Markets Are At The Crossroad: What Should You Expect? | Daily Market Analysis

Key events:

USA - Building Permits (Aug)

Canada - Core CPI (MoM) (Aug)

Eurozone - ECB President Lagarde Speaks

Markets Are At The Crossroad: What Should You Expect?

The past week on the American stock market took away with it deposits of many inexperienced market participants, and with them hopes for a serene and simple way of earning for other participants. All key indices got serious impulse of decrease by 3 - 5%. The blame for such a coincidence was the data on consumer inflation in the USA.

Reasons

The consumer inflation itself received a slight decrease, a little worse than the forecasted expectation, which may be considered a positive factor. But core inflation, which is more resilient, showed an increase at all time points, both YoY and MoM.

This development could have been predicted on the basis of statistical data on industrial activity in the U.S., as well as on economic indicators of big business - they absolutely do not reflect the recession so actively attributed to the American economy. In general, inflation is doing well, and so far it's not going anywhere.

Market participants' inflation expectations, which the yield on ten-year Treasury securities can measure, have been showing steady growth since the beginning of August.

Also, the normal value of the key rate, previously outlined by the Federal Reserve as around 3.5 to 3.75%, is now much higher, around 4%. The question is how fast and hard they will catch up with that value.

US treasuries yield curve

The Treasury yield curve is getting increasingly distorted, relative to its normal form, giving a more negative scenario for the US economy over the long haul.

All in all, the market sees some pretty harsh consequences ahead in the form of continued hawkish rhetoric from the Fed - the probability of a triple key rate hike on September 21 is 100%. The unanswered question is what the Fed thinks about this situation in general and what actions it will take. Any hint of positive will now give a serious growth impulse because the negative market moves beyond all possible bounds.

The basic market metrics

NDQ, DJI, and SPX price chart

All the key indices of the American stock market, except for the technology companies index NASDAQ, reached their June lows, which gives the prices local support at the moment. This is a rather important price point today. The market is literally at a crossroads.

DXY chart

The dollar index, which has shown a crazy rally since June 2021, is also at a crossroads right now, near the strong volume level that has always historically influenced it.

The basket of metals is not showing clear, unidirectional dynamics - copper indicates uncertainty, trading in a fairly tight price range.

XAU/USD chart

Gold, as a hedge, is showing a downward dynamic - recent market events forced market participants to take money out of their pots to cover unprofitable positions as well as avoid a Margin call.

The market is in the decision-making stage. The uncertainty of the participants is obvious and overflowing - just yesterday everyone believed that inflation was falling back, actively buying all risky assets, and today they see that inflation is with us for a long time. The U.S. economy is broken badly and all the positive indicators so far look more like death throes.

Guided by the seasonal statistics of the pre-election cycle in the USA, we can assume that the market will get a serious impulse for growth at this meeting of the Fed.

The pretext for this may be another injection of positive from the Democrats, because the election race for the presidency will soon begin, and the electorate needs something to butter it up. Statistically, 52% of U.S. households are active investors in the stock market, and their good mood may be a great help to the current leadership in the upcoming political struggle.

Well, these are just my guesses based on statistical data. There are too many factors right now, both technical and fundamental, merged into one moment in time.

Of course, the decisive event for choosing the direction will be the US Fed meeting on September 21, this Wednesday. This event will put clarity in the minds of market participants for the coming quarter. As always, we urge you to keep a cool mind and not make hasty trading decisions.