Daily Market Analysis - FRIDAY JUNE 23, 2023

23 ביוני 2023

Events:

UK - Manufacturing PMI
USA - FOMC Member Mester Speaks
USA - FOMC Member Bostic Speaks
USA - FOMC Member Bullard Speaks
USA - Services PMI (Jun)

During Thursday's trading session, the S&P 500 and the Nasdaq displayed upward movement, propelled by the statements made by US Federal Reserve Chairman Jerome Powell. Powell's hawkish stance indicated that the central bank's tightening cycle was not yet complete, instilling confidence in investors. However, he also emphasized the Fed's commitment to exercising caution in its approach to monetary policy.

The Nasdaq, known for its heavy concentration of technology stocks, experienced significant gains. This surge in the index was primarily driven by the momentum stocks of prominent companies like Amazon.com (NASDAQ: AMZN), Apple Inc (NASDAQ: AAPL), and Microsoft Corp (NASDAQ: MSFT). These tech giants showcased impressive performance, contributing to the overall positive sentiment in the market.

On the other hand, the progress of the broader S&P 500 index was more modest compared to the Nasdaq's surge. While still displaying positive movement, the gains in the S&P 500 were not as pronounced as those in the technology-driven Nasdaq.

In contrast to the S&P 500 and the Nasdaq, the blue-chip Dow Jones Industrial Average (Dow) remained relatively unchanged. The Dow is composed of large, established companies from various sectors, including industrials and financials. However, during this particular trading session, these sectors had a minimal impact on the index's performance.

Overall, the market sentiment on Thursday was largely influenced by Powell's statements, which offered a mixed perspective. While indicating a continued tightening of monetary policy, Powell also reassured investors about the Fed's cautious approach. This combination of factors led to varying degrees of upward movement in different indices, with the Nasdaq taking the lead, followed by the S&P 500, while the Dow remained relatively stable.


NASDAQ indice daily chart


S&P500 indice daily chart


DJI indice daily chart

During his appearance before the Senate Banking Committee for the semi-annual monetary policy testimony, US Federal Reserve Chairman Jerome Powell reiterated his stance on the likelihood of further interest rate hikes in the near future. This statement reaffirmed his belief in the need for continued tightening of monetary policy to address potential inflationary pressures and maintain economic stability.

Powell's perspective on future rate hikes was echoed by Fed Governor Michelle Bowman during the session. The alignment of views between Powell and Bowman highlights the consensus within the Federal Reserve regarding the potential necessity of raising interest rates as part of their ongoing efforts to carefully manage the country's economic growth.

The reaffirmation of this belief in further rate hikes signals the Fed's commitment to a proactive approach in addressing economic conditions and maintaining a balanced monetary policy. By emphasizing the likelihood of future interest rate increases, Powell and Bowman are providing transparency to market participants and indicating their intention to address inflationary pressures and promote sustainable economic expansion.

As the Federal Reserve's monetary policy plays a crucial role in shaping financial markets and investor sentiment, the reaffirmation of the potential for rate hikes in the coming months will likely influence market dynamics and investor decision-making. Traders and market participants will closely monitor future statements and actions from the Federal Reserve for further insights into the timing and magnitude of potential interest rate adjustments.


US initial jobless claims

In the economic landscape, the stability of jobless claims at a 20-month high reflects persistent challenges in the labor market. This indicates ongoing difficulties for job seekers and potential concerns about employment conditions. Additionally, the Conference Board's Leading Economic Index, which tracks various indicators to gauge the future direction of the economy, recorded its 14th consecutive monthly decline. This suggests that the Federal Reserve's efforts to moderate economic growth are starting to have the intended impact of slowing down the overall pace of expansion.

Meanwhile, the Bank of England (BoE) has made a decision to accelerate the pace of interest rate hikes during its 13th meeting under its tightening policy. This move has received mixed reactions from different stakeholders in the financial markets. Households, bond investors, stock investors, and foreign exchange (FX) traders have expressed their disapproval of the BoE's decision. This dissent stems from concerns about the potential impact of higher interest rates on borrowing costs, investment returns, and currency valuations. These stakeholders are closely monitoring the consequences of the BoE's actions and adjusting their strategies accordingly.

The BoE's decision to hasten the pace of interest rate hikes highlights their focus on managing inflationary pressures and ensuring economic stability. However, the varied reactions from market participants reflect the complexity and potential trade-offs associated with monetary policy decisions. As the effects of the BoE's actions unfold, it will be crucial to monitor the implications for different sectors of the economy and assess how market dynamics and investor sentiment are influenced by these policy moves.


UK interest rate

Despite the stabilization of the 2-year gilt yield above the 5% threshold, it failed to receive a substantial boost. This can be attributed to concerns among market participants regarding the potential negative consequences of the Bank of England's (BoE) proposed additional interest rate hike of one full percentage point. These concerns mainly revolve around the potential impact on the British economy, particularly in the property market. The anticipation of such a significant rate increase has dampened investor sentiment, leading to a cautious approach.

In parallel, the 10-year gilt yield has experienced a decline in response to the prevailing gloomy economic outlook. This decline reflects market expectations of a challenging economic environment and a lack of optimism regarding future growth prospects. The declining yield suggests that investors are seeking safer assets amid uncertainty, resulting in increased demand for long-term government bonds.

The possibility of Britain avoiding a recession, let alone a property crisis, appears increasingly unlikely in light of these developments. The market sentiment is shaped by concerns about the potential adverse effects of higher interest rates on the property market, which is a key sector of the British economy. This sentiment is further fueled by the prevailing economic uncertainties, both domestically and globally.

Turning to the FTSE 100, the index has approached the 7500 level. However, trend and momentum indicators are displaying negative signals, indicating a bearish sentiment in the market. Additionally, the index is nearing oversold conditions, suggesting that it may be due for a potential rebound or period of consolidation.


FTSE 100 daily chart

The performance of large British companies has been negatively impacted by falling energy and commodity prices, influenced by a relatively weak reopening in China. This year, these factors have contributed to bearish pressure on the companies, and the situation has been further intensified by rising interest rates. Until there is a rebound in global energy prices, which is yet to materialize, the outlook for the FTSE 100 remains neutral to negative. The market will closely monitor any developments that could potentially improve the prospects for energy prices and subsequently impact the performance of the index.

Interestingly, in response to the 50 basis point interest rate hike, the pound depreciated instead of appreciating, contrary to the typical expectation. This reaction reflects the sentiment of the market, which believes that the challenges and uncertainties facing Britain outweigh the potential positive effects that higher interest rates could generate. The prevailing concerns and uncertainties surrounding the British economy have outweighed the impact of the rate hike, leading to a depreciation of the pound.

Turning to the gold market, prices experienced a slight decline on Friday, signaling a potentially challenging week and heading towards their worst performance since January. This decline can be attributed to the significant rate hike by the Bank of England, coupled with hawkish signals from the Federal Reserve. These developments have raised concerns among investors about the prospect of tighter monetary conditions. Market participants will closely monitor any further signals and actions from central banks, as they have a significant influence on gold prices.


XAU/USD daily chart

Gold prices have reached a three-month low, breaking out of a narrow trading range observed over the past month, but unfortunately in a downward direction. This decline in gold prices indicates a shift in market sentiment and a potential weakening of demand for the precious metal.

Looking ahead to Friday's session, investors will closely monitor the release of preliminary manufacturing and services Purchasing Managers' Index (PMI) data. These indicators provide valuable insights into the health and performance of these sectors, serving as important economic barometers. The PMI data can influence market sentiment and investor confidence, as it offers a glimpse into the overall economic activity and potential growth prospects.

In addition to the PMI data, market participants will also pay attention to speeches from several members of the Federal Open Market Committee (FOMC), including Bullard, Bostic, and Mester. These speeches have the potential to shed further light on the monetary policy outlook and provide clarity on the Fed's stance and future actions. The comments made by FOMC members can significantly impact market expectations, especially regarding interest rates and overall monetary policy direction.

Overall, Friday's session is expected to be influenced by the release of PMI data and the speeches from FOMC members. These events will shape market sentiment and provide crucial insights into the current economic conditions and the potential future trajectory of monetary policy. Investors will closely analyze these developments to make informed decisions and position themselves accordingly in the market.