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Global Markets Under Pressure Ahead of Economic Releases
22.08.2022

It's Monday, and the financial markets are preparing to open in Europe and close in Asia. No major economic news has been scheduled to be released today, however, the rest of the week is crowded with releases from the EU, UK and the US. Nonetheless, very little is expected from the Asian markets and the Oceania region.

Europe’s Energy Crisis

If we go back a few months or even a year, not many would have believed that water would be an issue affecting the European Financial Market. However, it is a concern this month for both governments and investors, alongside the current energy crisis. Most European countries have declared a ‘state of emergency’ including the Netherlands, Germany, Spain, and Italy. The Netherlands have halted ferries and certain imports are struggling. Germany and the UK are also experiencing similar issues. Investors are hoping that this will not cause significant supply chain disruptions as they would further pressure investor confidence which is already down.

The US Dollar Index

The US Dollar Index is increasing in value this morning and forming its third bullish candlestick so far. The index is up by 0.06% and has managed to remain above the psychological level of 108.00. The highest level the index has reached this year is 108.54. This week, the US Dollar is likely to be mainly influenced by the release of the US PMI report for manufacturing and services, as well as the US GDP figure and the Jackson Hole Symposium.

Stock Markets

The price of US and European stocks has gone down in this morning’s futures markets as investors fear that they have misread the Fed’s past signals and were overly optimistic about inflation. The US stock market is no longer being influenced by the earnings season, which was surprisingly more positive than originally expected.

Most economists are predicting that there is a high chance of the Fed remaining hawkish. They expect that the Fed will most likely pause hikes at some point, but still push the Federal Fund Rate into the restrictive zone. Previous rumors and predictions about the Central Bank decreasing rates next year have more or less vanished, which is positive for the US Dollar.

This morning it was confirmed that 84% of traders believe that it will take 2 or more years for inflation to reach the Fed’s target of 2%. This is according to the latest MLIV Pulse Survey. So far this morning, the US stock market has not reacted positively with all three major indices significantly lower. European indices are also declining this morning along with Asian markets. The DAX has fallen over 1%, unlike the FTSE100 which appears to be slightly higher this morning.

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*Dax 1-Hour price chart on August 22nd *

USD/JPY

The USD/JPY continues to be supported by market expectations regarding the tightening of the Fed’s monetary policy. Certain members of the FOMC have advised that they will most likely support a 50 basis point hike, whereas others support a 75 bp hike. Yet, the USD/JPY is lower this morning, forming a retracement in the trend that it formed last week.

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USD/JPY 30-Min price chart on August 22nd

Meanwhile, the demand for risky assets is falling amidst growing fears about a possible transition of a number of developed economies into recession. The stock market and the cryptocurrency market have both experienced declines over the past few days. This could be a sign that the market’s risk appetite is potentially declining these days.

The Bank of Japan has been noticeably unsure of their monetary policy and taken very different steps compared to other Central Banks such as the Fed and the Bank of England. In particular, it is not willing to adjust its monetary policy as the Japanese economy has been under pressure from deflation for many years. At the moment, the level of inflation in Japan has improved, but the indicator is still below the Bank of Japan’s target levels.

Last Friday's data showed an acceleration in the National Consumer Price Index from 2.4% to 2.6%, while analysts had expected a decline of 2.2%. At the end of the week, investors expect the publication of preliminary data on the Tokyo Consumer Price Index for August. This is also likely to have an effect on the value of the Yen. However, the main event will be the Jackson Hole Symposium where the heads of both Central Banks are scheduled to give speeches. Investors will be specifically eager to hear what is said by the Fed Chairman, Mr. Powells.

Key takeaways:

  • The US Dollar Index starts the week slightly higher.
  • Stock markets are pressured around the globe.
  • The EU is hit by a water crisis, adding to investor concerns in the region.
  • The Japanese Yen is supported by better-than-expected inflation figures, but lagging behind other Central Banks.
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