Market Analysis

Weekly Outlook 4th to 8th July

 

As the US central bank attempts to fight skyrocketing inflation with higher interest rates, concerns have grown that it may send the largest economy in the world into recession. As a result, Wall Street entered the bear market territory in recent weeks, which is generally understood to represent a fall of 20% or more from a recent peak.

This is the worst first half of a year for the Dow Jones and the S&P 500 since 1962 and 1970, respectively, while the Nasdaq has never experienced such a fall, almost 30%, during the first 6 months of a year. The S&P 500 was down more than 21% between January and June, the Dow Jones more than 15%, and the Nasdaq almost 30%.

European indexes also recorded their worst semester in years, with the German DAX falling more than 15%, the French CAC 40 losing more than 17%, and the Italian FTSE MIB down more than 22%.

With the deteriorating economic situation, and growing fears of a worldwide recession, oil prices have gone down, as worries about lower demand weighed on oil, even though the oil market remains extremely tight due to limited supply. Last week, the North Sea Brent reached $110 per barrel and the US WTI light crude reached $107 a barrel.

Oil isn’t the only commodity affected by recession fears, as all industrial metals posted negative performance last week like copper, aluminum, zinc, nickel, and tin, some of them even closing the first semester of 2022 close to their lowest level of the year.

Gold hasn’t played its safe-haven role last week, as it lost around 1.30% last week to around $1,807, but the precious metal has limited its losses since the beginning of the year compared to other assets to around 1% since January 2022.

During the first half of the year, the Forex market experienced some notable movements worth mentioning, especially when it comes to the dollar, which strongly strengthened against its pairs due to higher interest rates in the United States. The USD/JPY reached its highest level in more than 20 years, above 135, and the GBP/USD kept falling towards the significant level of 1.2000. The selling pressure on the EUR/USD is still significant and could lead the pair deep below the 1.0400 mark.

 

What should you expect this week?

This week’s main events will be the RBA’s interest rates decision on Tuesday, which will strongly impact the AUD and the Australian indexes, the FOMC meeting minutes published on Wednesday, as well as the release of the NFP report on Friday, which should increase volatility on the Forex, the index market, as well as US bond yields.

 

RBA monetary policy decision

The RBA raised its interest rate by 50 basis points last month, to 0.85 percent, marking the biggest monthly rise in more than 20 years. Market participants are expecting the RBA to keep voting for interest rate hikes of that magnitude this month.

Despite being lower than in most other major countries like the United States, the United Kingdom, or the European Union, Australia’s inflation rate, which is above 5%, is still much higher than the goal of 2% inflation.

Before the publication of the RBA’s decision, Australian retail trade figures will be updated and they are already beating estimates in May with a 0.9 percent gain, marking the fifth consecutive month of growth, well above market expectations of a 0.4 percent increase.

 

FOMC meeting minutes

The FOMC meeting minutes will be published on Wednesday. As it provides a comprehensive account of the committee’s policy-setting meeting that took place roughly two weeks ago, it is an important document that traders thoroughly analyze.

By looking at the participants’ views on current conditions, the economic outlook, the review of the financial situation, and the committee policy action, as well as the vote, traders will be able to spot any changes in vocabulary compared to last month’s minutes – changes that can provide clues about inflation and growth prospects as well as upcoming monetary policy decisions.

 

US Employment report

Like every first Friday of the month, the Bureau of Labor Statistics will publish the American employment report with key data about the job market in the United States. Markets usually react to this publication, as the Fed is currently adopting a hawkish monetary policy to fight ramping inflation.

As Jerome Powell recently said that there is “no guarantee” that the American central bank can curb rampant inflation without harming the labor market, investors will closely follow the NFP report to note if the labor market stays red-hot or if it’s cooling down.

Facing a potential slowdown in the economy and the effects of persistent inflation, the number of jobs created in the US is expected to drop to 295,000 in June, although the unemployment rate is expected to stay at 3.6%. When it comes to hourly wages, they are predicted to increase by 0.3% compared to last month.

 

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