Panic Subsides Amidst Global Uncertainty, Zloty Lags Behind

We are behind an exceptionally intense week. Since Monday, markets have been dominated by Cassandra-like moods. Despite the sentiment remaining minor, the charts are ultimately not tragic. Only the zloty has succumbed to pessimism.

The Domino Has Stopped

When Japan started selling off on Monday, and panic spread methodically to other markets, it seemed that we were on the edge of a precipice. There were many voices claiming it was the repeat of the 2008 scenario. After all, the winding down of the Japanese carry trade was not the only problem. Other negative factors also came into play. Last week we got a series of weaker data from the US economy, which strengthened recessionary moods. Plus, geopolitics got heated after Israel carried out military operations in foreign countries over the weekend, including in Iran’s capital. However, over time these risks seemed to influence the market less and less. In the meantime, there was also the situation in Ukraine and the transfer of a Russian “special operation” onto the aggressor’s territory. Although John Kirby – US Secretary of Defense – stated that this action does not constitute escalation of conflict, we should not deceive ourselves that they may have a different opinion on this matter in Moscow. Despite all these factors, investors abandoned the panic button. The markets eventually picked up and signs of a recession are not yet visible.

Peace is Not Permanent

The coming week could be crucial for the future of the markets. If panic reactions can be kept at bay, it is not excluded that there will be a renewed temptation to reach new peaks in the stock markets (except for the Warsaw Stock Exchange). It is certain that the Federal Reserve’s decision in September on interest rates will once again be the focus of attention. Cuts are already inevitable, and the question is not whether but by how much the cost of money will be reduced. Interestingly, at the peak of the panic at the beginning of the week, the market was almost completely convinced about the double cut by the Federal Open Market Committee. Now that certainty is no longer there, and according to market valuations, the probability is a classic fifty-fifty. This may help the markets in the long run. It cannot be denied that Powell and his team have not been advocates of a very dovish monetary policy in recent months. The commencing of a rate-cutting cycle with a double cut suggests deep problems with the economy, and even if investors would get what they want, in a cool calculation, such a move could worsen market sentiment even further. Therefore, it is good that the expectations balloon is slowly being deflated.

Optimistic Friday

Today the broad market is in the green. Both DAX and pre-session trading in the US indicate growth. Eur/USD remains stable, maintaining the rate between $1.0910 and $1.0925. This slight volatility in the major global currency pair is a very good sign for the upcoming week. It shows that emotions have been tamed, at least for now. The situation with the zloty is different. It seemed a little behind at first and didn’t initially notice the improvement in sentiment. During the trading session, however, it started to recover. Euro reached the level of PLN 4.3312 and since then it has depreciated by almost one grosze. The same is true for the dollar, which reached 3.9665 PLN, but then turned south.

Author: Krzysztof Adamczak, Currency Analyst at Walutomat.pl