This week is a shortened week in the US in celebration of Labour Day. Typically, global markets do not start to shake off the summer reduced liquidity until post-labour day. Global markets will be more subdued, although, with Russia’s permanent closing of gas supplies to Europe, we could be in for an interesting start to the week.
After the holiday on Monday, markets will get back to the full-time business of assessing where interest rates are going in some key markets, with major central bank meetings happening weekly for the next three weeks.
Review of last week’s key action
FTSE -146 -1.97% DOW -964 -2.99% S&P -133 -3.46% NASDQ -510 -4.21% DAX -171 -1.28% NIKKEI -990 -3.46% Hang Seng -718 -3.56%
Global markets have really been suffering the hangover from the Jackson Hole Summit which concluded Saturday 27th August. Following the hawkish speech from Fed Chair, Jay Powell, global stock markets have had to adjust to the reality that interest rates will be going higher to counter the pernicious effects of inflation, even if that results in significantly slower growth in the world’s largest economy.
The markets hardened their interest rate expectations with the market implying a 60% probability of a 0.75% rate hike – which would be the third such hike in rates in the past three meetings. By year-end the year, expectations have hardened with a 50/50 split for 3.50% to 3.75% whereas the market had previously been expecting 3.25%.
The risk-off mood has been quite powerful with equities slumping as you would expect. The S&P and NASDAQ registered the third weekly decline in a row, having posted very impressive gains over the previous four weeks. Despite weaker jobs data, the market believes that the Fed will not be distracted form deploying another significant rate rise in their 21st September policy meeting.
It's not just equities that have reacted in the sharp risk-off move. Bonds are a real lightening-rod for concerns over inflation, whose returns are eroded significantly by the inflation rates all major developed economies are experiencing.
In both Germany and the UK, bond yields have risen alarmingly. The energy crisis in Europe is affecting all members as well as the UK. Despite the UK being assured of gas and oil supplies over the winter, there still could be an impact on electricity supply where Europe provides key supplies when demand is high.
Russia has shut off further gas supplies to Europe through the Nord Stream 1 pipeline citing technical reasons, but the EU knows this is a political move following the West’s decision to cap the price at which its members pay for Russian crude oil. German bond yields have recoiled in fear of further inflationary pressures – the yield on the 10-year bund climbed over 0.75% in August which is the biggest monthly rise since 1990.
In the UK, the picture is even worse with the policy vacuum created by the Tory leadership contest - the 10-year yield climbed to 2.9%, up from 1.91% just a month ago.
Now Liz Truss has been confirmed as the new leader, markets, businesses, and the people await details of the help her government will provide consumers and businesses to weather the huge rises in energy expected over the coming months.
EURUSD unchanged GBPUSD -1.92 -1.67% USDJPY +2.63 +1.91.
Euro has breached 0.99 on Monday morning, the first time in 20 years as the currency reacts to the escalating energy crisis following the permanent closure of the Nord Stream 1 pipeline that used to supply up to 40% of Germany’s gas needs. Speculation continues to mount about the size of the rate rise being contemplated by the European Central Bank (ECB) which will have a direct effect on the Euro.
The major moves last week were in the US Dollar and in particular the weakness in Sterling and the Japanese yen versus the US Dollar. Both currencies fell between 2 and 2.5% versus the US Dollar. The UK has been suffering for lack of clarity on energy policy during this election for a new Tory leader and Prime Minister.
In Japan officials are getting more concerned at the inflationary implications of a weaker yen whilst at the same time US dollar-based commodities have been surging. Intervention could be on the cards.
Gold -27 -1.55% UK OIL -7.59 -7.53% US OIL -5.89 -6.33% Bitcoin -725 -3.51%
Gold slumped again last week as the US Dollar continued its rise. Gold has now shed almost $90 since mid-August, as the US Dollar resumed its rise against all the majors. Oil continues to be affected by the twin forces of a strong US Dollar and expectations of a fall in demand as the global economic growth is impacted by significantly higher energy prices generally. Oil is now several US Dollars below the price it was it before the start of the Russian invasion of Ukraine.
Data / events for the week ahead
Undoubtedly the key event of the week is the European Central
Bank (ECB) policy announcement this Thursday. There are two other
central bank policy meetings, with both Canada and Australia both
deliberating.
Monday
US - All markets closed in observance of Labour Day.
OPEC - Meeting in Vienna for Opec+ as the cartel considers whether to cut production in the wake of the fall in crude oil over the past 3 months. Ironic considering Saudi Arabia agreed to slightly increase production only 6 weeks ago following pressure from the West.
Tuesday
Australia - Reserve Bank of Australia (RBA) policy meeting. Expect another 0.5% hike in interest rates as another Central Bank plays catch-up.
US - IS Services PMI data. Another fall predicted following last month’s surprise jump. USD, equities sensitive.
Wednesday
UK - Monetary report Hearings before treasury Select Committee in the House of Commons. Painful for the Governor of the bank of England and other members of the MPC.
Canada - Another central bank policy meeting and another large rate rise expected. Analysts expect a 0.75% hike ahead of the Fed move on the 21st of September. CAD sensitive.
US - Two Federal Open Market Committee (FOMC) members speaking. One at an economic outlook and monetary policy conference in New York. The other at an online event about the economy and monetary policy. Could be illuminating for the markets. US Dollar, equities, and bonds all sensitive to any clues re US Monetary policy.
Thursday
Eurozone - The main event and the much-anticipated European Central Bank (ECB) policy meeting. The last time the central bank for the Eurozone raised rates by 0.5%. This time the pressure has been ratchetted up a few notches with gas prices continuing to surge. Analysts are torn between 0.5% and 0.75% hike as the bank continues to try and catch up with developments. On balance the bank is more likely to raise rates by 0.75%, if only to demonstrate their determination to get control of inflation, which hit a multi-year high of 9.1%. Not to mention the recent fall in unemployment. Press conference could be lively. Euro, global equities, and bonds all sensitive to the announcement.
US - Jay Powell speaking via satellite at Monetary Conference.
Friday
EU - EU leaders and Finance ministers gather for an Economic Summit in Brussels. Energy and how to deal with this crisis. No easy task.
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