ANALYSIS | 8/22/2022 5:43:15 AM GMT
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The trading week kicks off on mixed sentiment. Last week marked the end of a four-week winning rally in the US stocks, and the new week starts with unpleasant new that drought in China’s Sichuan region will cause ‘severe’ power cuts.
People’s Bank of China lowered the lending rates for corporate and household loans to boost credit demand. Stocks in Shanghai gained slightly, but the rest of Asia was in the red and the major US futures traded lower.
The S&P 500 will kick off the week after having slid 1.20% last week, Nasdaq will be testing the bull’s nerves after having lost more than 2.5% over the course of last week.
All eyes will be on the Federal Reserve’s (Fed) Jackson Hole meeting. This year, Jackson Hole may have a bigger-than-usual impact on investor sentiment, as investors don’t really know where the market is going, as the market doesn’t really know where the Fed is going.
The July equity rally was mainly triggered by the expectation – and not the fact, nor an announcement – that the Fed could soften its policy and start cutting the interest rates if the US economy sinks into recession. While there are flashing signs that recession could be just around the corner, there have been no signs, or a mention, or a hint that the Fed would start re-lowering its rates at any point in the foreseeable future.
On the contrary, the Fed members kept that the monetary conditions would tighten until signs of sustainable easing toward the 2% policy target. Therefore, if anything unpleasantly hawkish comes out of this week’s Jackson Hole meeting, we could see the latest equity rally, which could push both the S&P500 and Nasdaq to their 100-DMA levels.
Before the Jackson Hole symposium, we will have a better idea on the latest PMI figures, the US durable goods orders, the latest US GDP data, and the PCE, another gauge of inflation that’s closely watched by the Fed.
Euro traders will keep a close eye on the flash PMI figures today to see the impact of the latest spike in energy prices on economic activity. On Friday, the German PPI data came as a shocker, with more than a 5% rise in factory-gate prices only during July, due to a nearly 15% rise in energy prices, ONLY IN JULY. The German PPI rose 37% since the same time last year, versus a slight easing expected by analysts.
The EURUSD extended losses. Normally, a higher-than-expected inflation print should rather boost the expectation of more aggressive action from the European Central Bank (ECB) and revive the bulls, but, as the ECB is slow to move, the hawkish expectations don’t do much to lift sentiment in the euro. If, on top, we see bad surprises across the PMI reads, the euro could easily sink below parity against the US dollar, yet again.
Speaking of the US dollar, the dollar bulls are back in force. The stronger dollar is not only a headache for the rest of the world, it’s also a headache for the US companies, as the revenues they make outside the US lose value when converted back to US dollars.
The strong dollar continues pressuring gold to the downside. The price of an ounce retreated to $1743 this morning, as Bitcoin struggles to hold ground above the $20K level. If we see the US stocks, especially tech stocks, give back gains this week, we could see Bitcoin vanish below the $20K mark.