Financial Markets’ Weekly Recap, August 21-25

All economic developments and investor-focused topics in the previous trading week were eclipsed by the speeches by ECB President Christine Lagarde and Fed Chair Jerome Powell on Friday.

Hawkish stances from Jackson Hole

ECB President Christine Lagarde and Fed Chair Jerome Powell addressed key economic developments and investor-focused topics. Lagarde emphasized the need for high interest rates to reduce rising inflation in the Eurozone, which remains unwinnable due to rising borrowing costs for households and businesses.

On his part, Powell emphasized the need for interest rate increases and the US economy’s strength, citing strong consumer spending and faster expansion. He reaffirmed the Fed’s commitment to maintain its benchmark rate until inflation falls to its 2% target. Although the economy may not be cooling as expected, Powell is prepared to raise rates if necessary. The key rate is high enough to slow hiring, growth, and inflation.

The US Dollar Index recorded its sixth consecutive weekly gain, reaching a multi-month high above 104.00. The strength of the US economy continues to bolster the US Dollar. While the US economy shows signs of softening, other economies face more challenging circumstances. This divergence in the outlook is a significant factor supporting the dollar.


China’s Economic Slowdown Has Repercussions

Markets have been panicking about China particularly with the potential for a deep crisis in light of China’s disappointing economic data.

China’s electric vehicle slowdown hinders Nvidia’s billion-dollar business. China, the world’s largest auto market, drives global push toward electric cars in recent years. Nvidia, US chipmaker, reported its first sequential decline in quarterly revenue in more than a year. In the three months ended July 30, automotive revenue fell by 15% from the prior quarter, the first sequential decline in more than a year. The sequential decrease primarily reflects lower overall auto demand, particularly in China.

BRICS

Russian Foreign Minister Sergey Lavrov reiterated, Sunday, that the BRICS bloc will strengthen the status of Russia in G20, following the admission of new members, including Saudi Arabia and Argentina. “So, the formal division of the G-20 into the G-7 + and BRICS + takes a practical form,” he continued.

“Certainly, we will coordinate our positions with the new members (of BRICS) at the level of the United Nations, the G20 and other international platforms,” Lavrov added. The BRICS summit was held in Johannesburg, South Africa, from August 22-24.

Oil Price Action

As US diesel prices jumped, the number of oil rigs decreased, and a fire broke out at a Louisiana plant, oil futures surged by roughly 1% to a one-week high on Friday. WTI crude increased 78 cents, or 1.0%, to close at $79.83 while Brent futures increased $1.12, or 1.3%, to settle at $84.48 per barrel.

The diesel crack spread, a gauge of refining profit margins, increased by roughly 5% to its highest level since January 2023 as a result of the increase in diesel futures to a level close to seven months high.

Iran announced plans to ramp up crude oil production to 3.4 million bpd by the end of September. The US and Venezuela discussed easing sanctions, which would increase global oil production.

Gold Price

Jerome Powell left the door open for another hike in 2023. Following Jerome Powell’s remarks at the Jackson Hole Symposium on Friday, there was selling pressure on the Gold Spot price XAU/USD. The spot trades close to $1,910, where a bearish cross between the 20-day and 200-day Simple Moving Averages is about to occur.

Wall Street

US stocks rose on Friday, marking Wall Street’s first winning week since July, as Powell announced that the Fed will “proceed carefully” in making interest rate decisions. The S&P 500 climbed 29.40 points to 4,405.71, while the Dow Jones Industrial Average rose 247.48 points to 34,348.90. The Nasdaq composite gained 126.67 points to 13,590.65. Powell acknowledged the risks of going too far on interest rates and doing unnecessary harm to the economy.

The Fed has raised its main interest rate to its highest level since 2001 to combat inflation, leading to a contraction in the manufacturing industry and three bank failures. However, stronger-than-expected economic reports suggest upward pressure may persist, potentially forcing the Fed to maintain higher rates.

The 10-year Treasury yield reached its highest level since 2007, but has fallen to 4.23%. This raises concerns about investors’ willingness to pay higher prices for stocks and other investments, which can be more volatile than bonds.

Bitcoin

One month after crossing the $30,000 mark, the price of bitcoin has dropped to $26,000. The decrease is brought on by declining market activity, a dearth of noteworthy ETF developments, and allegations that Elon Musk, the founder of SpaceX, has reduced his Bitcoin holdings.

What to watch in the new trading week:

Following Powell’s comments, the next week’s attention will return to economic data. Prior to the September FOMC meeting, the job market indicators, notably the NFP, and inflation data will be important. Additionally, the inflation reports for Australia and the Eurozone will be made public. The Chinese PMI will also be watched by the market.

As the Fed’s favoured inflation indicator, the US Core Personal Consumption Expenditures (PCE) Index publication on Thursday will be necessary. JOLTS and ADP Private Employment reports on the labour market are due out on Tuesday and Wednesday, respectively. The Nonfarm Payrolls report on Friday will be the week’s high point, while the weekly Jobless Claims data will be issued on Thursday. As they include information on the state of the labour market and broader economic conditions, these reports have the potential to cause market volatility.