Japanese and Australian equities made a positive start to the week, after a bullish session on Friday. The US equities ended last week on quite a high note, after investors pulled more than $10 billion dollars from the US stock funds at the start of the month on hawkish Fed expectations.
The S&P500 jumped more than 1.50% to above its 50 and 100-day moving averages, and closed the week above the major 38.2% retracement on August to September pullback, which stands above the 4050 level, hinting that the index stepped into the bullish consolidation zone and that we could see further gains. Nasdaq, on the other hand, rallied more than 2% to its own 50-DMA, and came very close to the 38.2% retracement.
I believe that the latest market optimism could be explained by hope to see a second month of softening inflation in the US at this week’s CPI release. Due Tuesday, the US will reveal its latest CPI figure which is expected to have eased to 8.1% in August, from 8.5% printed a month earlier, and from the 9.1% peak printed the month before that. If the data is soft enough, or ideally softer than expected, the equities will likely continue pushing higher this week as well. If, however, the data is not as soft as expected, or worse, if we see a higher figure than last month’s read, then last week’s gains in equities will likely be quickly given back.
There are signs that inflation in the US may have further eased last month. We saw softer Chinese producer prices which generally explains a part of US inflation, softer rents, softer used car prices and softer gasoline! Therefore, those who are optimistic about the number to come, have reason to be optimistic about. Fingers crossed.
Fed expectations
What you have to remember this week, is that, a lot of Fed officials spoke last week. They all repeated that the Fed will continue hiking the rates until inflation is under control, and that pushed the probability of seeing a 75bp rate hike from the Fed at the September meeting to 90%. So there is not much left to be priced there. And whatever happens this week, we know that the Fed is willing to deliver another 75bp this month. So no one is playing on this month anymore. What matters is, what will happen after the FOMC’s September meeting. If the Fed hiked the interest rate by 75bp this month, the probability that it hikes by 50bp at next meeting is around 77% today. But that almost fully depends on inflation. So all eyes on tomorrow’s inflation.
The softer dollar
We saw a decent pullback in the US dollar index last Friday, following the 75bp hike from the ECB, and hint that they will be tightening fast in the coming months to tame inflation and stop the bleeding in euro, which is also partly responsible for soaring inflation in Europe. And remember, Japan is also feeling pressured by an abnormally strong US dollar. The dollar yen tested the scary 145 level last week, and Japanese are willing to intervene to stop the dollar from rallying more.
The EURUSD kicks off the week above parity but sees some important resistance near the 50-DMA, which stands a touch above the 1.0100 level. The 50-DMA is an important tech resistance, as it has been working well since last June. So clearing that level to the upside would be a big step for a medium-term euro recovery against the dollar.
In commodities, gold benefits from a broad-based pullback in US dollar, but gains remained capped near the $1730 last week. The 50-DMA, which stands a touch above the $1740 is also an important resistance to be cleared for the gold bulls. Otherwise, the recoveries are still seen as interesting opportunities to sell the top for those who continue swimming with the flow, which is a very clear downtrend building since March. Of course, the strong dollar is the major downside pressure on gold prices. And the end of the dollar rally could reverse losses in the yellow metal. But the dollar rally has been real sticky since more than a year, and even if we see a peak in each positive attempt, dollar finds more energy to make it higher.
Finally, crude oil is softish this morning. The barrel of American crude trades near the $85 per barrel as high energy prices hit the prospects of economic growth, and global demand. The fact that China maintains its zero covid fight, doesn’t help improve the bullish mood in oil. An overall bullish sentiment in equity markets could help oil consolidate gains, but strong resistance is seen near the $90 mark.
