Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole meeting wreaked havoc across the equity markets on Friday. His message was crystal clear: inflation must come down even if it means pain for households and businesses in the process.
The S&P500 tanked more than 3% on Friday and slipped below the 100-DMA. It will certainly clear the major Fibonacci support in the coming hours, which is the 38.2% Fibonacci retracement on the summer rally, and which stands near the 4060 points. Breaking below this level will mark the end of the summer rally, from a technical standpoint, and send the index to the bearish consolidation zone. The 50-DMA, which stands a touch below the 4000 mark, will then be the next important support.
Nasdaq, on the other hand, dropped more than 4% on Friday, as the technology stocks are more sensitive to interest rate changes. The index slipped below its 100-DMA, and the 38.2% Fibonacci support on the summer rally, and is already in the bearish consolidation zone.
And oh, before I forget, Powell also mentioned how surprisingly resilient the US jobs market is, and hinted that the Fed is tolerant for a certain cool down in the jobs figures.
Therefore, this week’s jobs data has power to further revive the Fed hawks, rather than the contrary.
Due Friday, the NFP data is expected to print another month close to 300’000 new nonfarm job additions in the US. Over the past four months, the data clearly exceeded the market expectations, especially last month, the number printed was above half-a-million new job additions, versus around 250’000 expected by analysts.
Although, the layoff news over the past couple of months should, at some point, reflect in the US jobs data, it’s too early to titillate the Fed about the destroyed jobs. Therefore, even if we see a disappointing number, the Fed doves will be nowhere to be found and from now, we expect to see a deeper downside correction in equities, and further retracement of the summer rally.
Up goes the dollar, again…
The US US 2-year yield came close to the 2.50% level, the 10-year yield edged up following Powell’s Jackson Hole speech, but the price action in the US papers were less aggressive than in equities, as long-term bond holders seem relatively happy with a 3% return. Near the 3% threshold, the selloff in equities drive capital to the less risky sovereign assets.
The FX price action was of course in favour of a stronger US dollar. Powell sent the dollar rallying, and the dollar bulls now eye the 110 level, on the back of a solid divergence between the decidedly hawkish Fed, and more hawkish, but increasingly worried other central banks.
Other major central banks are also hawkish, but they are less aggressive than the Fed. The European Central Bank members, for example, are increasingly in favour of a tighter monetary policy, if nothing, to fight the strong dollar, which becomes a serious headache.
Activity in the European money markets now hints at nearly 50% chance of seeing a bigger than a 50bp hike in September. But even that, doesn’t get the euro bulls back on track. The euro is pushing lower below parity against the US dollar, and the Europeans are holding their breath before the next round of inflation figures in Europe start flowing in from tomorrow. Due Wednesday, the flash CPI estimate for Europe is expected to hit the 9% mark, and there is a stronger probability of seeing a bad surprise than a good done, given the skyrocketing gas prices, and the weakening euro.
Energy up…
The European nat gas prices continue spiking. The Dutch TTF futures rose another 8% on Friday, and are up by 340% since June, and crude oil kicks off the week on a positive note, as the supply side issues came back in force last week, after the Saudi minister said that OPEC is unhappy about the falling prices, and could restrict output. Also, there is no breakthrough in the US – Iran nuclear deal. We could see the barrel of crude exceed its 200-DMA level this week, which stands a touch below the $97 mark. The latter would add more pressure on equity pricing.
Gold, Bitcoin dive
Elsewhere, gold is cheaper since Powell’s speech, and is set to make another attempt below the $1700 mark, while Bitcoin fell below the $20’000 mark, and is now below the summer uptrending trend. The selloff in equities should further pressure Bitcoin lower. The next natural target for Bitcoin bears stands near $17’500, the June dip, then the $15’000 level, the next psychological support.