So, what do we know?
(A forex, index, and commodity market review)
The last few days in July and the first week in August shook markets although many investors and traders could not understand why global equities and bonds reacted so violently. This followed a surprise move in interest rates by the BoJ which was followed by some worryingly weak employment and manufacturing data out of the US. Well, last week the markets completely reversed as US data suggested the labour market was not foretelling a recession in the US and consumer confidence was more robust than expected.
Weekly change (amount change and percentage change on the week)
FTSE +106 +1.29%
DAX +552 +3.11%
DOW +1,206 +3.05%
S&P +216 +4.04%
NASDQ +1,013 +5.47%
NIKKEI +2,386 +6.75%
Hang Seng +512 +3.00%
In another extraordinary week for global markets, equity markets rallied sharply as fears of a US recession subsided. Market liquidity in this holiday month is reduced which helped magnify the sell-off two weeks ago but investors was still shocked with the moves. Hindsight is a wonderful thing, but few participants were predicting the risk-on move last week, which by recent standards was exceptional.
The broad and closely followed S&P500 index rallied 4%, its biggest weekly gain since November 2023 whilst the NASDAQ jumped over 5% as calm descended on the markets following the mayhem from late July and early August. The Japanese Nikkei 225, which fell 13% on 5th August, rallied over 2,000 points or 6.75% as investors picked up some bargains.
The risk-on move, typified by a rally in equities and a sell off in bonds and the US Dollar, was highlighted by the fear-and-greed VIX index which continued to fall, closing the week at 14.80, down another 6 points on the week. On the 5th of August, the intra-day high in the VIX index was 65, its highest level since March 2020 when the global pandemic kicked-off.
The S&P500 climbed last week as dramatically as it had fallen. By the close Friday night, the S&P500 was within2% of its all time high posted on the 5th of August. Not bad bearing in mind it was close to correction territory, where a market falls 10% from its highs, on August 5th.
Interest rates, or more importantly interest rate expectations, were also in the mix and traders adjusted their outlook for future rate cuts. In the heat of the moment when shares were plummeting and bonds rallying, the forward rate watch tool at the CME implied a 75% probability of a 0.5% cut at the 18th of September meeting, with a further two 0.25% cuts by year end. With the rally in the markets, prompted by relief that the labour market was not going too soft, interest rate expectations were pulled back as we would expect. The probability is now for a 0.25% cut on September 18th with a further two cuts of 0.25% by year end.
Bond markets also reflected the improved mood and confidence in the economy, with the yield on the 2-year Treasury rallying 0.40% to 4.06%.
The Jackson Hole Symposium in Wyoming, a gathering of the world’s top central bankers, could not have come at a more interesting time for Fed watchers as the market awaits the first rate cut since the early days of the pandemic in March 2020.
In an interview with the FT, the president of the San Francisco Fed, Mary Daly, underlined market expectations by saying that she has “more confidence that inflation is under control. It is time to consider adjusting borrowing costs from their current range of 5.25%to 5.5%.” However, she did sound a note of caution by contradicting some economists view that the US economy was heading for a sharp slowdown or even a mild recession. The question for the markets is by how much and how quickly will rates be cut. This has an impact on equities, bonds, and the value of the US Dollar.
Despite falling on Friday, UK markets have fully recovered the losses from the late July / early August slump. By close last Friday, the FTSE100 was back to levels at the end of July, following daily gains of 9 out of the past 10 days.
EURUSD +1.12 +1.02%
GBPUSD +1.83 +1.43%
USDJPY +0.93 +0.63%
The risk-on move over the past week or so was also felt in the foreign exchange markets as the US Dollar fell to its lowest level since early January this year, despite the lowering of the scale of interest expectations.
Sterling was the strongest main currency, rallying 1.8% versus the US Dollar, with gains versus the Euro as well. Interest rate expectations played their part as traders speculate over the timing of the next rate cut, which may not be until the November 7th, rather than the September 19th MPC meeting.
The Japanese Yen calmed down last week but traders are still aware that the yen carry trade could still pose problems. On Monday morning the Yen has already recovered all its losses from last week.
Gold +76 +3.12%
UK OIL -0.19 -0.24%
US OIL -0.68 -0.89%
Gold responded to the fall in the US Dollar and the risk-on move in markets, pushing through the $2,500 level for the first time in its history.
This week’s data and events to watch out for.
The calendar might look busier this week, but it is focused around just three main events – the FOMC minutes, the release of the manufacturing and services PMI data and the start of Jackson Hole Symposium in Wyoming and all the central banker speeches that go with it.
Monday
US Democratic National Convention starts in Chicago with the acceptance speech for the Presidential nomination by Kamala Harris. The Democrats can’t believe the transformation in 4 weeks as Harris leads Trump in three of the key battle ground states.
Tuesday
China PBOC announcement on 1-Year and 5-Year loan rates. Cut last time in a surprise move. No change expected this week.
Wednesday
US Minutes from the last FOMC meeting held on July 31st. Illuminating, and keenly anticipated as we are now just 4 weeks away from the expected first rates cut since March 2020. USD and US Assets sensitive.
Thursday
UK, Eurozone & US Flash Manufacturing and Services PMI data. Slightly weaker expected in the Eurozone with a further slowing in Services in the US. UK PMI expected unchanged from last month.
US Jackson Hole Symposium in Wyoming. Day-1 in this three-day event. It’s attended by Central bankers, economists, financial market participants, academics, U.S. government representatives with a limited number of press invited. The event involves discussion about long-term policy issues affecting participants.
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Friday
US Jackson Hole Symposium. Day-2.
US Jay Powell, Chair of the Federal Reserve, speaking. Likely to reinforce expectations for a rate cut but market will be in edge. USD and US assets extremely sensitive to any remarks about rate policy.
UK Andrew Baily, Governor of the Bank of England, speaking at the Jackson Hole Symposium. Any comments about when the next rate cut may happen will interest traders. GBP and UK assets sensitive.
