The markets have calmed down and exchanges have regained their equilibrium. This is the picture after Tuesday’s trading session. The situation is no longer as dire as it was at the beginning of the week. The VIX index has managed to drop from its extremely high levels, which signals less nervousness in the market. Japan’s Nikkei has managed to recover and grew by over 10 percent. The dollar slightly gained value. The EUR/USD exchange rate has moved away from the 1.10 level. The market is now coolly analyzing the latest macro data.
The risk to the American economy has increased following the July jobs report. There is no doubt that the Fed could act a little more decisively, but I do not expect any surprising moves. Powell values market trust too much and focuses on robust communication. The Federal Reserve certainly does not want to cause greater volatility in the markets, thus, in my opinion, any expedited actions before September are highly unlikely. It is not without reason that individual Fed representatives in their most recent comments try to calm the mood. A September cut of 50 basis points, of course, is real, but let us remember that the decision will depend on several subsequent reports: from the labor market and the Consumer Price Index (CPI).
Investors appear to be starting to approach matters with this mindset. The dollar managed to rebound from its lows. The main currency pair briefly held above 1.10. In a fairly quick pace, a correction has brought trading down to 1.09. Asian markets, led by Nikkei with growth of over 10 percent, mostly closed higher yesterday, European markets were not fully convinced of the calm and mostly remained unchanged at the end of the day, while Wall Street looked a bit more positively into the future and finished Tuesday’s trading distinctly in the green.
It is important how the American central bank assesses recent turmoil. Does this sudden sell-off in the stock market pose a risk to financial stability according to the Fed? If so, then the chance for a stronger move after the summer could increase. Perhaps the recent declines will be interpreted as something natural, something that follows strong gains, which are not entirely justified. Perhaps expectations for interest rate cuts in the USA have gone too far? The NFP report may have simply served as an excuse for part of the market to realize profits, and soon another group may emerge wishing to take advantage of the fact that shares are now slightly cheaper. The annual central bankers’ symposium in Jackson Hole (August 22-24) will provide an opportunity for clarity. On occasion, key opinions have been expressed there, influencing the further direction of changes in the charts of many assets.
By Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/rynki-odzyskuja-rownowage-73129
