As of August 24th, 2023, the current market trends include:
- S&P 500 performance: The S&P 500 has experienced a decline of 4.8% in August, making it the worst month for the index since December. However, on August 23rd, the S&P 500 Total Return Level was 9549.73.
- Jackson Hole Symposium: The 46th annual Jackson Hole Economic Symposium is taking place from August 24th to 26th, focusing on the theme “Structural Shifts in the Global Economy”.
- US existing home sales: In July, existing home sales dropped to a six-month low, with a 2.2% decrease to a seasonally adjusted annual rate of 4.07 million. The median existing-home sales price rose 1.9% from a year earlier to $406,700.
- Top U.S. stocks for August: Some of the best-performing stocks in August 2023 include Royal Caribbean Cruises (RCL), Upstart Holdings (UPST), Nvidia (NVDA), and Melco. The best Dow Jones stocks to buy and watch in August 2023 are Apple (AAPL), Boeing (BA), Caterpillar (CAT), Microsoft (MSFT), and Salesforce (CRM).
Currency markets have also reacted to global events in the following ways:
- US business activity stagnation: The US dollar eased against a basket of currencies after data showed US business activity approaching the stagnation point.
- Dollar’s recent gains: The dollar is unlikely to give up recent gains in the coming months, according to a Reuters poll of 70 FX strategists.
- Federal Reserve interest-rate hikes: US growth is expected to slow to 1.4% in 2023 as Federal Reserve interest-rate hikes work their way through the economy. The dollar’s outlook is more negative in these conditions, but depreciation is expected to be shallow, bumpy, and differentiated.
- US economy soft landing: Markets are increasingly pricing in the likelihood of a soft landing for the US economy, believing that the Fed can tame inflation while avoiding a recession.
- Currency volatility amid tightening global financial conditions: Many currencies have remained volatile amid tightening global financial conditions. Currency depreciations, coupled with rising commodity prices, have pushed import costs up, fueling inflationary pressures in many economies, especially in those that heavily rely on imports to meet domestic demand for food.
Current state of the global economy as of August 24th 2023
Some of the challenges facing the global economy include:
- Slowing global GDP growth: The International Monetary Fund (IMF) projects global growth to fall from an estimated 3.5% in 2022 to 3.0% in both 2023 and 2024.
- Inflation concerns: The IMF expects global headline inflation to fall from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. High inflation and interest rates pose challenges for many high-yield credit issuers.
- Recession risks: The head of the International Monetary Fund, Kristalina Georgieva, has warned that a third of the global economy could be hit by a recession in 2023, which she described as a “tougher” year than 2022.
- Geopolitical tensions: Global trade remains under pressure due to geopolitical tensions, weakening global demand, and tighter monetary and fiscal policies.
- Economic disparities: The global economic recovery is progressing at different speeds, with some economies, notably in Asia, experiencing strong growth, while others face constraints due to lasting damage to the financial sector and household balance sheets.
Jackson Hole speeches sway markets as Fed and ECB differences fuel uncertainty, prompting currency shifts and market turbulence
Market Drivers
The recent market developments are driven by a combination of factors that have shaped the current macroeconomic landscape. Firstly, the dollar index initially surged to its highest point since June 8, propelled by disappointing European services and manufacturing gauges. However, this gain was short-lived as significant misses in U.S. PMI figures reversed the dollar’s gains. The ensuing fall in the dollar index triggered a rebound in equities and risk-sensitive currencies against the haven dollar. As Treasury, bund, and gilts yields plummeted, reflecting growing concerns about global economic growth, market sentiment shifted. This decline in yields was further influenced by the weak U.S. PMI report and a notable plunge in gilts yields, prompting investors to seek higher-yielding assets.
Market Outlook
The market’s focus now turns to upcoming speeches by Fed Chair Jerome Powell and ECB President Christine Lagarde at Jackson Hole. The expectation of a final Fed rate hike is priced in at a 33% probability, while the market anticipates over 100 basis points of rate cuts in the coming year. The ECB’s potential move remains uncertain, with expectations of at least 70 basis points of cuts next year. Meanwhile, the BoE’s interest rate trajectory has shifted. Previously favored to hike rates by another 75 basis points, the current projection reflects 60 basis points of hikes before a gradual retreat in 2024, driven by elevated UK inflation at 6.8%.
Currency Summary and Outlook
Currencies have responded to these market dynamics with distinct patterns. The EUR/USD pair initially faced downward pressure but managed to reverse losses, with the euro gaining against the dollar. Sterling displayed resilience, recovering from an initial drop and partially offsetting losses despite substantial declines in gilts yields. The Australian dollar (AUD) rebounded, supported by oversold conditions and a potential easing of concerns over China’s economic situation, signaled by the recovery in copper prices. The Japanese yen (JPY) benefited from weakening Treasury yields and robust Japanese PMI data. The yen’s recent strength is bolstered by a combination of factors, including the yen’s real effective exchange rate (REER) near historic lows and potentially increasing demand. Off-shore yuan also gained, despite retreating Hong Kong overnight rates. Risk traders are closely watching Nvidia’s earnings report for further market direction.
Global Economy’s Fragility: Slow GDP growth, inflation concerns, and recessions loom, intensified by geopolitical tensions. Fed’s control over US landing amid varied growth rates steers markets.
The Jackson Hole Symposium and Possible Scenarios:
Scenario 1: Dovish Central Bank Pivot
– The dollar weakens further as market participants revise down rate hike expectations, pushing the dollar index lower.
– Risk appetite improves significantly, leading to a substantial rebound in equities and risk-sensitive currencies.
– EUR/USD gains traction on the dovish tone from the Fed and ECB, potentially breaking above key resistance levels.
– Sterling could see a limited impact as its recovery from prior lows might be curbed by ongoing concerns about UK inflation.
– Gold prices rise as lower interest rate expectations reduce the opportunity cost of holding non-yielding assets. The safe-haven appeal of gold diminishes, but the dovish central bank stance supports its value.
Scenario 2: Mixed Signals and Volatile Markets
– The market experiences heightened volatility as conflicting signals from central banks trigger rapid shifts in sentiment.
– Currencies like the dollar and euro might fluctuate within a range as traders weigh the ambiguity of central bank outlooks.
– Risk assets initially rally on the dovish aspects but could face retracements if uncertainty overshadows positive sentiment.
– GBP might be more sensitive to UK-specific factors, but the lack of clear central bank guidance could still contribute to heightened volatility.
– Gold could see mixed reactions: its safe-haven appeal might be dampened by improved risk sentiment, but lingering uncertainty could still provide support.
Scenario 3: Hawkish Central Banks and Risk Aversion
– The dollar strengthens across the board as expectations of rate hikes are quickly revised upward, leading to a rapid rise in the dollar index.
– Equities experience a sharp sell-off as higher interest rate expectations prompt investors to reassess risk exposure.
– Risk-sensitive currencies like the AUD and EUR face significant pressure, reversing recent gains and potentially testing support levels.
– Sterling’s resilience might be tested, and GBP could come under pressure if central bank rhetoric undermines its recent recovery.
-Gold prices face headwinds as the opportunity cost of holding non-yielding assets rises, and its safe-haven appeal is overshadowed by strong demand for cash and highly liquid assets.
Gold’s performance in these scenarios is influenced by its dual nature as both a safe-haven asset and a hedge against inflation. Depending on the central banks’ tone and broader market sentiment, gold could experience shifts in demand driven by changes in interest rate expectations and risk appetite. Traders should consider the interplay of these factors while monitoring central bank communications and adjusting their strategies accordingly to navigate potential opportunities and risks involving gold and other assets.
Conclusion
The market’s near-term trajectory hinges on speeches by Powell and Lagarde at Jackson Hole. A lack of clarity in the Fed’s rate hike prospects and the ECB’s stance could contribute to ongoing market volatility. While expectations of Fed rate cuts remain elevated, any signals of a more hawkish stance from the central banks could reshape market sentiment. Additionally, the currency landscape might shift if economic indicators diverge from current projections. If global economic conditions worsen, prompting further yield declines and risk aversion, safe-haven currencies like the dollar and yen could strengthen, potentially weighing on risk-sensitive currencies like the AUD and EUR. Conversely, a surprise rebound in economic indicators could fuel optimism, supporting risk-on sentiment and potentially leading to a resurgence in equities and higher-yielding currencies. It’s crucial for investors to monitor these evolving factors to anticipate potential currency fluctuations and market shifts.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
