The RoboMarkets Weekly Review and Outlook

Jürgen Molnar, Capital Market Strategist

26 August 2022

The combination of a change in sentiment after worrying inflation figures and the bouncing of the indices in Frankfurt and on Wall Street off strong resistances at the beginning of the past trading week caused a continuation of profit-taking after an astonishing recovery rally despite adverse conditions.

Then, however, the indices recovered and, from a technical point of view, the DAX formed a constructive bottom above the 13,000 mark, which gives it the chance to continue upwards after the lack of bad news from Jackson Hole. On the other hand, there is the threat of a relapse to the lows for the year just below 12,500 points.

Jackson Hole Reshuffles the Cards

For US Federal Reserve Chairman Jerome Powell, the annual symposium on international monetary policy is all about credibility. At the last meeting exactly one year ago, not only he but also the vast majority of participants completely underestimated the emerging inflation.

Today, it stands at 8.5 per cent in the US, and although it has recently slowed somewhat, it is still miles away from the monetary policy target. So it is clear that Powell will stick to the tight monetary policy, including further interest rate hikes. The only question is at what price the Fed will stick to its restrictive stance.

Does it have to bring about a recession to get inflation under control, including a resurgence of unemployment that is currently still stamped full employment? Or does it manage a soft landing for the US economy, because inflation rates may eventually take care of themselves through falling energy prices and solutions to supply chain problems?

Investors will also look for answers to these two questions between the lines of Powell’s speech and then make their investment decisions for the coming weeks. So once again, monetary policy has it in its hands whether things will get really uncomfortable on the stock markets again or whether the easing will continue over the summer into the autumn.

Lookahead for the Next Week

Speaking of the US labour market, probably the most important event of the coming week will again be on Friday, when the newly created Non-Farm Payrolls (NFPs) will be published. In July, 528,000 jobs were created, almost twice as many as expected, which caused concerns about rapidly rising interest rates and the likelihood of 75 basis points at the Fed meeting in September to skyrocket.

Quite a few economists have been warning for some time that unemployment would have to rise significantly to bring prices down further as well – most recently, the unemployment rate was only 3.5 per cent on a seasonally adjusted basis.

As far as Europe is concerned, it will be exciting on Tuesday when the inflation rate for the month of August is published. A slight easing after the 7.5 per cent in July would also be positive here. However, it is probably premature to speak of a real turnaround here, also against the background of the continuing supply shortage of gas.

According to industry insiders, this could last another two to three years. This can literally cost German households money. The first bills from gas suppliers have arrived and are shocking their recipients. Households have to shoulder up to 50 percent additional costs. The effects on the willingness to consume, but also on the investment behaviour of companies, are likely to be clearly felt.

EUR/USD Below Parity

The situation is similar for the European reserve currency, which fell below parity with the US dollar again this week and is now looking for support. With the looming energy crisis and the risk of recession, there is always the possibility that the euro could fall even further against the dollar. The consequences for the European economy would be fatal. Not only would imports become much more expensive and thus unnecessarily fuel the already high inflation. It would also leverage the energy crisis. The rising prices due to limited supply would be further increased by a weak euro.

DAX – Current Supports and Resistances

Supports: 13,190 + 13,075 + 12,800/13,000

Resistances: 13,420 + 13,550 + 13,700

This article was brought to you by RoboMarkets.