Weekly Summary: Truss exit, U.S. debt soaring yields

It has been a hectic week. A deepening political crisis in the United Kingdom, record yields on the debt market and an uninspiring Q3 corporate reporting in the United States. All these turbulent events may create an illusion of an environment that is highly saturated with information, and it could be assumed that this could result in strong market movements.

This is usually the case but if we really try to spot a real peak of information it appears that there are none in sight. We can only guess at a dim outline of this information tsunami that is likely to arrive during the first half of November, or closer to the end of next month.

This week the buzzing story was the resignation of U.K. Prime Minister Liz Truss who only served her country in this role for 45 days. The PM’s exit came right after the resignation of finance minister Kwasi Kwarteng last week. The immense speed of political shuffling in the U.K. this year highlights an extreme external volatility that has to be tamed not by an ordinary politician but a politician that is able to deliver unpopular anti-crisis measures.

The same sentiment could be said for the United States where the U.S. debt yield soared to record pre crisis highs. The yield of the benchmark 10-year Treasuries hit 4.29%, a level last seen in May 2008. It is very hard to imagine where the pain threshold of the U.S. debt market is situated. Looking at the case of the U.K. with a similar financial system, it could be assumed that 4.5% of 10-year T-bonds are at their critical limits. Beyond this limit a turmoil of the debt market is likely to start. If this happens, the S&P 500 broad market index is likely break through the support at 3490 points and may accelerate further down. No corporate reporting will be taken into consideration as investors simply don’t care about stocks, at least before the yield curve is controlled by the Federal Reserve (Fed) and order in the debt market is restored.

What could be the engine of this chaos? There are plenty of reasons for geopolitical tensions to spark up or for an unexpected drop of the GDP in the U.S., or even for unexpected hawkish moves from the European Central Bank (ECB). The Fed’s decisions on the start of November could rock the market landscape. Elections in the United States on November 8 could also greatly contribute to the information tsunami. So, investors should already start making corrections to their risk-management strategies.

Target prices for the S&P 500 index are deep down at 2000-2200 points.

Brent oil prices survived above $90 per barrel but recession fears are aggressively rising. The nearest support is located at $88-90 per barrel and we may see this support level being tested soon. A breakthrough of this level may send crude prices diving down. The first stop would be at $75-85 per barrel, while the downside targets are set at $50-65 per barrel.

Gold prices are rapidly going down as they touched $1620 per troy ounce. The next downside target is located at the $1500-1550 per ounce area. The decline of gold prices may accelerate at any moment by the end of October. Nevertheless, it is very risky right now to add new short positions amid strong geopolitical uncertainties that may push gold prices up.

The money market is experiencing elevated volatility and it is very risky to open short-term positions right now. Considering longer movement there are many mixed signals for the rest of this month. On one hand we may expect the rise of the GBPUSD above 1.17000 by the end of October, while EURUSD is likely to remain under pressure. So opening long positions for GBPUSD from the current levels are seen to be justified. Nonetheless, traders should exercise such trades at low volumes and tread with extreme caution as it is not expected to be a short-term trade.