Weekly Focus: Markets Trust in Salvation in Jackson Hole

The S&P 500 broad market index moved down below 4200 points, Euro initiated a second attempt to cross the parity with the U.S. Dollar. Even gold prices fell below $1735 per tory ounce. If Brent crude prices would fall to $90 per barrel, it would resemble a financial crisis at its initial stages with a deflation shock. 

Brent crude prices are yet above $96 per barrel, and investors hope that Federal Reserve (Fed) chief Jerome Powell in Jackson Hole symposium would clearly mark a slowdown of interest rates hikes to 50-75 basis points. It is likely that Powell would indeed focus on a 50 points interest rate increase on Fed September meeting. Would it save markets from a downturn considering that such a rate hike would raise borrowing costs too? The major point, however, is a quantitative tightening (QT) that would accelerate to $95 billion in September.

The S&P 500 index dropped by 20% in 2018 and by 35% in 2020 after the Fed unload its balance sheet twice as low as this figure. So, if the contraction of the Fed balance by $35-40 billion a month led the index down by 20-40% then the $95 billion may lead to a massive 50-60% drop. That is well in line with the crisis scenario that was confirmed last week with a 50% decline of S&P 500 index by the end of 2022.

The gap of S&P 500 index at 4225-4230 points at the morning trades on Monday is somewhat disturbing, but it could not change the overall picture where the index is heading to a down spin this autumn. Only the Fed could slow down this massive decline, but it is occupied with the record inflation, and is unlikely to take decisive actions to support markets. Neither a slightly positive GDP data in the United States, nor a declining July Personal Spending data in the U.S. could provide a positive spin to the markets even in a short run.

Technically the S&P 500 index is still inside an upside formation, but the reversal is nearing fast. During two previous week short positions for the 70% of targeted amount for S&P 500 index were opened at the average price at 4285-4290 points. The rest of the targeted volume would be used once new technical signals would emerge. The target area is located at 2100-2300 points that is expected to be reached by the end of 2022.

Oil market is short of time to active an upside scenario with targets at $135-145 per barrel of Brent crude benchmark. There are no triggers for such a scenario to become real at the moment. Moreover, if Brent prices would close this week below $106 per barrel an aggressive downside formation could pressure prices to $75-85 per barrel, and even to the extreme targets at $50-60 per barrel by the end of November. So, the bulls have the last chance to avoid this scenario.

Gold prices dropped to the nearest support at $1700-1730 per ounce. This drop is very unlucky for opening short positions that were planned at $1800-1820 with targets at $1350-1450 per ounce. So, it is likely traders have to seek less attractive entry points for opening short positions in September.

EURUSD met its primary target at 0.99500-1.00500 and is ready to dive below the cornerstone 1.0000 figure. There are no buy options at the moment as the pair is targeting a support at 0.99500.

GBPUSD continues in an aggressive downside formation with completed primary target at 1.18000-1.19000 with the remaining secondary targets at 1.15000-1.16000 that would become real if the Euro dives significantly below parity with the Dollar. However, this week the pair may not perform sufficient volatility to open any trade positions.