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Markets Regain Health, Yet a Full Recovery is Precariously Perched

The sudden and sharp selloff in the markets early Monday last week put many traders and investors in tough positions. As risk aversion set in, the equity markets across the globe plunged, and sentiment further soured over dovish FOMC meeting minutes and the Chinese Yuan devaluation. With no intervention from the PBoC, the Shanghai Composite plunged by over -18.00% and recovered only after the PBoC intervened with a cut to short term interest rates and a reduction the reserve ratio requirement. The Chinese Central Bank intervention managed to help the Shanghai Composite close the week with only -7.80% in losses. It was the same story across the board with the Dow and the S&P500 recovering from their losses by Friday’s close.

Last Week

A surprising move last week came from the British Pound. While the cable initially remained muted to the market turmoil which saw the risk aversion sentiment send the safe haven Yen and the Swiss Franc soaring, the British Pound was practically flat earlier in the week. However, the cable plunged right after the rate cuts from China, whereby the US Dollar surge off its weekly lows. GBPUSD ended the week with losses of -1.97% after briefly testing the highs above 1.58 to close Friday’s session at 1.539. The UK’s second quarter revised estimate for the GDP was unchanged at 0.70%. In contrast, the US revised second quarter GDP estimates saw a sharp revision to the upside with the Q2 GDP in the US rising 3.70%, beating the median forecasts of 3.20% and leaping wildly from the initial estimate of 2.30%.

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The Week Ahead

Monday’s most important data will be the RBA’s monetary policy decision which is expected to be a non-event with interest rates presumably being unchanged. A report coming from will see monthly GDP and unemployment numbers being released. The Canadian dollar managed to bounce back last week led by gains in Crude Oil prices since late Thursday and a beat on the estimates on GDP and the unemployment rate which is at 6.8% could see some the Loonie make further gains. The ECB monetary policy meeting is also due this week. Draghi and Team are likely to stress on the ECB’s sovereign bond purchases and also reflect on the rather slow and muted growth in the Eurozone. A neutral tone could potentially see some bounce in the Euro in the short term. On Friday, the all-important monthly non-farm payrolls report will be released. This is important for the markets as it will be the final labour market report before the Federal Reserve meets two weeks later on September 17th in what could be a key FOMC meeting. The median forecasts are for the US unemployment rate to have improved further to 5.2%, after staying steady at 5.3% for the last two months.

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