This week’s market performance was shaped by three pivotal events: the European Central Bank’s (ECB’s) latest rate cut, the release of United States (US) inflation data, and the first US presidential debate between Kamala Harris and Donald Trump. Each had an impact, leaving investors to adjust their strategies as they navigate the economic and political landscape.
ECB rate cut: a subtle yet welcome adjustment
The ECB made a modest move this week, cutting its deposit facility rate by 25 basis points to 3.5%. This move wasn’t a surprise, nor was it a game-changer. ECB President, Christine Lagarde, made it clear that future rate cut decisions would be driven by data, with no specific rate-cutting path in sight. In other words, the central bank is keeping its options open as it assesses European Union (EU) inflation and economic growth in the coming months.
EU inflation remains in focus, with core inflation now expected to only drop to 2% by 2026, with wage growth keeping some price pressures alive. While the ECB remains committed to bringing inflation back to its 2% target, investors are uncertain about how quickly that will happen, given the delicate balance between inflation and economic growth in the eurozone.
US inflation: some good, some not so good
In the US, inflation data for August was a mixed bag. On the bright side, headline inflation eased to 2.5% year-on-year, down from July’s 2.9%, marking its lowest annual rate since February 2021. However, core inflation, which strips out food and energy prices, crept up by 0.3% month-on-month, slightly above expectations.
This uptick in core inflation has tempered the optimism that the US Federal Reserve (Fed) might make a more significant 50-basis point rate cut at its upcoming September meeting. Markets are now pricing in a more modest 25-basis point cut, with the CME FedWatch Tool showing an 85% probability of this smaller adjustment—a notable increase from 50% just a month ago.
Presidential debate: politics and markets intersect
This week’s US presidential debate offered plenty of policy talk, particularly on the economy. Former President Donald Trump and current Vice President Kamala Harris squared off on critical issues, taking different approaches to immigration, inflation, and national security.
Harris appeared to come out on top, as reflected in the PredictIt odds, which showed her gaining a seven-point lead by the end of the debate. This shift in political sentiment was reflected in financial markets almost immediately. Bitcoin, which has been boosted by expectations of a Trump win, dipped by 1%, while shares of companies involved in reproductive healthcare saw gains, reflecting the candidates’ sharp divide on key issues.
A cautious outlook
As the week wraps up, investors are left balancing several factors: the ECB’s commitment to data-driven decisions, the Fed’s likely smaller rate cut, and the ongoing political shifts in the US. With no clear direction from central banks and political uncertainties in play, the market is expected to remain cautious, at least in the short term. However, with central banks keeping inflation in focus and the US presidential elections just around the corner, the next few months will be crucial for economic policy and market stability.
A MARKET SNAPSHOT
As the financial world wrapped up another week, markets moved in response to a series of key economic indicators and central bank decisions. Bonds, equities, commodities, and currencies had their moments, with investors taking cues from inflation data, central bank actions, and global economic forecasts.
US yields decline amid ongoing Fed rate cut speculation
Bond markets were in focus this week as yields on government debt trended downward. In the US, the yield on the 10-year Treasury slipped below 3.7%, its lowest level since May 2023. This drop came after US inflation data pointed to a slowing annual inflation rate for the fifth consecutive month, reinforcing market expectations that the Fed will opt for a smaller 25-basis point rate cut at its upcoming policy meeting. Wholesale prices in the US rose by 0.2% month-over-month in August, slightly above forecasts. However, the broader outlook still pointed to easing price pressures, prompting bond traders to anticipate more moderate monetary easing.
Across the Atlantic, the yield on the UK 10-year Gilt fell to 3.95%, retreating from the highs seen earlier in the week. This reflected a trend of declining bond yields as traders reassessed the global economic outlook. With the Bank of England’s (BoE’s) September meeting on the horizon, most analysts expect the central bank to keep rates steady, though a 25-basis point rate cut is widely predicted for November. UK Prime Minister, Keir Starmer, also noted that the UK faces a “long road” to economic recovery, cautioning that conditions could worsen before they improve.
A mixed performance across sectors
Equity markets were a rollercoaster of activity this week, with mixed performances across sectors and geographies. In the US, the three major averages swung between small gains and losses on Thursday, influenced by the latest Producer Price Index (PPI) report, which showed a slightly higher-than-expected increase in factory gate prices. Despite this, annual inflation rates for the previous month were revised lower, and both initial and continuing jobless claims met forecasts, keeping market sentiment relatively stable.
Tech giants Microsoft, Apple, Amazon, Meta, and Alphabet posted gains. After an 8% surge the previous day, chip manufacturer Nvidia was up a further 1.9%. On the downside, biotechnology company Moderna took a significant hit, plunging 12.3% after announcing cuts to research spending and pausing the development of several pharmaceuticals.
Across the pond, the UK’s FTSE 100 index rose over 0.5%, breaking a two-day losing streak. Investor risk appetite improved after US inflation data reinforced hopes of a smaller Fed rate cut. Mining stocks led the charge, with Antofagasta, Glencore, Anglo American, and Rio Tinto posting strong gains. On the other hand, beverage company Fevertree’s shares plunged more than 11.5% following weaker-than-expected first-half results and a cut to its sales outlook.
In Germany, the DAX trimmed some of its earlier gains but ended Thursday up about 0.4%, driven by tech sector strength. Investors continued to digest the ECB’s decision to cut key interest rates and revise GDP growth forecasts downward for the next three years. The ECB also raised its core inflation forecasts for this year and next, further influencing market sentiment.
Japan’s Nikkei 225 index saw a strong rally on Thursday, jumping 3.41%, while the broader Topix index gained 2.44%. This reversal from the previous session’s losses was largely driven by tech stocks, which rallied in response to a similar tech-led surge on Wall Street. Key players like semiconductor inspection and measurement solutions company Lasertec, semiconductor firm Disco Corp, and global investment holding company SoftBank Group posted substantial gains, while other heavyweights such as engineering and manufacturing company Mitsubishi Heavy Industries and automotive manufacturing giant Toyota Motor also saw notable increases.
Oil gains as supply issues outweigh demand concerns
Commodity markets saw mixed movements this week, with oil prices climbing while gold remained stable. Brent crude oil futures rose to $71.60/barrel, extending gains from the previous session. This increase was largely driven by supply disruptions caused by Hurricane Francine, which hit the Gulf of Mexico and forced the shutdown of offshore platforms. However, ongoing concerns over weak demand continues to weigh on market sentiment. US crude stocks rose by 0.83 million barrels last week, below the forecast but marking the first inventory build-up since early August.
Meanwhile, gold prices steadied near $2,510/ounce as markets absorbed the latest US inflation data. The rise in core consumer prices increased expectations for a smaller Fed rate cut. With the Fed likely to take a more measured approach to rate cuts, investors maintained their interest in gold as a safe-haven asset.
The dollar softens while the euro and pound hold steady
In currency markets, the US dollar edged lower but remained near a three-week high, driven by expectations that the Fed will opt for a smaller rate cut at its upcoming meeting. The US Dollar Index slipped slightly to 101.6, though it remains supported by solid inflation data. Wholesale prices in the US rose more than expected, aligning with CPI data showing a month-on-month inflation increase.
The euro moved above $1.10/€ as traders digested the ECB’s rate cut decision. The central bank confirmed that recent inflation data had broadly aligned with expectations, though policymakers also raised their core inflation forecasts for the next two years. The pound held steady at $1.30/£ as traders absorbed fresh economic data showing stalled UK GDP growth and weaker wage growth. Investors are now looking ahead to the BoE’s November meeting, where a rate cut is widely anticipated.
Key Indicators:
GBP/USD: 1.3124
GBP/EUR: 1.1850
GOLD: $2,570.05
BRENT CRUDE: $72.48
Sources: Reuters, Bloomberg and Trading Economics.
Written by Citadel Global Director, Bianca Botes.
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