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US Stock Markets Continue to Rise Despite Poor Economic Outlook
01.08.2022

Despite an influx of negative news, the US stock market closed the trading week in the green on Friday. S&P500 and Nasdaq100 saw their biggest monthly gains since November 2020 and the Dow Jones Industrial Average since March 2020. High inflation rates, negative GDP figures, 75 basis-point interest rate hike and turbulence in the energy department, don’t seem to affect the stock markets. The S&P 500 is up by almost 9% in July, Nasdaq gained 12%, and Dow climbed 6%.

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Some analysts are questioning whether this is a bear market rally - a sharp short-term rebound, or if this is a sign that the stocks have reached their lowest point and can now begin to grow again. According to Fundstrat’s Tommy Lee, the 2022 bear market is over and the US stock market is gearing up for new record highs by the end of the year. "When bad news doesn't take down markets, it is time for investors to assess," he commented. On the other hand, BoA (Bank of America) analysts are suggesting that the stock market is bound to drop again based on the labor market conditions which are hinting towards a recession.

Traders will be monitoring the markets very carefully now to see if the recession is already priced in and the markets can only go upwards now, or if this was just a temporary rally.

Commodities - Oil

The oil sector has reported on record profits in the second quarter so far. Although oil prices have generally been shaky over the past few months due to heightened recession fears, crude oil recorded some gains last week. Nonetheless, this morning’s Asian session shows decreased sentimen with WTI trading at $97.87 a barrel, down 0.7%, after hitting a session low of $97.55. This is likely to be a result of anxiety ahead of Wednesday's OPEC+ meeting where the group is expected to decide on September output.

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Some sources claim that the group will discuss a modest increase in output, while others insist that it will remain unchanged. A few of the OPEC+ members have expressed their concern over using up all of their production capacity, indicating that the quota is indeed, unlikely to be increased. Fundamentals are expected to continue creating support for oil prices with tight supplies and growing demand. At the same time, economists predict that oil is unlikely to experience any major advances due to heightened recession fears. Traders will be focusing on the scheduled OPEC+ meeting on the 3rd of August to see what the group will decide.

Forex - GBP/USD

Last week, the currency pair found itself rallying past the 1.2200 level before falling again. During this morning’s Asian session, the GBP/USD pair saw a minor pullback after reaching 1.2198. Unlike the stock markets, the USD is feeling the pressure of the negative news, especially with circulating rumors that the Fed could pivot its rate hikes. However, the GBP bulls can't seem to find enough ground to push the currency pair further - something that can easily be attributed to political anxiety in the UK and the upcoming BOE meeting.

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During their June meeting, the MPC (Monetary Policy Committee) said that if necessary, they will become more forceful on inflation. However, the Bank of England is running out of excuses not to raise the interest rates. They have already admitted that they expect inflation to peak at 11% towards the end of the year; yet the bank refuses to take a more aggressive stance. The bank is scheduled to have a meeting on Thursday where they will discuss new economic projections and announce the new rate hike.

On the other hand, the US has major figures coming out this week as well - the Non-Farm Payrolls (NFP). Although last month’s NFP report was weak, it was still higher than expected with 372,000 jobs added, the unemployment rate steady at 3.6%, and wages growth at 5.1%. But despite vacancies at record levels, the participation rate fell to 62.2%. July NFP is expected to show 250,000 jobs added.

Key Takeaways:

  • US major indices saw their biggest monthly gains since 2020 last week.
  • S&P 500 is up by almost 9% in July, Nasdaq gained 12%, and Dow climbed 6%.
  • Oil sector has reported record profits in the second quarter so far.
  • OPEC+ scheduled to meet on Wednesday to decide on September output.
  • GBP/USD experiencing pullback from last week’s highs.
  • BOE expected to announce a rate hike this Thursday.
  • US NFP is expected to be released on Friday this week.
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