The risk outlook took an unexpected negative turn on Thursday, despite news of the U.S. reopening. Equities dropped sharply, marking the biggest daily decline in five weeks, while the U.S. Dollar fell to a two-week low, and Gold pulled back after hitting a three-week high. Although there wasn’t a clear catalyst for the sudden risk-off sentiment, concerns over the U.S. shutdown’s cost, uncertainty ahead of upcoming economic data releases, mixed comments from the Federal Reserve, and rising geopolitical tensions may have played a role. On Friday morning, Ukraine’s drone attack on Russia and mixed trade deal updates kept market volatility high.
What’s more puzzling is the drop in equities despite the U.S. Dollar being expected to rise. Instead, the Euro, Pound, and Yen made notable gains against the dollar, with the pound benefiting from eased concerns over the UK budget.
Some analysts pointed to an AI selloff or new announcements from China’s chip industry, but these didn’t provide major new insights. There were still valid concerns about overspending and overvaluation, with investor Michael Burry notably exiting his positions, which sometimes signals market tops. However, such a move alone wouldn’t explain the broad market downturn unless many more investors followed suit.
One unusual aspect was the relative calm in the foreign exchange market, with bond markets selling off—something that doesn’t typically happen during a "flight to safety" scenario. This suggests that the downturn wasn’t driven by fundamental changes, but market anxiety remains high as we head into Friday.
In U.S. economic news, reports indicated that the Trump administration may back down on some tariffs to lower food prices, a strategy to mitigate the costs of the ongoing trade tensions. This follows earlier efforts to lower prices and ease inflationary pressures. Additionally, White House Economic Advisor Kevin Hassett warned that the shutdown could subtract 1.5% from Q4 GDP growth.
In the Federal Reserve, St. Louis Fed President James Bullard, a voting member for the December meeting, reiterated his support for rate cuts to protect the labor market but noted limited room for easing without becoming overly accommodative.
Minneapolis Fed President Neel Kashkari also expressed concern about high inflation and signs of labor market pressure.
Fed officials were split on the outlook. Cleveland Fed President Loretta Mester highlighted persistently high inflation, while San Francisco Fed President Mary Daly said the risks were balanced but leaned slightly towards employment concerns. Daly also stated it was too early to decide on a rate cut for December.
The probability of a December rate cut by the Fed dropped from 66% to 50%, which partly explained the market selloff, but it didn’t fully account for the magnitude of the move.
In Asia, Japan’s Prime Minister Sanae Takaichi backed away from setting a minimum wage target, responding to pushback from regional firms. Instead, she emphasized creating conditions for faster wage growth. This more flexible approach to wage policy suggests that gradual, market-driven wage increases will remain the focus, aligning with the Bank of Japan’s inflation strategy.
China's October data showed stronger consumption but weaker industrial output and investment. Retail sales rose 2.9% year-on-year, boosted by holiday spending, while industrial output grew just 4.9%, below expectations. Investment in fixed assets continued to decline, particularly in the real estate sector. The National Bureau of Statistics remains optimistic about stabilizing the economy but acknowledged challenges in both domestic and external environments.
In the UK, Prime Minister Keir Starmer and Chancellor Rachel Reeves dropped their plan to raise income tax rates, reflecting concerns about voter backlash and internal tensions within the Labour Party. The government is now exploring alternative ways to fill a £30 billion fiscal gap ahead of the upcoming budget.
Oil prices surged after a Ukrainian drone strike hit Russia’s Novorossiysk terminal, escalating supply risks. The strike added to concerns over Russia-related supply disruptions amid ongoing U.S. sanctions, sending crude prices up more than 2%. Meanwhile, the U.S. Energy Information Administration reported an increase in U.S. crude oil inventories, which came in at +6.413 million barrels, higher than the expected +1.96 million.
The U.S. Dollar Index (DXY) is at a two-week low and on track for a second consecutive weekly loss, while Gold is heading for its biggest weekly gain in four weeks after a three-week downtrend. The EURUSD is set to post its second consecutive weekly gain, but the GBPUSD is down, moving toward a weekly loss after gaining last week.
USDJPY remains firm, at its highest level since February, while both AUDUSD and NZDUSD are on track for weekly gains. USDCAD is also looking at a weekly loss, despite a rebound from a recent low.
Crude Oil has risen for the second consecutive day, but is still facing a three-week downtrend due to concerns over Russia-Ukraine tensions and rising U.S. inventories. Bitcoin and Ethereum are both in a three-week downtrend, while equities, despite their sharp drop, are still on track for a weekly gain.
The U.S. Dollar’s weakness overshadowed mixed European news and mildly improving sentiment after a downbeat session, allowing EURUSD to rise ahead of the preliminary Eurozone Q3 GDP data. In contrast, GBPUSD fell as reports that the UK will not cut income taxes pulled the pair lower after a strong previous day. USDJPY also declined for a second day after reaching its highest level since early February, as expectations of Japan’s wage increases, potential stimulus, and possible Bank of Japan actions weighed on the pair following an otherwise strong week.
A weaker U.S. Dollar and growing concerns about a potential shift to a risk-on environment, as market players reassess earlier negative sentiment despite the U.S. reopening, helped AUDUSD and NZDUSD see modest gains, even with mixed market sentiment. Meanwhile, USDCAD remains under pressure, tracking a weekly loss as crude oil prices rise and the softer USD weighs on the pair.
A softer U.S. Dollar, renewed demand for safe-haven assets, stronger China demand, and a technical breakout are all supporting Gold’s strongest weekly gain in four weeks as it approaches a new record high, which could be reached soon. Fed commentary has done little to slow the XAU uptrend, and even any hawkish remarks may only trigger brief pullbacks rather than stopping the bullish momentum.
News about the Ukrainian drone attack on Russian refineries joined a softer USD to allow Crude Oil to pare its weekly loss, the third one in a row, despite a surprisingly heavy inventory build per the U.S. EIA weekly stockpile report.
Elsewhere, cryptocurrencies brace for the third weekly loss, with Bitcoin (BTC) falling to the lowest since early May, down for the fourth consecutive day, while Ethereum (ETH) also posts a weekly low, as traders consolidate October’s gains in the digital assets.
U.S. stock markets experienced their biggest daily drop since October 10, with the S&P 500 down 1.6%, the Nasdaq down 2.3%, and the DJIA also falling by 1.6%. Despite the sharp selloff, the markets still look set for a weekly gain, which further adds to the confusion over the sudden market move.
That said, Amazon and Microsoft voiced support for the proposed Gain AI Act, a U.S. bill that would restrict chipmakers like Nvidia from exporting advanced semiconductors to China and other embargoed markets until domestic demand is met. This marks a rare policy clash between Nvidia and its major customers as competition for AI chips intensifies within the U.S.
As concerns over the economic costs of the U.S. shutdown, geopolitical tensions, and trade deals continue to weigh on sentiment, traders will focus on risk-related news for clearer direction. EU GDP data and various mid-tier reports, along with speeches from central bank officials, are likely to keep intraday traders engaged.
Following the market’s surprise reaction to the U.S. government reopening, a period of consolidation on Friday looks more likely, with positive news and the release of delayed data. The U.S. Dollar may recover some recent losses if risk aversion intensifies, though this seems less likely, allowing Gold to extend its gains. Cryptocurrencies, however, may struggle with ETF outflows and technical breakdowns, while equities could see a rebound.
May the trading luck be with you!
