Weekly market recap

Your weekly global financial market newsletter

  • As expected, the ECB cut the deposit rate by 25 basis points to 3.50% on Thursday, repeating its June move after a pause in July. Although a similar move was also expected for the main refinancing rate, it was cut by as much as 0.6% to 3.65%, which may have raised questions among some less knowledgeable investors.
  • But the answer is simple. The main interest rate fell more sharply than the deposit rate because of changes to the operational framework for implementing monetary policy that come into effect this month. Accordingly, the spread between the main refinancing operations rate and the deposit rate is 0.15 percentage point.
  • The key rate is the rate at which the ECB grants short-term loans to commercial banks. It therefore determines how much banks will have to pay to borrow money from the ECB. The deposit rate is what the ECB pays commercial banks to deposit money with it overnight. When the rate is low, banks have more incentive to lend money into the economy instead of depositing it with the ECB. Although the deposit rate is not the main rate in the euro area, it is now the rate that determines the ECB's monetary operations.
  • The easing of monetary policy, which was clearly expected and was approved unanimously, should support the eurozone economy, which has been struggling with weak growth recently. However, the subsequent statement by ECB President Christine Lagarde was much less clear.
  • She said the ECB will continue to cut rates, but the question is the pace of the decline. Lagarde traditionally reiterated that the ECB's next steps will depend on interim data. However, the markets give a 50% chance of a rate cut at the next meeting, and similar expectations apply for the December meeting.

Indices

After one of the worst weekly results in months, US stocks managed to secure a very good weekly result last week. Technology titles in particular did well, with growth stocks significantly outperforming value titles. In particular, Nvidia shares performed very well, providing the markets with a positive outlook for the artificial intelligence sector, in which the technology giant is the market leader.

The good mood on the markets was also felt in Europe, where stocks were significantly helped by the ECB’s interest rate cut, although the central bank slightly downgraded the GDP outlook and did not give investors a clear signal on the next developments regarding interest rates. The pan-European STOXX Europe 600 ended the week 1.85% higher, Germany’s DAX rose 2.17%, France’s CAC 40 Index gained 1.54%, the UK’s FTSE 100 Index tacked on 1.12%.

US30
+2.60%
US100
+5.93%
US500
+4.02%
GER30
+2.17%

Commodities

Gold had another record-breaking day on Friday, with its price climbing to a new record of over $2,850 per troy ounce in response to US inflation data (and the increased chance of a more aggressive Fed approach) and interest rate cuts in the Eurozone. The metal has thus risen by a quarter since the beginning of the year and the market is heading for one of the best annual results in history.

Silver has done even better over the past week, and although it is quite far from its all-time highs of April 2011, it has already appreciated by around 30% over the course of this year. As well as the same factors as gold, its price was also affected during the week by the prospects for demand in China, one of silver’s biggest consumers, and growth in the renewable energy and solar panel sectors, where silver is a key component of production.

Gold
+3.68%
Silver
+9.95%
BRENT
+0.77%
NATGAS
+1.32%

Forex

The Japanese yen continues to rise strongly and is approaching a one-year high against the US dollar. We mentioned a week ago that if the yen manages to overcome important support levels around 142.5 and 141.7, its rise against the US dollar could continue and so far it looks like this scenario is coming true. One of the main reasons for this is the divergence in the monetary policies of the BoJ and other major central banks. While the Fed (along with the ECB or BoE) are starting to cut their rates, the Bank of Japan is heading in the opposite direction. It is likely to leave rates unchanged this week, but will likely raise rates in October.

The BoJ’s Naoki Tamura has said that the central bank needs to raise short-term rates to at least around 1% by fiscal 2026 to steadily reach the 2% inflation target. Another BOJ board member Junko Nakagawa said the central bank will continue to raise interest rates if the economy and inflation develop in line with its forecasts.

EUR/USD
-0.10%
USD/JPY
-0.99%
GBP/USD
-0.04%
USD/CAD
+0.10%

Macro

In the US, only inflation was on the agenda last week. The headline CPI rose again, by 0.2% m/m as expected, while the annual rate slowed from 2.9% to 2.5%. Core inflation, however, accelerated to 0.3% m/m from 0.2% in July, while consensus also expected a 0.2% pace. Producer inflation rose by 0.2 on expectations of a 0.1% rise, the July figure was revised to -0.2% from 0.0%. The core CPI increased 0.3%, above forecasts of 0.2%, and after a downwardly revised 0.2% fall in July.

The UK economy stagnated for the second month in a row in July, with markets expecting growth of 0.2%. In the three months to 31 July, inflation-adjusted growth was 0.5%, with expectations of 0.6%. On an annual basis, the economy grew by 1.2% in July against expectations of 1.4% growth. Unemployment then fell from 4.2% to 4.1% in July, as expected.

What to watch out for this week

  • Next week, the focus will be on Wednesday's US Fed meeting, where the rate cut cycle is expected to begin. Markets are looking for a 25 bps cut, but after inflation, the possibility of a 50 bps cut is also on the table. A lot of focus will be on the outlook. The market is quite optimistic in expecting a 100 bps rate cut by the end of the year, with only three more to go, including the upcoming meeting.
  • In addition to the Fed, the Bank of England (the day after inflation in the UK) and the Bank of Japan will also change their monetary policy.
  • In addition, US retail sales and industrial production for August are due on Tuesday, while Wednesday and Thursday will see reports from the housing market, namely preliminary data on building permits, housing starts and also existing home sales.
  • For the euro area, we will see final August inflation. The headline inflation rate is expected to be confirmed at 2.2% year-on-year after 2.6% in July, mainly due to the base effect in energy prices. We also expect core inflation to be unchanged from the preliminary estimate (2.8%), but there is a risk that it could be revised to 2.9%, as the estimate was 2.84%.
  • In Germany, markets will focus on Tuesday's ZEW indices, which should show a deterioration in both the assessment of the current situation and expectations.

Disclaimer

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