Stocks Rebound in August as Economic Fears Ease; Gold Falls Amid Strong Dollar and China Concerns | Daily Market Analysis

Key events:

• USA - Labor Day
• Eurozone - HCOB Eurozone Manufacturing PMI (Aug)
• UK - S&P Global/CIPS UK Manufacturing PMI (Aug) 

The S&P 500 ended higher on Friday, wrapping up August with its fourth consecutive monthly gain, as fading economic concerns fueled a strong rebound in stocks following an earlier selloff.

The S&P 500 edged up 0.04%, while the NASDAQ Composite gained 1%, and the Dow Jones Industrial Average rose by 228 points, or 0.63%. The S&P 500 finished August up 2%, bouncing back after its biggest drop in nearly two years on August 5, when a weaker July jobs report stoked recession fears. However, those concerns were eased by a series of upbeat labor market reports.

Gold prices continued to fall on Monday, dropping below the $2,500 psychological level as a stronger US dollar, buoyed by the July Personal Consumption Expenditures (PCE) Index, exerted pressure on the precious metal. Additionally, concerns about China's slowing economy, the world's largest gold consumer, have further contributed to the decline.

The core PCE Index, which is the Federal Reserve's preferred inflation gauge, rose 2.6% year-over-year in July, slightly below the expected 2.7%. On a monthly basis, the index increased by 0.2%. However, rising expectations of a potential interest rate cut by the Federal Reserve in its September meeting could help limit gold's losses, as lower rates reduce the opportunity cost of holding non-yielding assets like gold.

Meanwhile, the Japanese Yen remained steady against the US Dollar  after the release of the July PCE data, which tempered expectations of an aggressive rate cut from the Federal Reserve. On Monday, Japanese firms reported a 7.4% increase in capital spending for the second quarter, and the August Manufacturing PMI was revised upwards to 49.8 from 49.5, signaling stabilization. Additionally, rising inflation in Tokyo has reinforced the Bank of Japan's hawkish stance, limiting gains in the USD/JPY pair.

The Australian Dollar weakened against the US Dollar after key economic data was released on Monday. However, improving risk sentiment might limit further downside for the AUD, as expectations for a dovish shift from the Federal Reserve continue to rise.

Australia's building permits surged 10.4% month-over-month in July, rebounding from a 6.5% drop in June and marking the strongest growth since May 2023. On an annual basis, building permits grew 14.3%, a significant recovery from the previous 3.7% decline. Additionally, China's Caixin Manufacturing PMI increased to 50.4 in August, up from 49.8 in July, reflecting positive trade implications for Australia.

The GBP/USD pair climbed to around 1.3135 on Monday, snapping a three-day losing streak during the early Asian session. With no major UK economic data scheduled this week, the USD's price action will be the key driver for the GBP/USD. Investors are becoming more confident that the Bank of England will take a gradual approach to easing monetary policy for the remainder of the year. According to a Reuters poll, economists expect one more 25 basis point rate cut from the BoE in 2024.

EUR/USD also ended its three-day losing streak, trading around 1.1050 during the Asian session on Monday. The euro's recovery can be attributed to the softening US Dollar, driven by rising dovish sentiment surrounding the Federal Reserve.

On Friday, European Central Bank  Governing Council member Francois Villeroy de Galhau hinted at a possible interest rate cut in September, stating that there are "good reasons" for the ECB to consider such a move. He emphasized the need for action during the upcoming September 12 meeting, suggesting it would be a fair and prudent decision.

Looking ahead, traders will focus on the US ISM Manufacturing PMI for August, due on Tuesday, followed by the Services PMI on Thursday. The spotlight will then shift to Friday's US employment data, including nonfarm payrolls (NFP), the unemployment rate, and average hourly earnings for August.