Powell Boosts Markets and Gas Prices Tumble

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In this publication:

• Powell Signals Rate Cuts, Markets Rally

• Japan's Hawkish BOJ Strengthens Yen Against USD

• Oil Prices Slide for Another Week

• EU Gas Prices Fall Post-Ukraine Incursion: Russian Supply Ignored?

• Azerbaijan's Diplomatic and Trade Play: Balancing Regional Friends

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: The highly anticipated speech by U.S. Federal Reserve Chair Jerome Powell at the Jackson Hole symposium did not disappoint. On Friday, he stated that “the time has come for policy to adjust,” reinforcing market expectations for an initial interest rate cut at the Fed’s next meeting on September 18. He expressed greater confidence that inflation is on track to reach the 2% target, underscoring that the focus has shifted toward risks in the labor market .

  “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

• In another news, the U.S. government’s annual process to revise initial estimates of nonfarm payrolls jobs growth resulted in a downward adjustment by 818,000 for the year ending March 2024, increasing worries about a weakening labor market, especially after July’s disappointing job figures. Markets currently assign a 76% probability to a 25bps rate reduction and 24% to a 50bps reduction on September 18th, with expectations for a total of 100 basis points or more in cuts to be lowered in the remaining three decisions this year. We continue to hold the view that it is one a quarter point cut in September unless significant deterioration in unemployment data.

• The yield on the 10-year U.S. Treasury dropped to 3.8%, just above its year-to-date low from a few weeks ago, as increasing expectations of interest rate continue boosted demand for longer-dated bonds. It had been as high as 4.70% in late April, when rate cuts appeared more distant.

• Japan: The big mover in Asia was a 0.7%+ rise in the yen vs dollar as Bank of Japan Governor Kazuo Ueda disappointed some by saying the central bank still plans to raise interest rates if the inflation keep rising up. Supporting the governor's view is the data published earlier on the same day that showed Japan's core inflation accelerated for a third straight month to 2.7% in July. A more aggressive Fed rate cut could further strengthen the yen in the months ahead.

Equity Markets

• The S&P 500, NASDAQ, and Dow each rose over 1% for the week, extending their recovery from a tough start to August, though they didn't match the previous week's significant gains. Stocks were volatile earlier in the week but closed positively on Friday after U.S. Federal Reserve Chair Jerome Powell's speech. The advance was broad-based, with small-caps outperforming large-caps and an equal-weighted version of the S&P 500 Index surpassing its capitalization-weighted counterpart.

Commodity Markets

• Oil: Another week of disappointing market prices for oil producers, as both Brent and WTI slid further by 2%. OPEC+ plans to unwind voluntary production cuts, possibly starting in October, meaning more supply and further downward pressure on prices. Saudi Arabia is certain to continue running a budget deficit.

• Gas: Despite Ukraine's seizure of the Russian town of Sudzha, where the Gazprom metering station is located, and heightened risks of disrupted Russian gas flows to Europe, European natural gas futures have dropped over 7% this week, falling to EUR 36.6 per megawatt-hour from EUR 39.5. Absolutely zero panic in the futures market indicates that Europe has been preparing to wean off Russian gas, diversify its supply sources & transition to cleaner energy—while Gazprom remains desperate to secure much-needed revenue . Europe's reserves are now near full capacity at 90%, surpassing the EU's November target by over two months. However, Europe still faces potential supply risks from upcoming maintenance by its largest supplier, Norway.

Global Finance

• Azerbaijan: Day after Putin's visit, Azerbaijan has officially applied to join the BRICS group. The Foreign Ministry spokesman confirmed the application, noting Azerbaijan's interest in joining the expanded group, which recently included Iran, UAE, Ethiopia, and Egypt. President Aliyev is trying to play both sides as Armenia, its main rival in the region, is turning away from Russia and getting closer to the West. He’s also pushing for EU commitment on long-term gas deals, but with Azerbaijan pivoting toward Russia and China (BRICS) and EU transitioning to greener energy sources, that looks increasingly unlikely.

• China: JPMorgan dropped a proposal that would have significantly reduced China's representation in its GBI-EM bond index. The bank initially considered lowering China's weighting from 10% to 6%. This index is crucial as it guides the investment decisions of funds holding approximately USD 236 bln in assets, as evidenced by the surge in investments into India's debt market following its recent addition to the index. Institutional investors usually buy the index and get indirectly exposed to the bonds of the countries included in it. Lower weight for China would imply less demand & liquidity for their bonds.

• Ukaine: Prime Minister Denys Shmyhal announced that the country will need at least USD 38 billion in external financing next year, matching this year's planned amount. These funds, expected from international partners, are likely to include a mix of preferential loans and grants to support Ukraine through 2025.

In Motion

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