So, what do we know?
(A forex, index, and commodity market review)
Developed markets had a better week last as key US employment data came in worse than expected, resulting in an easing in expectations the FED might raise rates later this month. Despite the rally in equities last week, US markets posted their first monthly loss since February which underlines the resilience seen in markets despite the significantly higher rates imposed on the markets by the Federal Reserve and other central banks.
Weekly change (amount change and percentage change on the week)
US indices had their best week since the week ending 9th June as employment date was soft enough to result in an easing of an interest rate rise in the next FOMC policy meeting on 20th September. Whilst the 187K new jobs in August was 18K more than consensus, the Bureau of Labour Statistics revised the number of new jobs down for June and July by 110k. The unemployment rate unexpectedly rose to 3.8% against a consensus of 3.5%. August employment data is a more challenging month for the statisticians with a greater number on seasonal factors coming into play. Aside from the lower number of new jobs over the past three months, what will also please the Federal Reserve is the lower-than-expected average hourly earnings which has a direct effect on core inflation. The PCE core inflation data released last Thursday came in at 4.2%, slightly higher than June’s reading whilst the headline reading came in 3.3%, up from 3% in June, which was largely down to the base-effect , where prices had started to fall sharply a year ago. Overall, the numbers suggest inflationary pressures continue to moderate, which was further supported by the drop in hourly earnings last Friday.
The reaction in the markets was positive, with more of the optimism on the daywas felt in the treasury markets (US sovereign bonds) where yields fell to their lowest level in over three weeks as traders adjusted their expectations for a rate rise later this month. The yield on the 2-year Note fell to 4.96%, a 3-week low. A month ago, the yield was 4.35%, which represents a significant shift in expectations. The probability of a rate rise before year end has fallen from 50/50 a week ago to 65/35 as traders expect the US economy to experience a soft landing with a goldilocks scenario.
European markets also benefited from the US news as all main European markets posted decent gains in the final week of August. European banking shares were supported by a blockbuster report from UBS, which reported the largest ever bank quarterly profit of $29 Bln which was due to an accounting gain from the acquisition by UBS of its one-time rival Credit Suisse.
Core Eurozone inflation fell slightly last month which helped support shares ahead of the key ECB policy meeting on the 14th of September.
The US Dollar weakened in the first half of last week as ADP employment data and the second reading on Q2 GDP came in weaker than forecast. However, by the close of Friday, the US dollar had recovered all is earlier losses to post a slight uptick on the week. This came despite a noticeable easing in expectations for a rate rise by the Federal Reserve later this month, which would normally result in fall in the US Dollar.
The main reason for the recovery in the us Dollar, was the weakness in the Euro which reacted to the Core flash Inflation reading out last Thursday which resulted in a lowering in expectation that the ECB would raise rates on the 14th of September. Before the data was released there was a 43% chance of a rate rise, which fell to 30% after the data, resulting in a fall in the Euro against other majors. The ECB’s interest rate stands at 3.75% whilst the rate setting committee faces a dilemma whether to raise rates again, pushing the eurozone economy into a recession.
Gold +26 +1.35%
UK OIL -1.84 -2.13%
US OIL -1.88 -2.27%
Gold tracked the US dollar but has built on gains from the previous week. Oil markets were bolstered by reports that Russia was supporting further cuts to OPEC+ productions levels.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A quieter week expected this week with a shortened week in the US due to Labor Day. Two central bank policy decisions and China inflation data provide the highlights. G20 starts on Saturday.
US Labor Day. US markets closed for the day. Lower liquidity in other markets can lead to more pronounced moves.
Eurozone ECB’s Lagarde speaking at an event hosted by the European Economics and Financial Centre, in London
Australia RBA interest rate decision. Expected to keep rates on hold at 4.10% as inflation continues to slow. Australia also has to consider the effects of China’s spluttering economy which will weigh on Australian economic activity to some extent. AUD sensitive to the announcement.
UK Monetary Policy Report Hearing in front of the Treasury Select Committee in Parliament. More understanding of where the MPC stands on interest rate policy. GBP and UK assets sensitive.
Canada BoC rate decision. Canadian central bank is expected to hold rates steady at 5% after a report last Friday said Canada’s economy unexpectedly contracted in the second quarter. Expect a final rate rise in October the current tightening cycle. CAD sensitive.
US ISM services. In common with other developed economies, US service sector has been declining gradually from the dizzy heights at the start of last year. Expect a small contraction in August albeit the level still remains above 50 which separates expansion from contraction. USD and US assets sensitive to the news.
Australia RBA Governor Lowe delivers one of his last speeches as governor of the central bank. He retires on 17th September after 7 years. Michele Bullock, who is currently the deputy governor of the RBA will be his replacement.
US FOMC member Patrick Harker speaking at Federal Reserve Bank of Philadelphia Seventh Annual Fintech Conference. Any remarks concerning likely interest decision or his voting intention later this month may spark the markets. USD and US assets sensitive.
China CPI and PPI – Due out Saturday morning so we will have to wait until Sunday night for any market reaction. China struggles with a lack of inflation but effects are expected to be temporary although we have heard that before from Central bankers!
G20 Day 1 of the two-day G20 meetings which are being held in Delhi, India. Usually regarded as a glorified talking-shop, the main topic so far has been the fact that Xi Jingping will not be attending. He has a lot to content with back home but an interesting decision, nevertheless.
What should we be trading?
(Analysis of the popular markets and what we like) As discussed during the session, we took a good look at the latest index trades including opportunities on the UK100 and US30, for excellent profits, and a new short trade setting up for EURUSD.
What’s the problem?
(Examining a problem many traders face and what to do about it)