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Equities Gain Ahead of the Jackson Hole Meeting

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Global stocks started the week on a firm note amid easing concerns over the situation in Ukraine, while Yellen is expected to act dovish

There was good news regarding the US housing market on Monday, as the National Association of Home Builders’ sentiment index rose up to 55 in August from the previous 53, ahead of market expectations and the highest reading since December.

While there was some scepticism among analysts that the housing market has finally starting to pick up, the picture may only become clearer this week with the release of figures on housing starts and building permits, plus existing and new home sales. But it will be the health condition of the US labour market that takes centre stage on Friday when Mrs Yellen airs her views on the subject.

Global stocks started the week on a firm note amid easing concerns over the situation in Ukraine and a fresh bout of merger and acquisition activity in the US discount retail sector.

But the main focus for the markets were this week’s annual central bank conference in Jackson Hole, Wyoming, which will see Federal Reserve (Fed) chairwoman Janet Yellen speak on Friday about the US labour market. While risk sentiment has turned positive on the news that Ukraine and Russian foreign ministers had met in Berlin over the weekend seeking a solution to the crisis, in truth an agreement is unlikely to happen in the near term and the market is responding positively to the fact that there will be no further escalation unfolded over the weekend.

The Fed’s Jackson Hole symposium will clearly focus on the labour market though we are not expecting any new developments, with Mrs Yellen likely to restate her view that significant slack remains in the labour market. The S&P 500 equity index rose 0.8% to 1,971 overnight, leaving it less than 0.9% below its record closing high, while the Nasdaq Composite closed at a 14-year peak. The Chicago Board Options Exchange (CBOE) Vix index of implied equity volatility, a gauge of the cost of protecting equity portfolios, was down 5.6% at 12.41 in late trade, well off Friday’s intraday high of 14.94.

The Shanghai Composite index climbed up 0.6% to an eight-month high, even after data showed that new home prices fell in 64 out of 70 Chinese cities last month, while foreign direct investment in China dropped 17% from beginning of the year until July.

Australia’s central bank said the nation’s economic outlook remains uncertain because of the conflicting forces that are at play and reiterated that interest rates are set to remain on hold. Members “noted the significant uncertainties around the growth forecast and the importance of considering the risks to the forecast as well as the central projection,” the Reserve Bank of Australia (RBA) said in minutes released today, where it kept the cash rate unchanged at a record-low 2.5%. “Gross Domestic Products (GDP) growth was likely to have slowed to a more moderate pace in the June quarter.”

Governor Glenn Stevens, seeking to stoke the domestic demand to compensate for a slowdown in mining investment, has seen his efforts hampered by an elevated currency. Market pricing shows a higher chance of further policy easing after the nation’s unemployment rate jumped to a 12-year high in July. The RBA cut its growth and inflation forecasts and wage growth stagnated.

The central bank noted the local currency remained “well above” its level in late January even as commodity prices have weakened and rate differentials between Australia and most other advanced economies have narrowed down since then. The Australian dollar, which traded as high as about $1.11 and as low as 80 U.S. cents in the past five years, has remained above 90 cents since March.

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