Yields hit a record high, the dollar gains strength and equities face pressure

European equity markets are likely to follow the footsteps of Wall Street after a negative close on Thursday and the losses in Asia over the early Friday session.

As we enter the final trading day of the week, the mood of the market remains somewhat gloomy. This keeps the buoyant tone surrounding the US dollar intact across the board. Earlier in the session, there was some concern that European markets were going to follow the overnight weakness in Wall Street stocks, particularly after UK political uncertainty impacted EU bonds earlier. Investors remained cautious as US Treasury yields rose, recession fears loomed in the background and S&P 500 futures fell nearly 0.40%.

New record highs for Treasury yields

During early European trading on Friday, the US dollar strengthened versus the Japanese yen, pushing USD/JPY to a 32-year high above 150, while sterling declined as retail sales dropped in September and the UK's political chaos continued. In addition, an unexpected drop in US weekly unemployment claims data and hawkish comments from the Fed negated the impact of strong corporate earnings on the market.

In response to these developments, US Treasury yields rose to 14-year highs, souring investor sentiment as investors were concerned a further increase in interest rates from the Federal Reserve could plunge the world's dominant economy into recession. At its next meeting scheduled for early November, it is widely expected that the US Federal Reserve will continue to raise interest rates aggressively as policymakers continue to advocate tighter monetary policy as a means of containing soaring inflation by tightening monetary policy.

UK situation pushes EU yields higher

A sharp rise in yields for European bonds on Friday has led to expectations that they will continue to climb, including those associated with the benchmark 10-year UK gilt. It comes after six chaotic weeks of policy shocks, which led Prime Minister, Liz Truss, to step down following the political turmoil in the UK.

Furthermore, weak economic data also prompted more caution in the markets. In September, sales of retail goods declined 1.4% on a month-to-month basis in the UK, as consumers were forced to cut their discretionary spending to cope with double-digit inflation and rising interest rates, leading to a 6.9% decline in sales on an annual basis.

Weekly gain for crude oil

There was a slight rise in oil prices on Friday, setting the stage for small gains later in the week, as greater consumption was seen in the US, the largest economy in the world, and optimism over the potential rise in energy consumption in China, the world's largest crude importer.

There was a surprising fall in US crude oil inventories last week, suggesting that demand in the world's largest economy remained steady despite rising prices. As well, Bloomberg reported that Beijing is considering reducing the quarantine period for visitors to seven days instead of the current 10-day period, thus potentially relaxing the country's restrictive COVID regulations. During the past few months, crude oil has seen choppy trading, with the market caught between worries about a global economic slowdown and supply curbs from some of the world's biggest producers.