Four Factors That Will Affect the Markets in the Coming Weeks: A Brief Analysis of Cause and Effect

The global economy is intertwined with each other. Movement in one market has a significant impact on another. Countries can no longer isolate markets and political decisions made in one part of the world leave long-lasting effects on other parts. That said, in this blog, we’ll put together upcoming current issues that will direct the economy in the coming weeks.

 

The Federal Open Market Committee

The Federal reserve recently hiked up interest rates to 75 basis points. This caused several investors to slow down their activities. Despite the Federal reserve’s effort to curb inflation, the recession trend gave in. The end of July will be really in another decision policy where announcements from authorities indicated another rate hike. However this week U.S. equity rose as soon as speculations of lower interest rates by the U.S federal reserve started. The turn-in events were a result of economic data indicating a significant recession.

 

Purchasing Managers’ Index Surveys

The Purchasing Managers’ Index (PMI) released by the Institute for Management (ISM) tracks the progress of the manufacturing, or goods-producing sector and showed a decline to 55, from 56.1 recorded in May. These readings influence investors on whether or not to invest. This inclination to or away from investments can lead to price fluctuations. 

Currently, business sentiments are lower than ever influenced by inflation, looming recession, supply chain bottlenecks, and labor shortages.

 

Eurozone Unemployment and Inflation Readings

At the end of the coming week, unemployment data and inflation rates of the eurozone will be released for the months of May and June. This data is expected to raise market concerns driving forces in different directions. Expectations are that Eurozone unemployment has gone down 7.2%, lower than what it was during the pre-pandemic era. 

Inflation in Europe has risen in June to 8.3%. This increase has marked an all-time new record since the introduction of the common currency in Europe.

 

Expected Effects on the Market

The above-mentioned events will start having an impact on the market as soon as speculation about the event outcomes,

Lower bond yields

The increased gap between treasury and equity bonds might lead to the following four situations, 

If bond yields go down, inflation in the U.S. will also fall for bond yields to come off, which is quite unlikely due to the current situation of inflation. 

On the other hand, if the yields rise, the inflation rate will continue to increase which is more likely considering the current situation of inflation. This however can only be possible with a correction in the market which will be a high profitability event. 

The third scenario which could likely take place is the narrowing gap between equity and bond yields by higher earnings, which is quite unlikely in the current economic scenario. 

The last probability is by reducing the gap between equity and treasury bonds by market correction of 16.8 times 1-year forward P/E multiple through time correction. Another option for market correction is by falling to a similar level via price correction for market multiples to bottom.

 

Commodity prices

Lowering Metal prices and increasing crude oil prices will help calm the inflation which would lead to obvious changes in the market. It is this inflation that has led to the tightening of monetary policies by global central banks, other than the central bank of china all others hiked up interest rates with the U.S. Federal Reserve applying the harshest policy of all by increasing interest rates to 75 points basis. According to announcements made by Federal Reserve authorities, they won’t hesitate to reapply at a similar rate for the months of July and September if the inflation is tamed. Commodity prices have shown sharpie declines and might continue to do so reflecting concerns of the evident recession in Europe and the U.S. 

 

Conclusion

The Global economy is the perfect example of the butterfly effect where even an apparently insignificant economic act in one part of the world causes market movements in another part of the world. The war in Ukraine and energy bans on Russia have led to an energy crisis. Where the global economy is now struggling to make up for the shortages. These effects have in turn caret gloomier consumer sentiments which is also a reflection of the inflation and upcoming recession only to have the entire economy slow down.

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