After a solid start into the week, equity markets took a quick dive yesterday as tensions keep mountint ahead of Jerome Powell speech on Friday at the Jackson Hole Symposium. On Tuesday, E-mini S&P500 futures tumbled on the 2,932 resistance level (previous highs and Fibonacci 61.8% on July-August debasement) and fell 1.33% to 2,893 points. Across the Atlantic, equities moved in a similar fashion with the EuroSTOXX 600 falling 1.28% to 369 points. It is worth mentioning that since the mid-August sell-off, European equities are lagging almost 3% behind their US counterparts as the EU economy, and more specifically Germany, is showing signs of slowdown, if not of recession. We anticipate this divergence will accentuate in the coming months. In addition, the recent resignation of Italy’s Prime Minister Conti also weighted on equities as investors favoured less risky assets such as bonds.
However, the overall risk sentiment quickly improved on Wednesday as investors anticipate that Jerome Powell would deliver a dovish message at the occasion of its speech on challenges for monetary policy next Friday. A significant share of market participants anticipates that Chairman Powell would seize this opportunity to suggest another rate cut in September. Looking at OIS rate, markets are pricing in an 86% chance of a 25bps rate cut and 14% of a 50bps cut. Anything that would sound less dovish than that would likely trigger another sell-off in the equity market and further appreciation of the buck. Given how Powell struggled to justify the July rate cut, we believe it is inevitable that markets will be disappointed, as a 50bps cut is out of the table while a 25bps will be difficult to justify.
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