Market Update – Eyes on ECB!

US inflation data supported bets for a rate cut from the Fed next week, but also argued for gradual moves.

Asia & European Sessions:

• Selling initially drove the moves on Wall Street and Treasuries as the pick up in the monthly US CPI core rate weighed on aggressive Fed rate cut bets, and basically confirmed a -25 bp reduction next week. However global equities turned around and dip buyers provided support with the major indexes bouncing off of support. 
• European stock markets are broadly higher in catch up trade, after Wall Street turned optimistic yesterday and the tech rally extended through Asian hours. Japanese markets, which were hit by a rally in the yen earlier in the week, bounced back and the Nikkei closed 3.4% higher. DAX and FTSE100 are currently up 1.2% as markets wait for the ECB to deliver the widely expected 25 bp rate cut.
• Tech stocks like Amazon, Microsoft, and Nvidia drove Wall Street’s gains, pushing the S&P 500 and Nasdaq higher.
• ECB Preview: Comments from officials have left little doubt that rates will be cut by 25 bp once again at tomorrow’s meeting. It is likely to be another “cautious cut”, however, that doesn’t commit to additional moves. Growth indicators may have come in lower than hoped, and headline inflation dropped sharply. Underlying inflation, though, remains high and that means Lagarde is likely to stick with a data-dependent approach. We expect further cuts, but for now only at meetings with updated staff projections. A 25 bp cut would leave the deposit rate at 3.50% and the main refinancing rate at 4.00%. However, the ECB announced earlier in the year that it intends to lower the spread between the deposit rate and the main refinancing rate to 15 bp from currently 25 bp. That will come into effect on September 18, together with the changes announced tomorrow. That will leave the main refinancing rate at 3.65%, the marginal lending rate at 3.90%.

Financial Markets Performance:

• The USDIndex is at 101.796 and USDJPY has lifted to 142.66 amid a wider correction in the Yen.
• Oil rebounded 2.19% to $67.80 per barrel due to Hurricane Francine affecting Gulf of Mexico production.
• Gold dipped -0.15% to $2512.89 per ounce after rising to a session high of $2528.98 per ounce.

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Andria Pichidi

Market Analyst

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