Volatility was fairly low last week as traders spent much of the time waiting for the Jackson Hole Symposium.
On Thursday, Jerome Powell, the Federal Reserve chair announced the bank would be changing its inflation policy to an average target of 2%. The Fed’s preferred measure of inflation is the core PCE reading, and as we saw on Friday it increased to 1.3% from 1.1%. Demand is clearly on the rise but that inflation metric is way off the 2% mark.
On account of the pandemic, the Fed adopted an extremely loose monetary policy as a way of providing assistance to the US economy. When you go down the route of aggressive monetary expansion, there is the risk that you will drive up prices. The Fed have decided to allow inflation run above 2% for ‘some time’. It would appear the US central bank is giving itself the flexibility to maintain a very loose policy while not being constrained by the possibility of high inflation. The much awaited update from Mr Powell briefly injected some volatility into the markets but it was short lived.
On Friday, the main story was the announcement that Japan’s Prime Minister, Shinzo Abe, resigned because of health reasons. The leader is well known for his very aggressive approach to fiscal and monetary policy. Mr Abe appointed Haruhiko Kuroda as the head of the Bank of Japan, and the aim was to devalue the yen in an effort to try and boost exports. The news that Mr Abe will be stepping down pushed up the yen and in turn hit Japanese stocks.
As far as European and US markets were concerned, Friday was a quiet session. The major equity benchmarks in Europe posted modest losses, while the US indices closed higher. Trading ranges were small. US markets continue to outperform as the S&P 500 closed above 3,500 and the NASDAQ 100 finished just shy of 12,000. By contract, the FTSE has been drifting lower for almost two months. The DAX 30 is roughly 2.4% away from the July highs, which were five month highs.
Yesterday, equity markets in mainland Europe lost a little ground. Volatility was low as the London market remained closed because it was a bank holiday.
The S&P 500 closed a touch lower at 3,500. The NASDAQ 100 set yet another record high, it rallied almost 1%. The Russell 2000, the broader index, fell over 1%. The divergence between the tech-focused index and the small cap benchmark highlights that there are some pockets of negativity in the US market. Yesterday was the first day of trading for Apple and Tesla since their respective stock splits took effect. Companies typically pursue a stock split with the intention of making the share price cheaper, even though the market value remains the same. Both stocks traded higher yesterday.
Overnight, the Caixin survey of Chinese manufacturing for August was posted, and the reading was 53.1 – the fastest rate of expansion since 2011. Economists were expecting 52.6. The July report was 52.8. Equity markets in the Far East are muted, and European indices are tipped to have a mixed start.
The RBA kept rates on hold at 0.25%, meeting expectations. The central bank reiterated the point that it will do what it takes to support the economy.
The dollar index was hit hard on Friday, largely because of the sharp move higher in the yen. The weakness in the greenback continued overnight as it fell to a 28 month low.
The drop in the US dollar gave a boost to gold. The metal is traded in dollars so the fall in the greenback made it relatively cheaper to buy gold. Some investors consider gold to be a hedge against inflation, and judging by the comments from Mr Powell, it looks as if inflation is set to rise. Gold has been range bound recently, but in the past few sessions it has produced a series of higher lows so the bias remains to the upside.
Copper rallied overnight on the back of the manufacturing report from China – it hit its highest level in over 26 months. The red metal is typically seen as a good barometer for the perceived health of the global economy, so the price action in copper suggests that dealers are optimistic.
In the middle of last week, oil gained ground as traders were afraid of supply worries ahead of hurricane Laura. The energy industry took precautions, by winding down operations. Capacity from the Gulf of Mexico was cut by over 80%, while some US oil refineries were closed, which equated to roughly 15% of total capacity. Hurricane Laura was downgraded to a tropical storm and the adverse weather didn’t cause much disruption to the oil industry, WTI and Brent crude actually nudged lower on Thursday and Friday.
Between 8.15am (UK time) and 9.30am (UK time) a number of major European economies will post their manufacturing PMI reports. Spain, Italy, France, Germany, and the UK will release their reports, and economists are expecting 52.9, 52, 49, 53, and 55.3 respectively.
The BoE consumer credit report is expected to be £0.8 billion, and the UK mortgage lending reading is expected to be £2.8 billion. The updates for July will give us a flavour of demand. The reports will be posted at 9.30am (UK time).
At 10am (UK time) eurozone unemployment will be released and it is expected to increase to 8% from 7.8%. The inflation data will be posted at the same time. Headline CPI and core CPI are anticipated to be 0.2% and 0.9% respectively.
US manufacturing PMI and ISM manufacturing are anticipated to be 53.6 and 54.5 respectively. The announcements will be made at 2.45pm (UK time) and 3pm (UK time) respectively.
EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000. A pullback might find support at 1.1696 or at the 1.1600 zone.
GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3515. A move back below 1.3000, could see it target the 1.2800 zone.
EUR/GBP – since late July it has been pushing lower and a break below 0.8930 should put 0.8864 on the radar. A rally might run into resistance at 0.9069.
USD/JPY – while it holds below the 100-day moving average at 106.95, the broader bearish move is likely to remain intact. A move lower could see it target 105.10. A break above 106.95, should bring 107.94, the 200-day moving average, into sight.