Weekly market recap 26 September 2022 - FTMO®

Slide WEEKLY MARKET RECAP Your weekly global financial markets newsletter Market weekly Recap

26 September 2022

  • Like other central banks, the Bank of Japan did not surprise in its interest rate decision last week and kept its rates at -0.10%. It has kept its rates at this level since the beginning of 2016, having previously held rates at +0.10% for eight years. So, we cannot expect any significant interest rate moves in Japan in an environment of prolonged low inflation.
  • Still, the BoJ’s stance is exceptional compared to other countries and already a bit surprising to many economists. The extremely easy monetary policy is in contrast to the approach of other central banks, which widens the interest rate differential and has a powerful effect on the exchange rate of the Japanese Yen.
  • And with the Japanese Yen at 24-year lows against the US Dollar and central bankers admitting that the weak currency is no longer bringing only positives to the Japanese economy, one might have expected the BoJ to move on rates after all, especially as year-on-year inflation rose to 2.8%, the most since 2014. However, that didn’t end up happening, and rates remained at -0.10%, and according to the BoJ, we shouldn’t expect any other approach anytime soon.
  • However, the BoJ did end up being supportive by intervening in the currency market for the first time since 1998, and the USDJPY currency pair fell from 145.8 to below 140.5. Finance Minister Shunichi Suzuki commented that while markets should influence currency rates, the Japanese government wants to monitor the situation and fight against significant moves against the Japanese yen. However, neither the extent nor possible cooperation with other central banks was confirmed.

Indices

US stocks have again recorded significant losses in the past week. However, after a relatively good start to the week, when trading volumes were lower, another cold shower came from the Fed and its plans to continue raising interest rates rapidly in the coming months. As a result, the DJIA index fell below this year’s lows by the end of the week, ending the week at late 2020 levels. So far, the S&P 500 index has held its lows for this year, as has the tech-heavy Nasdaq, but it is again losing more than 30% from its December highs.

European stocks also started more quietly due to a holiday in Britain to commemorate Queen Elizabeth II. In the end, however, they still paid the price for the hawkishness of central banks. In addition to the Fed, central banks in European countries such as Switzerland and the UK also continued to tighten monetary policy. The pan-European STOXX Europe 600 ended the week down 4.37%, dropping to the lowest levels in more than a year. France’s CAC 40 lost 4.84%, Germany’s DAX slid 3.59%, and the UK’s FTSE 100 Index 3.01%.

US30
-4.00%
US100
-4.64%
US500
-4.65%
GER40
-3.59%

Commodities

Also, most commodities paid the price for monetary tightening by most central banks during the week. In addition to an increasingly strong dollar, uncertainty about future economic developments around the world is also affecting commodities and negatively impacting demand for commodities. Thus, only supply-side constraints can stop the price decline. According to analysts at Capital Economics, this may be particularly pronounced in the case of energy, while the price decline in metals may continue for a more extended period of time.

Gold
-1.89%
Silver
-3.60%
BRENT
-5.08%
NATGAS
-11.95%

Forex

The forex market was quite busy during the week. First, the US Fed took the lead, which was not surprising with its rate move but rather with a hawkish outlook for the future. Then other central banks joined in tightening monetary policy, but this did not hurt the US dollar. In the end, the Japanese yen saw the most significant market movement due to the aforementioned central bank intervention in the forex market.

However, the clear loser of the week is the British pound, despite the BoE raising rates again by 0.5%. The GBP hit 37-year lows during the week and ended at $1.09 per pound. The British government has moved to make significant tax cuts to boost the economy, but this will significantly impact the country’s debt burden. The pound continued its declines at the start of the week and fell to a historic low at 1.03 on Monday morning.

EUR/USD
-3.27%
USD/JPY
+0.29%
GBP/USD
-4.97%
USD/CAD
+2.48%

Macro

The US Federal Reserve did not surprise by raising rates by the expected 0.75% (1% was also in play) to a target range of 3.00 – 3.25%, the highest since early 2008. Instead, the market’s surprise is that most central bankers expect further rate hikes up to 4.50% by the end of the year. The uncertainty was exacerbated when Fed chief Jerome Powel said that the risk of a recession is still present, yet no one knows how severe the recession will be.

Meanwhile, US macro data during the week was not bad at all. Housing starts unexpectedly rose 12.2% MoM to an annualized rate of 1.575 million units in August, beating market expectations and recording the most significant increase since March 2021. Existing home sales fell 0.4% to a seasonally adjusted annual rate of 4.8 million, but the number was also better than expectations.

The PMI also surprised with growth. Activity in manufacturing was rising and accelerated even faster than in August (51.8 vs 51.5). Activity in the service sector is declining, but at a much slower pace than in August ((49.2 vs 43.7).

Central banks in Europe have also now definitively switched to hawkish monetary policy settings. The Bank of England raised rates by 0.5% for the second consecutive week, but markets were also pricing in the possibility of a 0.75% hike. Switzerland’s central bank increased rates by 0.75% and now has a base rate above zero for the first time since late 2014. The Norwegian central bank increased rates by 0.5% to 2.25%, and the Swedish central bank surprised by raising rates by 1% to 1.75%

Compared to the US, business activity is doing poorly. Activity in manufacturing fell from 49.6 to 48.5 and in the service sector from 49.8 to 48.9. The composite PMI fell to 48.2, the worst reading in two years.

What to watch out for this week

  • We will hear the most important news at the end of the week. We will hear the final US GDP number on Thursday, confirming a possible technical recession in the world’s largest economy. Then on Friday, the most interesting will be the YoY reading of the PCE Price Index, considered the most important inflation gauge in the Fed’s interest rate decisions.
  • On Tuesday, reports on durable goods orders, consumer confidence, and new home sales will be released, with pending home sales added on Wednesday.
  • St. Louis Fed President James Bullard, Cleveland Fed President Loretta Mester, Chicago Fed head Charles Evans, Atlanta Fed President Raphael Bostic and Fed Vice Chair Lael Brainard are all due to speak during the week. Investors will thus anxiously await hints of a possible further 0.75% rate hike in November.
  • Also, we won’t know the European numbers (plus separate German ones) on inflation and unemployment until Friday. In any case, it will be interesting to see how this affects the stance of ECB policymakers. On Monday, ECB chief Christine Lagarde will give a speech in Brussels.
  • The developments from Monday morning show that we should prepare for increased volatility during the week, which can occur on a broader range of currencies, not only on EURUSD or USDJPY.
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