Daily Market Analysis

Markets Lacking Conviction Ahead of Jackson Hole

August 23, 2023

With the Jackson Hole event just around the corner, markets are understandably lacking some conviction given the interest rate implications which could stem from this eagerly awaited get-together of central bankers. Jerome Powell probably won’t venture too far away from the hawkish tilt derived from the FOMC minutes last week.  

Because any dovish turn could lull the markets into a false sense of security should the rate of disinflation stall between now and year-end. Such a scenario where inflation hovers at current levels rather than continues to trend lower could well prompt the Fed to pull the trigger on one more hike. In any event, the story of inflationary trends for the rest of the year is yet to play out and as such, The Fed Chairman will be wanting to keep the option of further tightening up his sleeve.  

In equities, the upcoming Nvidia earnings result is shaping as a pivotal moment for not only the tech sector but also broader market momentum. The AI-fuelled rally has been one of the shining stories of 2023, with Nvidia being the star player. So, there is some weight on the shoulders of the much-vaunted chip maker to again deliver the goods not only with regards to earnings but also in relation to the outlook.

In currencies, the rise of the greenback has continued with the dollar index (DXY) hitting fresh multi-month highs. The DXY was trading around the 103.50 during Asian market hours on Wednesday. US yields are not showing any signs of an imminent retreat, and this heightened treasury yield environment is acting as a buttress for the greenback. As to why treasury yields are where they are, some of it is down to the Fed outlook while Chinese economic troubles are also contributing to the yield on the 10-year note sitting at levels not seen since the GFC.  

At the BRICS summit, markets will be monitoring for any rhetoric or actions pointing towards dollarisation trends. For much of the year there was a lot of hype about BRICS potentially signalling the formation of a common currency, but such plans appear to be on the backseat for the moment (with the idea of a common currency not on the official agenda) with BRICS members focusing on more easily achievable measures of reducing USD-dependency, such as settling trades among members in local currencies.  

Elsewhere in markets, gold has clawed its way back to the US$1900 level but it’s a very slow grind for the precious metal, given the relatively high yield available in alternate low-risk assets such US treasuries. Meanwhile, WTI oil has slipped below the US$80 threshold. Momentum is beginning to wane for oil in part due to the ongoing USD strength, while Chinese growth concerns are also starting to weigh on the oil price. However, on the supply side, the OPEC+ production cuts remain a counterweight which is serving to prop up the price.  

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