This was supposed to be a quiet Monday, but inflation pressures are heating up again over Europe’s troubling energy crisis, crop shortages from severe heat and droughts, and production shutdowns in China. Stocks are declining as it looks like inflation will continue to rise and that should keep the Fed staying hawkish.
Europe’s recession is a foregone conclusion, especially as the risks of disruptions for energy supplies remain elevated. Maintenance for Nord Stream 1 is a big risk for Europe as no one knows when and how much supplies will come back online. The key pipeline is expected to be suspended for a few days between August 31st and September 2nd. Europe’s benchmark for natural gas trading surged almost 20% after Gazprom, Russia’s state-owned energy titan, said they needed to service the pipeline’s only remaining compressor.
Europe’s energy crisis is just getting bad news all over the board. Heat waves have put a strain on supplies and it seems any disruptions in the winter could be devastating. Countries that have supplies will continue to put on curbs on exports and natural gas prices could spike much higher in the winter. France’s nuclear power situation is taking a hit as high temperatures forced some plants to lower their output. Norway will likely continue to limit electricity exports.
All eyes on Jackson Hole
Powell will reiterate his commitment to taming inflation and may try to push back on market expectations for a dovish pivot in September. He may try to send a clear message that even if they have a slower pace of rate hikes that won’t signal a lower peak rate or that they will be quick to cut rates.
After this week, Wall Street should not be surprised if Fed fund futures start pricing in rate hikes for next year. This could be the week, as many return from vacation and double-down on their bear market rally calls.
Bitcoin momentum has evaporated as risky assets soften ahead of the Jackson Hole Symposium. Too much of Wall Street expects inflation to take two years or longer for the Fed to get inflation under control. Bitcoin weakness, however, is not matching the selling pressure hitting stocks, so that could be a sign that investors are not ready to see prices retest the June lows. Normally on a day like today, bitcoin’s percentage loss would easily exceed the weakness hitting the S&P 500 index. Bitcoin may have some defending the $20,000 level, but it may be tough for that level to hold if King Dollar continues to appreciate leading up to Fed Chair Powell’s speech at the Jackson Hole Symposium.
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