Markets look ahead to Jackson Hole

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

After five weeks of progress for most indices in the wake of good corporate results, financial markets took a breather last week. Poor macroeconomic indicators and the Federal Reserve’s willingness to maintain its aggressive monetary policy in the short term have somewhat revived fears of recession, leading to legitimate profit taking after the flourishing summer period. On the week, the S&P 500 and the Nasdaq dropped 1.1% and 2.5%, respectively, and the Dow booked marginal losses. Similarly, the Euro Stoxx 50 in Europe was down 1.4% for the week. 

Summary

• Shares in Asia were mixed on Monday with gains concentrated in China and Hong Kong after China’s central bank lowered its benchmark lending rates for corporate and household loans to spur credit demand amid a sluggish economy. 
• European equities are poised to start the week on a soft note as US futures fell early Monday morning. 
• Oil prices retreated last week and remain below $100 per barrel, with the spread between Brent and WTI widening to nearly $6 in favour of the former. This favours US exports, which tend to compress weekly inventories. Prices resumed their drop this morning as traders considered the prospect for more Iranian supply following US President Joe Biden’s discussions with European allies about reviving the 2015 nuclear deal. 
• The People’s Bank of China lowered its key loan price rates, the second reduction this year, as policymakers stepped up efforts to revive the demand for credit. The 1-year LPR, which reflects corporate and household loans, was cut by 5bps to a record low of 3.65%, and the 5-year LPR, the mortgage reference rate, was slashed by 15bps to 4.30%. 
• The focus of the markets this week will be on Jackson Hole and the tone from Federal Reserve members at their annual symposium. Economic reports this week include updates on durable goods orders, home prices, PMI readings and the closely-watched PCE price gauge. Earnings reports will mainly focus on the consumer and tech sectors.