Monthly Market Outlook

August was kind of a transition month for the central banks. Despite the 25 basis points hike at the latest meetings, both central banks are moving towards pausing rather than hiking. The economy showed signs of slowing and cooling.

In September, the main events will be, once again, the ECB and FED meetings. Both banks are expected to pause, but more importantly, the new economic forecasts will determine the rate path for this hiking cycle. Are we done or not? This question will most probably be answered before the end of this month.

Macro View

At the Jackson Hole meeting, Powell held the door open for a possible rate hike and stated that rates would stay higher for some time. Although this might seem hawkish, the overall speech was somewhat neutral. Combining the speeches of many members, it is clear that the Fed has reached or is very close to the threshold of this hiking cycle. The Fed has managed to guide market expectations quite effectively. Currently, in the futures market, another rate hike is being priced in with a 46.7% probability, and the first rate cut is expected at the May meeting.

During the September meeting, members will update the economic forecast, but it’s highly likely they will pause once again and defer their final decision to the November meeting. However, the September forecast will help clarify the situation for the markets, allowing them to price in the November decisions early.

The US economy showed signs of a slowdown in the second quarter, with GDP falling to 2.1% from 2.4%, and the job market displayed signs of a slowdown as JOLTS job openings reached their lowest point since early 2021, although it still remained significantly higher than long-term averages. The unemployment rate increased to 3.8% from 3.5%, but most of the increase was due to the rising participation rate, which should generally please the Fed members. Overall, these signs suggest that a possible soft landing scenario is about to unfold. However, as many central bankers have emphasized numerous times, it will have a limited window.

Inflation is still slightly higher than the target. Monthly core PCE fell to the desired 0.2%, but since 2011, it has fallen below this level only two times. It will be important for core PCE to remain close to 0.2% over the next few months for the Fed to even consider rate cuts.

The manufacturing sector still appears weak despite some early positive signs. China’s manufacturing PMI rose to 49.7, and even the Caixin PMI increased to 51. However, the US manufacturing PMI is still holding below 50. The real concern arises from the UK and EU, where a reading lower than 44 indicates a sharp decline in activity. Some ECB members have even begun discussing the possibility of stagflation. Additionally, the risk of a potential strike at Chevron LNG in Australia is not helping matters. The natural gas market in the Eurozone remains on edge.

During August, there was a risk of a possible strike at Woodside Energy, although an agreement was reached. Now, negotiations with Chevron LNG have become stuck. If an agreement cannot be reached soon, a potential strike could disrupt the already tight natural gas market, potentially impacting the EU and UK if it takes too long to resolve. Despite these challenges, if inflation numbers continue to moderate, and central banks cease raising rates, confidence could return to the manufacturing sector relatively quickly. Some sub-indices of PMIs are already showing small signs of recovery.

Another sign of the manufacturing recovery is emerging from the commodities market. The Bloomberg Commodity Index has broken out of its year-long downtrend and formed an uptrend channel. This could mean that demand for commodities is picking up, especially as US oil demand has reached pre-pandemic levels.

The economic data from the Eurozone has been very weak in recent months, but in August, there are some signs of recovery. Germany’s factory orders increased by 6.4% and 7% in May and June, respectively. PMI data remains very low, but the decline in activity has slowed, even if only slightly. Despite these small signals, weakness still persists. Additionally, inflation is not slowing down sufficiently. The preliminary CPI for August came in at 0.6%, much higher than what the ECB desires and market expectations. Core inflation also appears to be holding steady at over 5% and shows no immediate signs of decreasing. With the tightening measures still in progress, the M3 money supply has fallen below 0% for the first time since 2010. Increased tightening, high inflation, and a slowing economy all increase the risks associated with monetary policy decisions. Some members have even begun using the word “stagflation” as a possibility.

The market expects another hike within this year with a 58% probability, while it anticipates a pause in September with a 77% probability. Similar to the Fed, the ECB is also expected to begin cutting rates later in 2024. The ECB’s position is somewhat more challenging than the Fed’s, mainly because the US economy, driven by a strong services sector and job market, is performing much better. The hopes for a soft landing in the Eurozone are diminishing.

Looking at other central banks, after raising the limit of bond rates, USDJPY did the opposite of what the Bank of Japan had hoped for. The additional purchases to curb the rapid selling of bonds are keeping the Yen lower and lower. However, Japan’s economy appears to be cooling down. Tokyo’s CPI fell, the jobless rate increased by 0.2%, and industrial production declined more than expected. The only silver lining appears to be a 6.8% increase in retail sales on a yearly basis.

Concerns about the Chinese economy remain high, with troubling news emerging from the real estate and shadow banking sectors. Trade also seems to be cooling down, and inflation has fallen into negative territory. However, the government and central banks have finally started to take steps to boost economic activity. There have been some reductions in loan rates, FX reserve requirements have been lowered, and various measures have been implemented to ease home buying, among other steps taken throughout August.

Central Bank Meeting Calendar

Technical View

US 10-year government bonds continue to experience selling pressure. The 4% level has acted as support for the interest rate, and the uptrend is persisting, despite the negative surprises for the US economy last week. Accumulating debt and the ongoing Quantitative Tightening (QT) policy are still exerting negative pressure on US bonds. The downgrade of the US economy credit rating did not help either.

A break of the 4% level could potentially alter the negative outlook to some extent if it occurs.

Brent oil has risen due to supply concerns and weak US oil stocks. After the breakout and a pullback from 79, upward pressure increased. Now it is approaching the key resistance at 90. A breakout and holding above 90 could indicate that almost a year of flat movement might be coming to an end with a potential uptrend. Rising oil and commodity prices could put central bankers in a difficult position in the coming months.

Precious metals had a challenging first half of August but recovered well in the second half of the month. In particular, silver’s recent surge has created good trading opportunities. The pressure on metals could persist as high real yields continue. However, both silver and gold are approaching key resistance levels, so a breakout could alleviate some of the pressure if it occurs.

The gold/silver ratio, which serves as a useful indicator for gold prices and typically exhibits a negative correlation, continued to show silver leading the way in August. Silver’s price movements are much sharper than gold’s, so it often leads the way in sharp trends.

Despite the traditionally high negative correlation between real rates and gold, recently, the correlation seems to be weakening. The 10-year time period real rate has reached nearly 2%. However, there is a chance of cumulative pressure from the rates weighing on gold in the coming months, despite the rate hiking cycle nearing its end.

Gold has reached a critical point, determining its future direction. Several key factors are at play, including Fibonacci levels for the short and medium term, a retest of the previously broken orange uptrend, the upper boundary of a shorter-term green downtrend channel, a 144-day moving average, and a crucial horizontal resistance level. All of these factors converge near the 1950 mark, making it a highly significant resistance level to monitor. In the coming days, gold could decide whether to rally towards 1985 and test the five-month-long resistance or continue within the downtrend channel, pulling back towards the 1892 support level, and possibly even below it. Gold bulls may attempt to capitalize on momentum and the potential pause in rate hikes. However, the already overvalued gold prices could encounter difficulties in achieving higher highs in 2023.

Silver rose as much as to $25 in August after falling to nearly $22 in the first half of the month. The surge was similar to the one seen in July when it moved from $22 to nearly $25. Following the significant increase in July, silver underwent a consolidation phase between $24 and $25, but with the break of $24, a sharp selloff began. Now, the current situation is starting to look familiar once again. Silver is attempting to hold between $25 and $24, and a downward breakout could trigger another selloff. However, a breakout above $25 could lead the price to reach the latest peak or even the upper boundary of the trend channel in the coming weeks. Traders should anticipate sharp movements in either direction or even a whipsaw-like movement after the possible consolidation phase between $24 and $25 comes to an end.

After breaking out of the falling wedge formation in August, the dollar index enjoyed a small rally and recaptured the 200-day moving average. The weaker Eurozone data throughout the summer served as the primary catalyst for the index’s gains. Now, it is approaching the next key resistance zone. The 105-105.40 zone will be the next barrier for the dollar. As long as this zone holds, the upside potential will remain limited. Since December, this zone has prevented upward movements, but the momentum from the breakout of the falling wedge could potentially increase the likelihood of a breakout.

Regarding downward movements, the 200-day moving average and 101.30 could serve as support levels in September.

The stock markets retreated after two months of good returns. US indices, including the Dow Jones, S&P 500, and Nasdaq, fell by nearly 2%. The MSCI World Index also dropped by more than 2% in August. Nasdaq experienced a decline of more than 7% within August but recovered quickly in the last few days. The DAX index, on the other hand, diverged from the US indices and declined, primarily due to Germany’s PMI numbers remaining very low.

The VIX made a jump in the first half of August but then retreated rapidly to below 14.25 once again. As long as the downtrend in the VIX index continues, stocks could extend the months-long rally.

The S&P 500 experienced a significant decline after breaking out of the rising wedge formation in the first week of August. The signal from the break of the bearish formation, the selling pressure from the upper trendline of the channel, and a sell signal from the RMI all contributed to the substantial selloff. However, momentum appears to be shifting once again as the RMI is now indicating a buy signal.

Within the uptrend channel, historically, whenever a buy signal emerges from the RMI, the S&P 500 has risen by at least 5%. Currently, there is more than a 4% increase needed to reach the upper boundary of the channel, which could be a reasonable target for the bulls. On the other hand, if bearish pressures begin to mount once more, potential support levels to watch would 4350 and 4200.

With the massive AI and tech rally alongside a slowed-down manufacturing sector, the Dow/Nasdaq ratio has fallen by more than 25% since the beginning of this year. However, the falling wedge formation was broken in August, which could signal a potential improvement in performance for the Dow Jones. A potential dip in the manufacturing sector could be a favorable scenario. Nevertheless, Nvidia’s impressive earnings beat might jeopardize the pro-Dow expectations, as the AI rally could extend further with high expectations.

The FX market experienced a strong dollar index in August, aided by the weakening Yuan, Yen, and Euro. China’s problematic recovery, along with the central bank and government’s delayed stimulus, caused the Yuan to weaken. Japan’s ultra-loose monetary policy continues to pose challenges for Yen bulls. As for the Euro, the ongoing negative surprises from economic data began to take their toll. The GBP remained relatively resilient until the last days of August but eventually succumbed to the influence of the strong dollar index. Among all currencies, the AUD was perhaps the weakest, experiencing a significant drop in inflation and signs of a slowdown in the job market.

EURUSD is still holding within the uptrend that started early this year. In our earlier article, we discussed the key resistance level of 1.0960. From that resistance, a significant selling pressure emerged. However, as long as the trend remains intact, there may be further attempts to reach 1.0960. If a breakout occurs, a new upward wave toward 1.11 or even the upper boundary of the trend channel could commence.

Nonetheless, despite recent negative surprises from the US, the persistently weak economic activity in the Eurozone continues to weigh on the Euro. A potential break of the uptrend could exacerbate the recent declines even further, leading to downward movements toward 1.06.

According to the COT report, net non-commercial Euro positions are currently at their highest levels, which could have negative implications for EURUSD. It has been observed that whenever Euro long positions accumulate to excessive levels, EURUSD tends to experience significant losses. Since the 2008 crisis, there have been four instances where EURUSD made such moves, resulting in an average retreat of 19.35%. This raises the possibility of a long squeeze. However, before making a major downward move, EURUSD sometimes enjoys one last significant push, and that could happen in this instance as well.

EURUSD is currently close to its long-term downtrend from 2008, by nearly 4%. However, it’s worth noting that many previous reversals did not reach the trend line at all. As long as the positions remain at such elevated levels and the trend holds, there is a chance of a long squeeze, particularly if this year’s uptrend channel fails.

GBP has demonstrated resilience against the dollar for some time, but signals of a weakening job market, poor retail sales data, and declining economic activity are starting to increase selling pressure. The uptrend that began in October has now been broken, and GBPUSD is retracing towards the previously broken uptrend from 2021. If the downward pressure continues, the decline might extend towards 1.23. As for upward movements, 1.2850 is the resistance level to watch in September. A breakout could potentially lead the price toward the July high.

USDJPY jumped above 145 after testing the 137.50 support two times. The recent BOJ move to change bond rate limit did not satisfy the Yen bulls. But now, USDJPY is near the previous intervention levels and this is making trading a little bit tricky. As long as the uptrend and for shorter term 50 day moving average holds, the upward pressure could continue. If the price can hold above the Fibonacci %76.4 level, the upward wave could extend towards the upper line of the trend channel which is currently near 150. 150 also could become a physiological resistance as well.

As for the down moves, the zone between 50 day moving average and 142.50 is the first key support to follow.