September begins with more recession fears and Fed concerns – Daily Market Brief, September 1, 2022

After a painful August, investors are looking at a tough start to September amid hawkish Federal Reserve worries, weakness in China, and recession fears in Europe. The FTSE is set to open lower.

·         Chinese manufacturing PMI falls into contractions, Asian stocks slump

·         German retail sales unexpectedly rise 1.9% MoM, the DAX is still set to fall on the open

·         Gold falls to 1700, a 6-week low on USD strength, hawkish Federal Reserve expectations

August was a tough month on the market. Stocks on Wall Street and in Europe experienced a deep selloff. The DAX lost just shy of 5% across the month, while US stocks saw the weakest August performance in seven years. The FTSE fared better than most losing 1.8%, but that was mainly thanks to the tanking pound. 

GBP/USD dropped 4.4% across August in its worst monthly performance since October 2016. EUR/SD fell below parity, and the long USD bet was a winner as the US dollar index hit a 20-year high of over 109.00.

The selloff in stocks and the USD rally found fresh legs following Federal Reserve Chair Jerome Powell’s speech at Jackson Hole, where the Fed vowed to keep hiking interest rates and keep them elevated to stamp out inflation.

September isn’t set to start much different from how August ended. High inflation continues to fuel fears of an aggressive Federal Reserve, keeping stocks out of favour and lifting the USD. In Europe, the deepening energy crisis fuels the cost-of-living crisis, as inflation hits double digits and record highs.

USD/JPY has risen to a fresh 24-year high ahead of the European open. Meanwhile, GBP/USD looks vulnerable, falling for a fifth straight day, trading below 1.16 at a level last seen in May 2020.

Chinese manufacturing PMI

The resurgence of COVID in China is adding to the downbeat mood. Beijing’s insistence on the zero-COVID strategy has seen lockdown restrictions in Chengdu widen. The Caixin manufacturing PMI highlighted the policy’s negative impact and the drought-driven energy crunch on industrial activity. The manufacturing PMI fell to 49.5 in August, down from 50.2 in July. The level 50 separates expansion from contraction.

Stocks in Asia slumped following the data, which, combined with the weaker close on Wall Street, sees Europe heading for a lower open. The DAX is set to open 0.8% lower, and the FTSE -0.7%.

German retail sales

Stronger than expected retail sales in Germany have done nothing to lift the dark cloud lingering over the economy. Retail sales unexpectedly jumped 1.6% MoM in July after falling -1.6% in June. Expectations had been for sales to remain flat at 0%.

Looking ahead

Manufacturing PMI data in Europe and the UK are expected to confirm contraction with 49.7 and 46, respectively. These are the second readings, so typically less market moving than in the preliminary reading.

In the US, jobless claims are expected to increase slightly to 248k. They have steadied around this 250k level for several weeks. The data comes after a mixed bag of jobs data this week, ahead of tomorrow’s non-farm payrolls. While job vacancies unexpectedly jumped to 11.2 million, the ADP private payroll report saw 132k jobs added in August, well below the almost 300k forecast. Strong jobs data will likely fuel aggressive Fed bets, pulling stocks and gold lower and lifting the USD.

Gold trades depressed amid USD strength and rising treasury yields. The precious metal is testing $1700, a level last seen on 21st July.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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