Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout September and beyond.
We’ve left publishing this month’s blog a little late as we wanted to see the figures for the US Non-Farm Payrolls which, as we know, is a critical chunk of information affecting the world’s largest economy. Every analyst, bank, hedge fund, trader, politician, financial journalist, investor and, especially the US Federal Reserve, and our old friend Janet Yellen — US Treasury Secretary — were waiting for these figures. Read below.
For a further perspective on our current economic crisis, don’t forget to register for our webinar on 20 September. https://www.valutrades.com/en/upcoming-webinars
As before, the key problem for all global economies is Inflation. This is not just a hangover from COVID but the result of an intense amount of pressure, put on global supply chains and energy users (that is to say, “everyone”), by the Ukraine/Russia war.
We will be watching every central bank into September and October and the resulting market reactions.
Jerome Powell’s speech at the Jackson Hole, Wyoming Economic Symposium hit the markets hard as he was quite blunt about what needs to be done. However, many analysts and industry experts feel that he should have given this speech 6 months to a year ago.
Throughout the first half of the year, investors went off US equities in fear of rate hikes by the Fed. After we saw the first rate hikes (actually more than the markets had priced) we saw a serious rebound, breaking the upper trend line in a bearish trend, from mid-June through mid-August. Reality set in with US CPI figures of 8.5%, which showed that inflation was actually slowing down, but with food and rent still climbing, the markets saw it as bad news.
Therefore, profit taking and selling-off started shortly afterwards. A rebound was crushed by Jerome Powell at the Jackson Hole Economic Symposium with his resolute statement about getting inflation under control.
How? The plan is to continue reading Interest Rates and slowing Bond Buying until the Fed sees Inflation back to a normal number. The international norm for a central bank’s inflation target is 2% and the US is currently at 8.5%. Then, and only then, will they lower Interest Rates to re-stimulate the economy.
Meanwhile, higher interest rates mean bad news for corporate earnings and, therefore, we see the sell-off.
Just last week, the US Non-Farm Payrolls came out slightly better than expected but the Unemployment Rate went up and the Average Wage figures went down. The markets didn’t like this.
Valutrades clients can now trade a variety of US Indices, including the Russell 2000 and the S&P 400, with spot pricing and many with futures contracts.
Moving forward, we will be watching for Inflation CPI figures in mid-September, which will be key for the Fed’s next move. Investors need some good news before we see the US and global stock indices rising again.
The best way to judge the strength of the USD is with the Valutrades MT4 USD Index.
Here we see the steady rise in the Greenback over August. Why? To understand why this has happened, and to save me from repeating the whole chain of events, go back and read the chapter on US Equities.
Basically, all the fundamental events, figures, and speeches that took place over August had the opposite effect on the USD than on the equities. Higher Interest Rates and lower Bond Buying by the US Federal Reserve will result in a stronger dollar.
From a technical view, we also see a Rising Wedge on the USD Index which, as we know, is a bearish signal. the question then is, when? Likely, when the Fed sees a better future on the Inflation horizon, the rumours of lower Interest Rates will start, thereby driving price action lower.
A strong USD is a bad concept for many reasons. Any economy importing goods and services from the United States of America (of which there are a few) will find that costs are rising, thereby fuelling inflation, which is the last thing anyone wants to see right now. Perhaps more importantly, any economy with high sovereign debt is likely to be trying to make payments of that debt in USD. Due to the high USD, we may see many small or struggling economies failing in the next few months. This will start another crisis with larger economies needing to bail out smaller ones.
To get an overall picture of the strength of the USD, take a look at the chart below. EURUSD is the most traded and most liquid instrument we have and the Monthly chart tells the story. In 2008 EURUSD reached $1.60. Today, price action has fallen to below $1.000.Watch this space!
Speaking of the Euro, we are finally starting to see a bit of a rebound in most pairs, excluding EURUSD.
If you have been watching our Market Blast videos you will have heard us talking about the two weakest currencies being GBP and JPY. The EUR has done best against these two and is finally catching up with CHF and the COMDOLLS.
Why? Europe has been in a unique situation compared to other major economies. Inflation due to COVID has hit Europe just like the rest of the world, but the proximity of its member states to the Ukraine crisis has caused major uncertainty for investors, consumers, and industry. The differentiating issue, however, is the constant threat of an energy crisis, caused by our old friend Mr Putin, affecting Germany which is the largest economy in the European Union.
This has left Christine Lagarde and the European Central Bank with some real problems. Right now, the collective economy of the European Union’s 27 member states is like a house of cards and the ECB has been super-cautious in its efforts to keep the house from falling down. For this reason, they have been late to the game in racing Interest Rates but we are starting to get the feeling that they will have to bring out the sledgehammer and raise more than they wanted to, this week.
As discussed in the chapter above, the impending energy crisis facing Germany, and much of Europe, is being fuelled (pardon the pun) by the constant threat of the disruption of supply by Russia. However, Germany has done a good job in the last few weeks, negotiating with other countries for the supply of gas, minerals, and alternative sources of energy. This has eased the rise in price action on Natural Gas but only time will tell if we can call this a bear run.
Last month we talked about the mixed results of GBP but today we will drop the word “mixed”. If you catch the Strong/Weak analyses on our Market Blast videos, you will know that our two weakest currencies are GBP and JPY. Logically, our chart shows consolidation on GBPJPY and bearish sentiment against everything else.
The UK economy is faltering with inflation at over 10% and many lower-income families having to choose between energy bills and food. Many economies around the world have put plans in place to alleviate the burden on their citizens and workforces but, sadly, the UK is like a rudderless ship right now.
In a few days, a new Prime Minister (likely Liz Truss) will take over at Number 10 Downing Street with a satchel full of relief and stimulus plans.
Meanwhile, several tube stops away, Andrew Bailey and the Bank of England are planning the next round of Interest Rate rises. Bailey will be testifying before Parliament this week so his answers and sentiment will drive GBP one way or the other.
On an important note for investors, India has been forecast to overtake the UK as the world’s fifth largest economy.
The key level of support on this WTI chart shows how price action tried and failed to break lower but global uncertainty is keeping it above $86 per barrel.
To be honest, the markets are too uncertain for us to make any intelligent forecasts right now but a break below support could see substantial relief for those of us who need to put petrol in our tanks.
Here are the factors to follow into September and beyond:
- Russia has been holding the keys for many months now in that they are a huge producer of oil. Also, the crude market needs to follow the natural gas market, simply in terms of future supply and demand. A fall in natural gas prices should produce falls in crude pricing.
- OPEC+ will be meeting this week and any hint of production cuts, or not, will affect price action.
- the state of the Chinese economy has been driving Crude prices for some time now. Basically, any hint at a slowing Chinese economy means a drop in demand for crude, which in turn means lower prices.
The steady fall in price action on XAUUSD is attributable more to the strength of the USD than any relief from geopolitical events. We see no reason for gold to rise and it should probably range in the $1700s during September.
Beginning traders often ask, “if there is so much wrong going on in the world right now, why isn’t gold rising?” The simple answer is, after a while, the markets get used to it and life and the economies march on despite the hardships. To paraphrase, “It’s old news and now it’s time to get on with it”. Let’s hope that this sentiment lasts with global investors.
Keep an eye on the Falling Wedge which may be forming on XAUUSD.
That’s all for now. Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of September.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.