into the end of the month.

Going forward for the China A50 and Hang Seng will depend, not only on COVID and a return to a normal economy but on the next victims of the Chinese government’s corporate bullying.Screenshot 2021-11-01 at 19.18.51

The Nikkei fared worse in September as supply chain problems and a semi-conductor shortage smothered normal business.  A weaker Yen helped exports which helped the Nikkei and, now with a fresh start for the Pro-Weak Yen government, we see further gains for the JP225 Index.

Turkish Lira

 Once in a while, we need to take a look at what we call an Exotic Currency pair and USDTRY got our attention in October with record lows for the Lira.Screenshot 2021-11-01 at 19.49.50

Inexplicably, the Central Bank lowered Interest Rates in an environment of high inflation, and the 10 major foreign ambassadors were threatened with expulsion due to comments about a jailed businessman.

Fortunately, cooler heads prevailed but the Turkish Lira is still in very weak territory.

Gold 

Again, the chart tells the story as price action had been falling in a bearish channel all through September, and recovery was apparent in October, with price repeatedly pushing resistance past $1,800.Screenshot 2021-11-01 at 19.24.57

It is not usual for the price of Gold to parallel the charts with similar price action to the Global Stock Indices, but here we have it.

We can see price action moving repeatedly into the $1,800 area, but without any major geopolitical issues, or dramatic movement by USD, we only see consolidation.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of November.

Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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