Weekly market recap

Your weekly global financial market newsletter

  • The U.S. Drug Enforcement Administration (DEA) plans to reclassify marijuana as a low-level drug. Marijuana is now categorized under Schedule I of the Controlled Substances Act, which puts it on the same level as heroin or LSD. When reclassified under Schedule III, it will be on the same level as ketamine and Tylenol with codeine.
  • The reclassification of cannabis as a less dangerous drug would mark a significant shift towards legalisation of cannabis at the federal level. It would help cannabis producers who continue to have problems with federal laws in states where cannabis has been legalized. It would also allow them to take advantage of federal tax deductions, which could save them millions in taxes.
  • The value of some ETFs tied to producers of cannabis products rose 20% after the news was released, but shortly thereafter there was profit taking and a slight correction. Shares of Canopy Growth or Tilray Brands are similarly positioned, which may be a way for many investors to expand their portfolios to include titles with very interesting growth potential.

Indices

US stocks had a very volatile week, but eventually managed to finish in the green. One of the strongest weeks in terms of the number of important macro data started promisingly, but Tuesday saw a more pronounced drop after the release of data suggesting rising labour costs and falling consumer confidence. But the situation reversed sharply on Wednesday, when first the Fed was much more dovish than expected in its post-meeting announcements, and on Friday the labour market data was significantly worse than expected, pushing the Fed’s rate cut outlook from November to September.

European equities have fallen since the start of the week, along with poor results from major companies and rising GDP and inflation. These slightly beat forecasts and supported the announcement by hawks in the ECB who warn of increased inflation, which in turn increases uncertainty over interest rate moves. Unlike US equities, then, the data in the second half of the week did not have such a positive effect on the markets and the indices ended mixed. The pan-European STOXX Europe 600 ended 0.48% lower, Germany’s DAX weakened 0.88%, France’s CAC 40 lost 1.62%, and the UK’s FTSE 100 Index added 0.90%.

US30
+1.14%
US100
+0.97%
US500
+0.55%
GER30
-0.88%

Commodities

Gold lost ground for the second week in a row and reached around $2,300 per troy ounce, the lowest level since early April. Gold is not helped by more positive prospects regarding a possible ceasefire between Israel and Hamas, which slightly reduces its safe-haven status. On the other hand, poor labour market data should help gold as it increases the chances of no earlier interest rate cuts by the Fed, but investors seem to be starting to look for riskier assets because of this. In any case, the optimism around gold is unlikely to end and the current slight decline from all-time highs may well be a correction driven by profit-taking on behalf of speculators.

US Natural gas gained more than 11% for the week, closing above the $2/MMBtu mark for the first time since early March and finally hitting its three-month high on Friday. Thus, over the past month, the price of US natural gas has risen by more than 20%. In the long term, US gas producers are producing record amounts of gas and there are record levels of gas in storage due too mild to warmer weather. However, increased exports and significant curtailment of production by the largest producers, which has led to a 9% decline in production this year, has led to the aforementioned gas price increase.

Gold
-1.56%
Silver
-2.38%
BRENT
-6.11%
NATGAS
+11.80%

Forex

After losing heavily in recent weeks, losing 14% against the dollar since the start of the year and hitting 34-year lows, the Japanese yen posted its best weekly performance since early November 2022. The yen began rising almost immediately after hitting 160 against the U.S. dollar on Monday morning, a level at which government intervention was expected and at which Japanese banks reportedly began aggressively buying the dollar. While the Japanese government has not confirmed the speculation of intervention, based on Bank of Japan data, Tokyo spent about $60 billion to prop up the yen. However, Japan’s finance minister has not ruled out intervention, especially if volatility in the exchange rate were to negatively affect households and businesses. During the week, the Japanese yen fell below the 152 per dollar level, ultimately helped by worse-than-expected US labour market data and dovish comments from Fed officials.

The aforementioned labour market data and surprising comments from officials on Wednesday eventually led markets to again push back the first possible interest rate cut date to September. The US dollar index thus weakened to three-week lows and, with the exception of the Canadian dollar, weakened against all major currencies.

EUR/USD
+0.64%
USD/JPY
-3.36%
GBP/USD
+0.47%
USD/CAD
+0.12%

Macro

In the US, we saw a relatively high number of data in the past week, which had a significant impact on the markets in both directions. On Tuesday, several reports spoiled the mood for investors, as the Labour Department reported that first quarter hat employment costs rose 1.2% in the first quarter, or an annual rate of nearly 5%, which was above expectations and the fastest pace in a year. Shortly thereafter, it was revealed that the Chicago PMI had fallen to its lowest level since November 2022, and in addition, the Conference Board’s consumer confidence gauge also saw a drop in April to its lowest reading in nearly two years.

On Wednesday, the Labour Department’s report that job openings fell by 325,000 to 8.488 million in March 2024 from the previous month, reaching the lowest level since February 2021 and falling short of the market consensus of 8.690 million. And at the same time, the manufacturing PMI from ISM was shown to have fallen back into contractionary territory (49.2) in April. The market was expecting a drop to the 50 level from March’s 50.3, the first expansion in 16 months. On Friday, ISM Services PMI had fallen back into contraction territory for the first time since December 2022.

However, Wednesday’s batch of data was ultimately overshadowed by the Fed and its chief Jerome Powell after the central bank did not change interest rates as expected. He said the Fed is not ready to cut rates, given the growth in the economy and inflation around 3%, but at the same time he sees no reason to speculate on raising rates as the current level of rates is restrictive enough.

His words were eventually confirmed by Friday’s nonfarm payrolls report, which showed that employers added 175,000 jobs in April, much less than expected (243,000) and the lowest number since November. After March’s figure (315,000), this may be a sign of weakening inflationary pressures, with the slowdown in month-on-month wage growth from March’s 0.3% to April’s 0.2% adding to the picture. Year-on-year growth fell to 3.9%, the slowest in almost two years.

In Europe, German inflation did not surprise, with a preliminary estimate of 2.2% in April 2024, holding at its lowest level since May 2021 and slightly below market estimates of 2.3%. Core inflation, excluding volatile items such as food and energy, fell to 3.0% in April, the lowest level since March 2022.

Eurozone GDP surprised with a 0.3% rise in the first quarter, after a 0.1% decline in the last three months of 2023. The decline recorded in the fourth quarter of 2023 was revised down from 0.0%, indicating that the economy entered a technical recession in the second half of last year. Meanwhile, annual consumer price growth was steady at 2.4% in April, but core inflation – which excludes energy and food prices – slowed to 2.7% from 2.9%.

What to watch out for this week

  • The US calendar for next week will be less intense than last week. The Fed policymakers, who have surprised with their dovish tone in the past week and investors will want more detail from them regarding the monetary policy follow-through, deserve a lot of attention. Fed's Goolsbee, Williams and Cookwill speak on May 4, Fed's Williams and Barkin will speak on May 6, Fed's Kashkari will speak on May 7 and Fed's Cook will speak on May 8.
  • The main indicator is likely to be the preliminary reading of Michigan Consumer Sentiment, which comes out on Friday, and Thursday's weekly jobless claims figure is sure to be closely watched. Beyond that, the big-cap earnings season is poised to conclude with releases from Vertex Pharmaceuticals, Walt Disney, BP, Toyota, Uber, Airbnb, and Shopify.
  • In the UK, the Bank of England is expected to keep monetary policy unchanged following a drop in the inflation rate to 3.2% in March, the lowest since September 2021. The UK is also set to release preliminary first-quarter GDP, business investment, foreign trade balance, industrial production, and construction output.
  • The final services and composite PMI is expected to confirm growth in major European economies in April, while German factory orders likely saw a slight decline in March.
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Source: forexfactory.com
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