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Global equities saw a steep sell-off last week as economic concerns, the European energy crunch and increasingly hawkish Central banks weighed on market sentiment and saw investors paring back on risk assets.
Friday’s session saw a mixed Non-farm payroll announcement, with a beat on the headline figure offset by weaker than expected wage growth and an unexpected increase in the unemployment rate causing some volatility in the markets. Overall the cooling wage growth had traders rethinking the perceived Fed rate path and saw an initial rally in equities, which faded strongly later in the session on European energy concerns and traders squaring up before the Labor day holiday weekend in the US.
The upcoming week is all about Central banks, with the RBA, ECB and BoC releasing rate decisions and Fed chair Jerome Powell set to give a speech at the Cato Institute’s Annual Monetary Conference on Thursday.
Rates markets are favouring a 75bp hike from the Fed at their 21st September meeting, though after Fridays NFP figure showing a slowing down in wage growth, the odds shifted slightly to the dovish side, with bond traders now pricing in a 56% chance of a 75 hike, down from 61% at the start of the trading week.
Despite this repricing, The US dollar continued to rally breaking big psychological levels on the Euro (under parity) and the JPY (breaking through the 140 level) as it’s safe haven status continued to play out.
Jerome Powell’s comments on Thursday will be his last before the Fed enters its blackout period, so will be especially watched for any clues as to the Feds move later in the month.
Canada – BoC
After Julys supersized 100bp hike, the BoC looks set to hike another 75bp on Wednesday, with inflation still well above target and a relatively strong economy should see it unlikely the BoC will switch back to a more modest 50bp move. This should see the CAD catch some support after a drop in oil prices last week put some pressure on it.
Australia – RBA
Tuesday’s meeting is set to an interesting one, with markets fairly split on whether the RBA will hike 25 bp or 50bp in their September meeting. The RBA would have taken comfort in the 2Q22 wages price index, which showed a growth rate of only 2.6% year-on-year, softer than had been expected, but with inflation still well above their target band coupled with a weakened AUD will probably see them deliver a 50bp hike. Rates markets are still predicting Australia hits a 3.2% by the end of the year, a 25bp hike at this meeting would risk putting the RBA behind the curve, again.
Europe – ECB
Septembers ECB meeting on Thursday is also sure to produce some fireworks with a real battle between the hawks and the doves being evident among ECB members. A 5obp hike seems to be the most likely, being a compromise and with evidence of a real slowdown in the European economy is easier to justify. Saying that 75bp is on the table as the ECB may want front load rates now, before the predicted winter recession is in full effect. Either way, it is bound to see some volatility in the EUR and European indices. Another factor is the dramatic collapse in the EURUSD rate, with it trading consistently below parity and having some of the ECB hawks calling for higher rates to support it.
All in all, a very interesting week in global markets is ahead and should set the tone for trading for the rest of Q3.
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